December 20, 2012 / 5:50 PM / in 5 years

RLPC: Freeport's $12.5B acq. deal sees pushback

NEW YORK, Dec 20 (Reuters) - 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.

Syndication breakdown

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 $5.5 billion.

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 said.

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 banker said.

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 corporate strategy.

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 Exploration.

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 times.

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