Due to disappointing pricing, Jefferson Smurfit Corp. and Stone Container Corp. have shelved a $4.8 billion loan syndication that was expected to launch this week, sources said.
The paper packaging companies, which in May announced plans to merge, are now considering issuing high-yield bonds, the sources said.
Bankers Trust Corp., Chase Manhattan Corp., NationsBank Corp., and Morgan Stanley, Dean Witter & Co. are leading the bank loan. The package includes a $1.5 billion institutional investor piece, a $1 billion term loan, a $1.5 billion asset-bridge loan, and an $800 million revolving- credit facility.
Randolph C. Read, chief financial officer for Stone Container in Chicago, did not return phone calls seeking comment. But bank sources suggest that the borrower, to be called Smurfit-Stone Container Corp., was disappointed by the pricing for the $1.5 billion institutional piece of the loan.
That piece was priced at the London interbank offered rate plus 3.5 percentage points. The price was set after bankers polled the investors and found that an initial price of Libor plus 2.75 points would not move the loan.
"It's fine with us if they want to look," said a bank source. "But we're anxious to get going. I think they're going to find what's available in the bank market is a good deal."
The fate of Stone-Smurfit is significant because it is one of the first super-size loans to come to the market after the declines in the stock and bond markets. Loan prices, which have been ticking up during the summer, are at the highest levels of the year.
Bankers said they expect Stone-Smurfit to commit to the bank market next week, but said there was a possibility the company may request a smaller loan package.
The combined entity already is debt-heavy with $6.7 billion in mostly bond debt and $8 billion in pro rata annual revenues, according to Standard & Poor's. A majority of the debt is Stone's and that company has struggled in the past to service its debt burden, S&P said.
Bob Woods, head of syndicated finance at Societe Generale in New York, declined to talk about the Stone-Smurfit deal but said low-rated borrowers would struggle in a junk-bond market that has been "shut down" since August.
"The bank market is a laggard to any other market," Mr. Woods said. "As of today the bank market is still open, and in that, it's relatively attractive."
By going to either market, Stone-Smurfit is hoping to retire more than $1.3 billion of its existing debt, a banker said. But with the cost of financing higher than expected, Stone-Smurfit is reconsidering that strategy, the banker said.
Michael Schroeder, a fixed-income analyst at Wamser Schroeder & Co., said the company could decide to retire none of the debt or some of it. Stone-Smurfit also could split its financing between the bank and bond markets.
"I'd be talking aggressively with the banks," Mr. Schroeder said. "If you're a strong credit, this is a good time to be in the bond market. If you're weaker credit, you'd have to stay away."
Stronger credits would consist of companies rated in the strong double-B range. Stone Container carries ratings in the single-B range. Jefferson Smurfit is rated higher, but has been placed on watch by ratings agencies for possible downgrades.
Mr. Schroeder said he believes that in the end Stone-Smurfit will return to the bank market over bonds. He said the company may have been disappointed with the prices for bank debt.
But, he added, Stone-Smurfit should consider that much of Stone's existing debt carries interest rates between 10% and 12%. A bank loan at Libor plus 3.5% would require annual interest payments of 9% based on Wednesday's close.
"They shouldn't be shocked if they're familiar with current events," Mr. Schroeder said, adding that Stone-Smurfit's current interest rates are "pretty ugly."
