NEW YORK (Reuters) - Investors are threatening not to fund a US$2.75bn loan backing office supply retailer Staples’ purchase of rival Office Depot after pricing moved against the deal, which could delay the completion of an acquisition already challenged by antitrust issues.
Banks committed to the financing, which includes the US$2.75bn term loan and a US$3bn revolving credit facility, in February 2015. When the deal was unable to be completed in a timely manner, that commitment was extended to February 4 from November 4, 2015 after the Federal Trade Commission (FTC) raised antitrust concerns.
Market conditions have deteriorated since the deal was put in place and loan pricing has increased significantly in the interim, which is leading some investors to call for higher pricing. The issue highlights the risk of committing to fund loans in advance of deals closing in volatile markets, sources said.
Lead arranger Barclays asked investors on a conference call to fund the loan into an escrow account on February 2 before the financing is due to mature on the original terms, which are below current market rates. The call on January 20 was described as “contentious.”
Changes, including possibly increasing pricing, may be made to the financing following the strong market reaction, but nothing has been announced yet, sources said.
Although investors have committed to provide financing, they argue they did not commit to funding the loan into an escrow account before the transaction received regulatory approval. With the February 4 commitment deadline fast approaching, some investors say they should be in negotiations to extend the maturity of their commitment.
The term loan is rated Baa2/BBB and was sold to investors at 275bp over Libor with a 75bp floor in April, sources said. The average yield for an investment-grade loan on January 20 was 350bp; 50bp higher than the market was in April of last year, according to Thomson Reuters LPC data. The loan will be sold at 99.5bp when it is funded into escrow and may only be repaid at par, sources said.
If the merger had already received regulatory approval and was due to be completed, investors would be prepared to fund the loan at 275bp, even if it is below current market rates, because they committed to the terms last year, sources said.
Investors are already being paid, receiving a ‘ticking fee’ on the loan that started on May 1, 2015, of 50% of the margin. That fee increased to the full margin plus the Libor floor on June 1, 2015 where it will remain. Staples said last year it has already paid US$56m in commitment fees and expected to pay between US$25m and US$35m in fees during the fourth quarter.
A Barclays spokesperson declined to comment. Spokespeople for Staples and Office Depot did not return telephone calls seeking comment.
Staples and Office Depot remain committed to the transaction, according to a lender presentation, and will contest the FTC ruling in a court hearing on March 21. The company expects a decision by May 10.
The funds would be released from escrow at the earlier of the merger closing, the merger terminating or the escrow outside date of September 10, with an additional two-month extension option. Escrow is an account in which money is held until a specific condition, such as the completion of an acquisition, is met.
Barclays said on the January 20 call it would post final term loan documents on January 25 and that commitments are due on January 27. The company is also seeking to extend commitments on the asset-based revolving credit facility to May 10.
Framingham, Massachusetts-based Staples previously tried to purchase Boca Raton, Florida-based Office Depot in 1997 when the rivals reached an agreement but regulators forced the cancellation due to antitrust concerns.
Editing By Tessa Walsh and Michelle Sierra
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