| NEW YORK
NEW YORK Dec 20 A $12.5 billion loan package
slated to back Freeport-McMoran Inc's acquisition of
Plains Exploration & Production Co and McMoran
Exploration Co is facing significant pushback, sources
told Thomson Reuters LPC.
Banks invited to participate at the top tier level of
syndication are finding the share of the bridge loan the company
and its lead banks JP Morgan and Bank of America Merrill Lynch
are offering them too small relative to the hefty revolving and
funded debt component top tier level banks are being asked to
contribute to the deal, sources said.
JP Morgan did not return calls for comment. BAML declined to
comment. Freeport did not return calls by press time.
With investment grade activity mostly focused on the
refinancing of existing, undrawn revolvers and limited
M&A-driven issuance, bridge loans are seen as one of the rare
opportunities to make money in the investment grade side of the
bank loan market. Underwriting fees for bridge loans are
generally richer than those paid for regular roll-over
transactions. Bridge loans also ensure lenders a seat at the
table with a proportional commitment when the loan is ultimately
replaced by a more permanent security such as a bond.
The metal and mining giant reached out last week to top
relationship banks to syndicate a $4 billion term loan and a
$5.5 billion bridge to bonds. The company is additionally
looking to refinance and upsize an existing $1.5 billion,
five-year revolver to $3 billion.
As the tiers now stand, lead bank JP Morgan along with BAML
will hold on to $630 million split between the revolver and term
loan and $1.2 billion of the bridge, according to sources. This
suggests their hold levels for the bridge will be 22 percent of
By comparison, the company is offering the next tier to
participate with $455 million in the term loan and revolver and
$275 million of the bridge. This suggests the tier's hold level
of the bridge would be roughly 5 percent. Ten relationship banks
that were invited to this tier including Bank of
Tokyo-Mitsubishi, BNP Paribas, Citigroup, Goldman Sachs, HSBC,
Mizuho, Morgan Stanley, Scotia, Sumitomo Mitsui and Wells Fargo,
according to sources.
"The 22 percent and 5 percent ratio is really low," a banker
The following tier has been invited to participate with $140
million between the revolver and term loan and with $55 million
on the bridge. This suggests a 1 percent share of the bridge,
according to sources. Banks invited in this tier include
European, Canadian and U.S. regional institutions.
The company is offering the two tiers below the underwriter
level upfront fees of 40bp on pro rata commitments and 20bp
upfront on the bridge upon signing. The company is also offering
an additional 20bp ticking fee on the bridge that will be
payable if and when the bonds are issued or the bridge is
terminated, according to sources.
The size of the $7 billion pro rata combined with what is
perceived as a tight drawn pricing of LIB+150 for ratings of
BBB/Baa2 is also raising eyebrows among the lending syndicate.
If not priced accordingly, a hefty term loan component of $4
billion could pose a problem to those banks that are
implementing or have implemented Basel III as the regulatory
standard requires banks to set capital aside to back their
lending commitments. It could also pose a problem to U.S.
investment banks and to European banks that do not have large
U.S. dollar deposits.
"It's not a credit issue, it's just a lot of debt," a second
Outlook is not rosy
Add to these concerns some market wariness about the M&A
transaction and the deal's outlook is not rosy. For one, the
acquisition deal was structured so that Freeport was able to
avoid a shareholder vote. Another sticking point is that six
executives and directors are shared by both Freeport and
McMoran. It is also a concern that Freeport exited its
exploration and production business 18 years ago by selling
McMoran Exploration and now is looking to reenter the business.
This is viewed as an inconsistency in terms of Freeport's
However, even if the tie-up may falter and the financing
package was to go away, the banks could still pick up the
commitment fee of 20bp but would miss the bond economics.
Given this pushback, some market participants are hoping
structural changes can take place in the financing package. The
term loan component could be reduced in favor of a larger bond
component, sources suggested. This, is turn, could imply the
bridge would also be upsized. Another possibility could be to
maintain the size of the revolver at $1.5 billion or to increase
it by an amount below the $3 billion target.
Such changes throughout syndication are uncommon when it
comes to the investment grade space and would only take place
after the company completes a very broad retail syndication
round for the pro rata expected to take place in January. The
company is looking to gather $1 billion in this round with
commitment tiers starting at $50 million and $75 million.
"They will invite everybody," a third banker said.
Yet, even if the deal were to get done at current terms, it
is expected to affect the bank market outlook on what seems to
be the recent trend of using term loans to back M&A financings.
"I don't think this will kill the bridge market. I don't see
term loans going away. But it will make people evaluate who are
the right clients or transactions for these types of
structures," said a third banker speaking of bridge and term
loan structures on M&A deals.
Bankers anticipate the bridge loan will remain undrawn as
Freeport will potentially tap the bond market in the first
quarter of 2013. Bankers also expect the term loan will be
funded in the first or second week of January.
As previously reported, syndication of the $12.5 billion
loan package launched last week to two groups of top tier banks.
The facility backs Freeport's acquisition of PXP and McMoran
Freeport is buying PXP for $6.9 billion in cash and stock.
It is buying McMoRan for $2.1 billion in cash. The acquisition
is expected to close in the second quarter of 2013. The company
estimated that total debt would be $20 billion following the
acquisition, with debt to Ebitda in 2013 predicted to be 1.7