Investors Win Warner Chilcott Battle, But Expect a War

Investors this week pushed back on Warner Chilcott’s attempt to reduce pricing on its $1.95 billion term loan B, but most don’t believe the market’s repricing fight is over.

The consensus among buysiders is that more companies will try, “to see what they can get away with,” as one investor put it. And their success will depend—depend on whether a repricing amendment contains a little quid pro quo, you know, a little somethin’ somethin’ in return for investors, as well as where market conditions sit when the company makes the attempt.

In the short term anyway, “It will work for those companies whose loans have been seasoned and whose credit has improved,” another investor said. “Otherwise it will be tough without a give by the companies.”

The lack of said “give” is what angered investors most about the Warner Chilcott pricing amendment, which would have reduced the Libor floor on its term loan A to 1.75% from 2.25% and cut the spread on the term loan B to 325 bps from 350 bps. The proposed amendment offered no fee or other compensation, not to mention that it included a “yank-a-bank” provision allowing for the replacement of uncooperative lenders. It also came quite soon after the initial deal pricing. 

“It certainly seems aggressive considering the company is doing this less than three months after entering the credit agreement,” Citigroup analysts wrote.

With a couple of larger creditors taking the lead, the pushback worked. And some say it sends a message to the market that if the buy side is riled up enough, it can come together and block a coercive repricing. 

But that may not always be the case. Investors can dig in their heels more now than they could in the last cycle, but as market conditions heat up, as most think they will in the future, some of that leverage will be lost.

An investor involved in the Warner deal said that while he and his firm were pleased that market conditions allowed for successful pushback, what they’d really like to see is greater discipline by lenders when writing up deal documentation, such as measures that make repricing more difficult. He cites tougher and better written call protection as a good start, saying it would improve the market for everyone if it became more standard.

Seems pretty reasonable to me. We certainly don’t want an amnesiac return to the manic days of “any deal goes.” Whether we’ll actually see voluntary discipline from banks, well, unfortunately that question can probably be answered best by a return to the now famous words of John Mack: “We cannot control ourselves.”

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