After meeting serious market resistance, Salomon Smith Barney Inc. is restructuring a $2.25 billion syndicated loan it is leading for Meditrust Corp., a health-care real estate investment trust.
The restructuring, which would involve new pricing and commitment levels, is expected early next week but could come as early as today, sources said. The investment bank is redoing the deal so it can avoid having to fund a sizable portion of the loan.
The loan has been hampered because of what is considered aggressive pricing against Meditrust's BBB-minus credit rating, sources said. Meditrust, based in Needham Heights, Mass., is buying LaQuinta Inns and Cobblestone Holdings.
The deal's restructuring shows that in today's investor-driven loan market underwriters need pricing flexibility from their borrowers. Without flexibility, underwriters may be forced to hold large parts of loans on their books-a situation disliked by investment banks and borrowers alike.
"The last thing an issuer wants to happen is for the underwriting institution to end up with an extraordinarily high hold level" of the loan, said Michael H. Rushmore, a managing director in BankAmerica Corp.'s loan syndications and trading research department. BankAmerica is not participating in the Meditrust loan.
Bankers said the Salomon loan was heading in that direction. The deal languished in the market for weeks as Salomon searched for co-arrangers to make commitments. PNC Bank Corp., Citicorp, and Fleet Financial Group committed themselves to the loan.
As interest in the deal waned in recent days, Meditrust officials and participating banks pressed Salomon to do better. And bankers said Salomon probably did not have an agreement with Meditrust to restructure the loan should its pricing fail to woo investors.
"The company is not happy," a bank source said. "We're in discussions to see what can be done."
The loan was originally priced in two parts: a $1.5 billion, three-year revolver with a starting price at 137.5 basis points over the London interbank offered rate and a leveraged $750 million, one-and-a-half-year term loan priced at Libor plus 175 basis points the first year and plus 200 basis points the final six months.
Those terms are likely to be adjusted dramatically.
Salomon's troubles also illustrated the problems smaller syndicated loan operations are having in a competitive underwriting market.
Last year Salomon was involved in 17 deals, worth $5.39 billion, ranking it 46th among syndicated lenders, according to Securities Data Co.
"Pricing has become very volatile since last year," a bank source said. "Doing a lot of deals gives you enough proprietary information to have a good idea where the market's at. If you don't have it, you can get burned if you're locked into the wrong price."
It's not the first time a syndicated loan by Salomon has hit an embarrassing snag. A $750 million loan to Mercury Finance Co. in January 1997 was immediately followed by a disclosure by Mercury, a subprime auto lender, that it had found accounting irregularities.
The embarrassment was compounded for two reasons: Salomon had touted the loan as an example of its one-stop-shopping capabilities, and the investment bank wasn't at risk-it had syndicated the entire loan amount.