Sound and fury

The leveraged loan market continues to see the limits of what is permissible stretched as institutions scramble to clear their exposure to the hung pipeline of 2007 vintage debt. The latest example has seen former lead left arranger Citi wriggle free of its co-arrangers on the giant deal that backed the US$22bn leveraged merger of chemicals corporates Lyondell and Basell.

Citi’s absence from the deal stunned many in the market last week. It emerged when now lead arranger Goldman Sachs said it was relaunching the hung syndication of an originally US$9.45bn term loan B, having replaced Citi on the left of the senior deal. The deal will be relaunched on Tuesday in New York and in London the following day.

“This is the first example of a lead left arranger selling down and screwing up everyone else. I’ve never seen that before,” a source close to the banking syndicate said. “They sold in the most egregious and foul way the loan market has seen.”

Citi is understood to have sold its 20% of the US$9.45bn TLB as part of the US$12bn portfolio of long debt positions it sold to private equity-backed debt investors last month.

Most arrangers saw the portfolio sale as a positive step in reducing the backlog of funded debt. Now the realisation that the sale included assets still ostensibly held within syndication agreements has provoked outrage, particularly given Citi’s lead left role, which is an unprecedented development.

A source confirmed that Citi has cleared its exposure to the TLB, but emphasised that it did so only after the original syndicate agreement expired in mid-March. The bank remains involved with the borrower, and has committed a further US$120m ABF since the original deal was structured.

“This is not a front-running, breaking-ranks kind of situation,” a Citi source insisted. But the move is seen by some as the latest example of underwriters stretching the boundaries of good practice to mitigate risk – and angering other banks along the way.

“We’re in uncharted territory here,” said a banker away from the deal. “We’ve never seen a lead arranger sell its exposure like this, apart from the syndicate. We cried ‘foul’ when Credit Suisse sold out of Harrah’s but now that doesn’t look nearly as egregious.”

Indeed, Citi is not the first bank to provoke an angry response by selling its exposure in a hung deal. Credit Suisse did so by selling its 15% exposure to Harrah’s Entertainment‘s US$2bn loan in January. In that case however, Credit Suisse was lead right on the deal, while Bank of America and Deutsche Bank were lead arrangers.

“Both Citi and Credit Suisse sold ahead of the syndication process,” a source close to the remaining syndicate group said. “The only difference is that Credit Suisse was on the right and had no responsibility to anybody else. In this case Citi was on the left and everybody else had entrusted their own risk to Citi to manage.”

The syndication agreement, a Memorandum of Understanding (MoU), outlines how banks within the syndicate will manage the sale of debt on a deal and includes guidelines on how long the syndicate is obliged to act in concert, how the group will agree the clearing coupon and fees and even the specifics of the distribution among arrangers of each dollar that comes in during the sell-down.

A source close to the deal said the Lyondell-Basell transaction featured US documentation, “so the syndicate MoU is based on a US model with relatively rapid expiration dates”.

The same source added that European agreements tended to require the unanimous agreement of the arranging group before they could be dissolved.

While technically free to exit the deal, Citi’s role as lead left arranger and administrative agent in the transaction involved a sought-after, leadership position, with responsibilities that have intensified in a difficult market where syndications have been long-running fraught affairs requiring a great deal of discipline and co-ordination between banks.

Arrangers argue that when Citi sold its loans to Texas Pacific Group, Blackstone Group and Apollo Management last month it also washed its hands of its responsibilities to its co-arrangers.

Where a syndicate group does break there is a first mover advantage, especially in a market with limited liquidity. That reality could fatally undermine discipline among arrangers and banks’ confidence in each other as partners.

While the LyondellBasell situation might be unprecedented it was not unforeseeable, but one result of the increasingly lengthy hold periods on other large deals may be a re-examination of credit syndicate agreements or even the introduction of binding syndication contracts.

The lead role now falls to Goldman Sachs, which will look to take advantage of the current rise in the market. It will be marketing portions of the US$9.45bn term loan B at separate bank meetings in New York and London. Goldman Sachs was the former global transaction co-ordinator. Merrill Lynch, ABN AMRO (now part of RBS) and UBS are also lenders.

To facilitate the sale the B loan is split into three sub tranches broken down into a US$2.5bn piece and a €433m component, pro rated to exclude Citi’s US$1.89bn position. The TLB1 is callable at par. The TLB2 has call protection at 103 and 101.5, while the TLB3 is non-callable for the first two years and then callable at par. The coupon on the three tranches is 375bp over Libor, with a Libor floor at 3.25%. It had previously been marketed at 325bp over.

Syndication is likely to begin with one of the sub tranches, with a decent cash bid expected for the paper. Price talk for an OID will emerge this week, with leads expecting it will be above 90.

A source said syndication of the bulk of the other senior facilities was wrapped up last year. These included a US$2bn term loan A paying 300bp over Libor, an asset-backed loan facility split between a US$1.15bn assets receivables piece paying 150bp and a US$1bn inventory backed piece paying 175bp, and a US$1bn revolver at 300bp.A further US$8bn is being held as a bridge to a mix of 144a senior secured second-lien and senior unsecured notes.