Hillhaven Corp., a Tacoma, Wash.-based operator of nursing homes, is lining up $400 million in bank loans as part of a major debt restructuring.

Morgan Guaranty Trust Co., the banking unit of J.P. Morgan & Co., will lead the new credit.

In addition, Morgan's securities unit is expected to comanage a planned sale of $175 million of senior subordinated debt for Hillhaven, to be led by Merrill Lynch & Co.

Hillhaven outlined the restructuring on Wednesday, but the roles of Morgan and Merrill were not disclosed in the announcement.

A Hillhaven spokesman confirmed market talk that Morgan was leading the ban deal but declined to comment on the underwriters of the planned bond sale.

Terms Being Hammered Out

The terms and structure of the bank credit are still being negotiated.

But Hillhaven is likely to wind up paying a higher rate on the new loans that it does on roughly $200 million of existing term debt and letters of credit.

The existing bank debt and letters of credit are guaranteed by Hillhaven's largest shareholder, National Medical Enterprises Inc., which has an investment-grade rating of BBB-minus from Standard & Poor's Corp.

Hillhaven's implied senior debt rating, a B-plus, is well below investment grade.

Despite the higher interest rates on the new bank debt, Hillhaven will actually save on its debt costs. Unlike the existing bank debt, the new credit will not be guaranteed by National Medical. The savings on the guarantee fees that Hillhaven had been paying National Medical will more than offset the higher interest rate, a Hillhaven spokesman said.

Hillhaven's existing bank debt includes a $62 million term loan, obtained last year, that was priced at 100 basis points over the London interbank offered rate.

Morgan led the 19992 deal. Other bans participating in the deal reportedly included Bank of New York, Pittsburgh National Bank, ABN Amro Bank, Chemical Bank, and NationsBank.

As part of the debt restructuring, Hillhaven also plans to issue $120 million of pay-in-king preferred stock to National Medical in exchange for $63 million in cash and the repayment of $57 million of debt.

In an announcement on Wednesday, Hillhaven also said it will buy 23 nursing centers currently leased from National Medical for $112 million.

Other aspects of the restructuring include the repayment of $92 million of notes, as well as non-bank debt guaranteed by National Medical.

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