The battery maker Exide Corp. got a taste of how tight credit standards have become last week when its bankers, Credit Suisse First Boston and Citigroup's Salomon Smith Barney, took the highly unusual step of offering warrants to attract investors for its $250 million syndicated loan.
The sweetener was an attachment to Exide's senior secured debt, offered after the bank debt issue flopped with investors its first time out in August. The arrangers got the market's attention by raising the yield spread by half a point, to 4.5 percentage points over the London Interbank Offered Rate, including extra prepayment penalties; and by adding warrants to buy up to 3% of the company's stock. Warrants are more commonly reserved for junk bonds or IPOs.
"I think it's really piqued people's interest, I know it's piqued our interest," said Chris Ochs, a managing director and portfolio manager of SunAmerica Corporate Finance.
"We have not seen warrants connected with a broadly syndicated loan transaction before this," said Chris Donnelly, a director at Portfolio Management Data, a division of Standard & Poor's. "To the extent that the high yield market is out, this is a novel way to try and get investors interested in deals that might have been seeking access to junior capital," Mr. Donnelly said.
Exide, of Reading, Pa., needs the funds to help finance a $368 million acquisition of rival GNB Technologies. The company already has $575 million in bank debt - some of which it has drawn down - and $750 million in other debt. Its purchase of GNB is aimed at expanding further into the industrial battery business, better favored by investors, as well as the car battery business. Exide is better known as a car battery producer and has been dragged down by investors' worry over the outlook for auto parts companies.
In addition, many investors have been skittish about taking on debt rated below a BB grade. Exide's bank loan rating is BA3 by Moody's Investor's Service and B+ by Standard & Poor's.
Kevin Morano, chief financial officer for Exide, said he welcomes the buzz about his company's offer. Exide has undertaken a major turnaround effort that began with the appointment of former Chrysler president Robert A. Lutz as chairman and chief executive officer 18 months ago. The company has since replaced its entire board and hired Craig H. Muhlhauser as president and chief operating officer and Mr. Morano as chief financial officer.
Mr. Morano said the GNB purchase is a key to the restructuring effort, along with cost-saving measures and other changes.
"Investors like the story and our strategy and wanted a better opportunity to participate on some of the upside," Mr. Morano said. He added that the benefits of the acquisition are "so substantial" that he does not expect "any significant dilution from offering the warrants."
