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The banks funding Penn National’s take-private have started working on the finer details of the credit agreement with Fortress and Centerbridge, an event that should be “as pleasant as giving birth,” one source close to the situation told dealReporter.
In anticipation of all gaming regulatory approvals being received by mid-June, the groups had their first few meetings this week to toss around ideas on the financing agreement, said a person familiar with the banks’ thinking. In speaking directly to the lenders, this person said he came away convinced they do not want to do this deal.
Fortress Investment Group declined comment on this story. Centerbridge Partners did not respond to requests for comment.
The first source said that for lenders Deutsche Bank and Wachovia, the deal’s original terms are now even more unacceptable, making it that much harder for the banks to extract their own rate of returns. The assets are not worth the leverage or the price, the source said, adding it would be very difficult deal to see through.
A senior industry banker, not involved on the transaction, took a harder line: “There is no way that this transaction will get consummated. The banks don’t want to fund debt. The sponsors don’t want to fund the equity. Only the shareholders, who have a deal struck at 40 points above the current unaffected market value, assuming no transaction, want the transaction to close. The assets are worth 7.5 – 8x EBITDA and the debt at almost 10X EBITDA, suggesting zero equity value at such price.”
The deal’s current financing package is composed of a secured USD 7.1bn debt commitment, consisting of a USD 5.1bn senior credit facility and a USD 2bn term loan in addition to the sponsors supplying USD 3bn in equity.
Presumably, with at least four to six weeks before Penn’s banks need to go to the credit market, the tide could turn in the deal’s favor, the source familiar with the banks’ thinking commented. But with further bank write-downs expected and a significant leveraged loan inventory yet to be cleared, the oversupply is still driving prices down, he said. “Simple fundamentals of this deal do not support this transaction, and anyone who thinks it’s going to be done is mad.”
One would presume the sponsors’ enthusiasm for the deal would be waning as well, it was said. Fortress and Centerbridge should be pushing very hard for a price cut if not walking as a USD 200m reverse termination fee is substantially less than an immediate USD 2-2.5bn write-off on the equity, it was offered.
Fortress affirmed its commitment to the deal during a conference call at the end of March.
The glue holding this deal together is the specific performance clause within the merger agreement, the second source said. Penn National is believed to be convinced, based on the advice of its legal team, that it has a very strong deal contract, he said. A source close to the company declined comment on this story but in past has reiterated the sentiment of a very strong contract.
The company has a specific performance clause against the shell corporation which could prove to be a very challenging legal option to pursue, considering United Rentals’ suit with Cerberus earlier in the year. Even though Penn could probably get specific performance against the shell corporation, it is unclear whether the shell can get a specific performance against the sponsors.
Previous media reports have also suggested the issue of specific performance on shell companies is cloudy at best, questioning exactly how a shell could be forced to perform, especially if allowed to spiral into bankruptcy by the sponsors. Even so, this issue could be mitigated to some extent by the equity commitment letter as it appears Penn can sue directly versus traversing the shell companies, these reports stated.
A Penn shareholder said the market is closely monitoring Clear Channel’s (CCU) litigation to gauge Penn’s likely success. At this point, he added, CCU seems to be more positive for the sponsors versus the banks.
CCU’s unraveling is also important to Penn’s lenders who already received legal advice on their own account, said the first source, while adding he was unsure how the situation would play out in Penn’s case.
Penn still needs regulatory approval in nine gaming jurisdictions and is seeking to complete the merger in the second quarter of 2008.
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