Freescale Looks To Bondholders To Finance New TL

Freescale Semiconductor, an Austin, Texas-based microchip maker, is trying to land $1 billion from lenders for a new senior secured term loan to help shore up liquidity. But because financing is so hard to come by, Freescale has done something unconventional. It has invited a mix of its senior unsecured and subordinated debt holders to swap their debt for a stake in the new loan. That is, if Freescale's existing senior lenders decide not to fork over the $1 billion themselves.

In other words, those lenders can invest in the new loan first, or sit by while the unsecured and subordinated debt holders exchange their bonds for a higher place in the capital structure. All of this comes not even a month after Freescale drew down $184 million from its $750 million revolver.

"[Freescale] went to the bank group for another $1 billion and said, 'show me the love,'" a source said. "The company also said to the bank group, 'Oh, and by the way, if you don't show me the love, then we're going down to the toggle notes and ask them for the $1 billion. Oh, and by the way, the toggle note holders are going to climb up in the capital structure.'"

The company's senior unsecured and subordinated debt consists of $1.5 billion in 9.15% senior toggle notes due 2014; $1.5 billion in 10.125% senior subordinated notes due 2016; $475 million in senior floating rate notes due 2014; and $2.3 billion in 8.875% senior unsecured notes.

Freescale's senior lenders have until Feb. 19 to decide whether to participate in the new term loan and must pay up by March 17, according to a company statement. If they decide to take a pass, Freescale has offered first priority to the toggle note holders, who can exchange as much as $250 million of notes. The holders of the subordinated notes get second dibs and can swap $746 million. That leaves about $4 million of the new term loan for the other debt holders. If the senior lenders pass, the other lenders have until March 10 to participate in the new loan. The new term loan would mature on Dec. 15, 2014.

A Freescale spokesman declined to comment.

On Feb. 10, the day the company announced the offer, Freescale saw the average bid on its $3.5 billion term loan B fall to 47.5 from 52. Meanwhile, the price on the 9.15% senior toggle notes fell to 13.5 from 14; the price on the 10.125% notes fell to 18.25 from 24.27; and the price on the 8.875% notes jumped up slightly to 27.63 from 27.00.

In late 2006, Citigroup, Credit Suisse, JPMorgan, Lehman Brothers and UBS arranged the $3.5 billion term loan, a $750 million revolver and the bonds to help fund Freescale's acquisition by a private equity consortium including Blackstone, The Carlyle Group, and TPG.

On Feb. 10, Standard & Poor's downgraded Freescale's corporate credit rating to CC from B- and lowered the rating for the senior unsecured and subordinated debt to C from CCC. Freescale's exchange offer, in S&P's view, is "tantamount to a default, given that the participation in the new term loan would represent a substantial discount to the par amount of the outstanding issue," said an S&P analyst. If the exchange is carried out with bondholders, S&P said it would downgrade Freescale's notes to D. However, if the exchange is successful in alleviating Freescale's debt burden, S&P will raise the corporate credit rating to B-.

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