Issuers are paying up to keep investors happy on acquisition term loans that have not been funded due to delays in deal closings. Buysiders said issuers have been offering generous "ticking" fees recently as a way to appease antsy investors in a tough market while they await funding on their allocations. Suiza Foods is offering investors 50 basis points as compensation for their patience, while International Multifoods has raised eyebrows with an unusually high 300 basis points fee--matching the spread on the loan. One market player suspects Multifoods may have credit issues unrelated to the acquisition explaining its hefty fee. John Byom, cfo at Multifoods, did not return repeated phone calls. Officials at CIBC World Markets, did not return calls about the increased fee.
Fees to maintain good relationships with buysiders are not new, but with Multifoods, "It's an unusual level and surprised a lot of people," said one buysider, noting the fee is as generous as the spread on what should be the company's $450 million funded deal. "It's like free money," he said, explaining that he's getting the same spread he'll receive once he pays up on the loan. But no matter how high the fee, investors still want deals funded since unfunded deals require capital allocation. Lenders can't walk away from the deal once documentation closes, and unfunded deals are difficult to trade out of in the secondary market. "The deal was scheduled to close in June and it's been pushed out month by month," said one disgruntled investor in the credit backing Suiza Food's acquisition of Dean Foods.
Cory Olson, treasurer of Suiza, said his company started offering investors a 50 basis points ticking fee in mid-July to maintain the company's relationship with investors after the deal looked like it might take longer than expected. "A year ago you might get a transaction done without a ticking fee, but the market's changed," said Olson, explaining that his company is now trying to raise money in an environment with fewer participants. "We didn't want to take the last penny off the table," said Olson, describing the motivation behind his company's decision to compensate investors for the unfunded paper they are holding. "There's less capacity in the market and the market is tightening up from a credit perspective. This is a way to keep a good relationship."
On Multifoods, buysiders speculated that a richer reward may be a function of a more complicated acquisition. The company's purchase of certain General Mill assets is dependent upon the closing of a General Mills' acquisition of Pillsbury which has been delayed for months. The deal has been in the market since February and investors are still awaiting word.
A buysider noted that after a certain amount of time, a 50 basis point ticking fee isn't enough to compensate investors for the risk associated with the credit. "It's inadequate after awhile because you still own the risk."