Bloomberg News

Lowest Rates in Four Months Spur NRG, Penn National to Refinance

June 10, 2011

June 10 (Bloomberg) -- NRG Energy Inc. and Penn National Gaming Inc. are seeking more than $6 billion in bank loans to refinance debt as companies take advantage of the cheapest borrowing costs since February.

The largest U.S. independent power producer is proposing to pay 3 percentage points to 3.25 percentage points more than the London interbank offered rate on a $1.6 billion facility, while the operator of 25 gaming and racing facilities is offering to pay 2.75 percentage points more than the lending benchmark on a $750 million term loan B. Libor on both loans will have a 1 percent minimum.

Issuers have obtained $144.2 billion in leveraged credits this year to refinance debt as margins on loans sold to investors including collateralized loan obligations, hedge funds and pension funds have decreased to 403.1 basis points as of May 31, from an all-time month-end high of 589.1 in July 2010, according to Standard & Poor’s LCD.

“Pricing is obviously a key driver for companies seeking to reduce their borrowing costs and extend maturities,” Valerie E. Radwaner, corporate finance partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP, said in a telephone interview. “This is an opportunistic loan-refinancing market, meaning companies with certain credit fundamentals are going to the market to seek better pricing, more favorable covenant packages and other borrower-friendly terms.”

Liquidity Available

In May, there were 63 institutional loans totaling $38.2 billion, according to JPMorgan Chase & Co. research led by Peter Acciavatti in New York. Most of the volume went to refinancing, which made up 75 percent of new deals, according to the June 3 report. Total leveraged-loan volume in May set a record, at $83.9 billion, the research show. A basis point is 0.01 percentage point.

“There are a number of companies we advise that are examining their capital structure and determining where they can reduce their cost of capital, extend maturities and generally evaluating whether a refinancing in the current market is an optimal strategic solution,” Radwaner said. “Liquidity in the bank market is very much available for the right credit-quality borrower.”

S&P assigned a BB+ rating to NRG’s $3.9 billion in loans, two levels above the company’s BB- corporate credit rating. The refinancing will eliminate a 50 percent excess cash-flow sweep that’s part of NRG’s term loan and will create flexibility for larger shareholder distributions, Swami Venkataraman, San Francisco-based credit analyst wrote in a June 8 ratings report. That means NRG will no longer be required to use half of its excess cash flow, as defined in the term-loan agreement, to repay debt.

Rating Raised

“How management balances this desire for greater distributions with its capital expenditure program in the context of declining cash flows will be key to the company’s rating over the next few years,” Venkataraman said.

Penn National, based in Wyomissing, Pennsylvania, received BBB- and Ba1 debt ratings from S&P and Moody’s Investors Service, respectively. S&P raised its corporate credit rating on the company to BB, citing an 8 percent increase in Penn National’s 2010 earnings before interest, taxes, depreciation and amortization, compared with S&P’s expectation of flat performance.

The S&P/LSTA U.S. Leveraged Loan 100 Index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, dropped 0.12 cent to 94.64 cents yesterday, the lowest since Jan. 7.

Loan Funds

On Feb. 14, the S&P/LSTA Index closed at 96.48 cents on the dollar, the highest level since November 2007. At February month-end, institutional spreads touched a year-low, at 378 basis points, according to S&P’s LCD.

Leveraged loans are those rated below BBB- by S&P and less than Baa3 at Moody’s.

Inflows into loan funds year to date are about $4 billion, according to data compiled by Bloomberg, compared with 2010’s $16 billion.

“Flows into loans have been pretty material versus last year, and that’s simply investors looking to not necessarily get away from duration but to diversify into instruments that may not be negatively impacted by a massive movement in rates,” Leland Hart, money manager at New York-based BlackRock Inc. said in a June 6 interview on Bloomberg Television’s “Fast Forward.”

‘No End in Sight’

NRG, based in Princeton, New Jersey, is proposing to sell its $1.6 billion facility at 99.5 cents on the dollar, according to a person with knowledge of the terms who declined to be identified because the deal is private. The $3.9 billion transaction includes a $2.3 billion, five-year revolving line of credit that pays 2.75 percentage points more than Libor.

Commitments to the Morgan Stanley-led financing are due today on the term loan portion and June 17 on the line of credit, the person said. In a revolving credit facility, money can be borrowed again once it’s repaid; in a term loan, it can’t.

Penn National is proposing to sell its seven-year term loan B at 99.75 cents on the dollar, said a person with knowledge of this deal who declined to be identified because it’s also private. Lenders must let Bank of America Corp., the bank arranging the credit, know by June 16 whether they will participate, the person said.

The transaction includes a $700 million revolving line of credit and a $700 million term loan A that will pay 1.75 percentage points more than Libor. A term loan B is sold mainly to non-bank lenders such as CLOs, bank loan mutual funds and hedge funds. A term loan A is sold mainly to banks.

“We’re continuing to see companies come to the loan market to refinance their debt with no end in sight,” Paul, Wiess’s Radwaner said.

--Editors: Chapin Wright, Cecile Gutscher

To contact the reporter on this story: Krista Giovacco in New York at kgiovacco1@bloomberg.net

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net


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