DEALTALK-Archstone loans appear priced at pre-crunch level

Wed Sep 26, 2007 5:38pm EDT

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By Jonathan Keehner

NEW YORK, Sept 26 (Reuters) - Investment firms who agreed in May to buy apartment landlord Archstone-Smith Trust (ASN.N) are now arranging financing and are pricing the deal as if the last six months never happened, some investors contend.

Number-four U.S. brokerage Lehman Brothers Holdings Inc LEH.N and property developer Tishman Speyer, which plan to buy the real estate investment trust for about $22 billion including assumed debt, are trying to entice investors to buy $3.15 billion of loans linked to the buyout.

But the deal is drawing closer scrutiny as other blockbuster leveraged buyouts are on the rocks. In recent days, takeover deals for audio equipment company Harmon International Industries Inc (HAR.N) and student loan provider SLM Corp SLM.N, or Sallie Mae, have collapsed.

If Archstone hits a snag, other buyouts awaiting financing may suffer. The deal is one of the first to come to market after the Labor Day holiday and the U.S. interest rate cut this month, which had raised hopes that credit markets tripped up by the subprime mortgage crisis would regain equilibrium.

Lehman and Tishman are putting just $500 million of their own cash into the deal, according to sources familiar with the deal, giving them minimal downside if the business struggles.

Tishman and Lehman were not immediately available to comment on the deal.

The firms are offering a portion of the loans at 99 cents on the dollar, above where other recent buyout financings have closed or been discussed, according to Reuters Loan Pricing Corp (RLPC).

Archstone's annual debt service payments will be well above current adjusted cash flow -- although the company may pay down debt by selling assets, according to a potential investor.

The terms look aggressive for a leveraged buyout after a summer which saw weak credit markets embolden investors to demand higher returns for debt-laden takeovers.

"Archstone is a good company, it's got great assets, and bankers probably thought they could sell at this price," said a buyside analyst looking at the deal.

"But my initial view is that a lot of deals are coming in at the mid-90s, and this is coming in at 99 cents on the dollar. It looks rich to me," the analyst added.

There are early signs that credit markets are improving. Kohlberg Kravis Roberts & Co [KKR.UL] is still hoping to close financing for its First Data Corp <FDC.N acquisition.

That financing had a rocky start this month, but First Data now plans to sell two more pieces of its $13 billion term loan after seeing strong demand for an initial $5 billion portion, sources told RLPC on Wednesday. Loans in that deal sold for 96 cents on the dollar.

PREMIUM BUILDINGS

Archstone's portfolio consists of luxury apartment buildings concentrated in major coastal metropolitan areas like Washington, D.C., the San Francisco Bay and New York. Analysts consider its management team, which will be kept in place, to be the best in its class.

These factors likely played a role in justifying Lehman and Tishman's $60.75-per-share cash offer for Archstone -- a 23 percent premium to where it traded before news of the deal was leaked in an industry publication. It is also the largest public-to-private transaction in the multifamily REIT sector.

But the company will carry about $16 billion in debt, according to people familiar with the deal, which only adds to investor concerns given the more risk-adverse current climate.

Archstone projected its annualized cash flow, including expected growth, at about $700 million, which is 70 percent of its projected interest expense of about $1.04 billion, according to a potential investor.

The company has established a reserve fund to cover shortfalls, the investor said, without quantifying the amount.

The financing presented to investors last week consisted of a $750 million revolver and a $2.4 billion term loan, according to RLPC. Pricing on the revolver and term loan is at LIBOR, a key short-term lending rate, plus 3 percentage points and the term loan is offered at 99 cents on the dollar.

(Additional reporting Faris Khan and Dan Wilchins)

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