Banks are flocking to the $1.95 billion pro rata portion of the financing package for Ashland's acquisition of International Specialty Products, hoping to gain access to one of few opportunities to tap high-quality funded debt, sources said.

Ashland's pro rata loan consists of a $1.2 billion term loan A and a $750 million revolver. The loans, along with a $1.7 billion term loan B, are part of a $3.65 billion bank loan package that will back the chemical products concern's $3.2 billion purchase of International Specialty Products, which was announced earlier this week.

Ashland is rated BB+/Ba1, the highest non-investment grade rating. The company was downgraded in November 2008 after it purchased specialty chemicals manufacturer for the pulp and paper industry Hercules in a transaction valued at $2.6 billion.

To fund the deal that included $786 million of assumed debt, Ashland borrowed $2.3 billion and retained $205 million in existing debt. Citing increased leverage, S&P and Moody's downgraded the company's corporate credit rating to BB- and Ba2, respectively.

Opportunities in the U.S. loan market to lend to crossover companies that will carry a large funded debt component are infrequent. They involve a highly rated name that is close to investment grade status. Bankers call these types of borrowers "unicorns" as opportunities to lend to them are both rare and extremely desirable. They mainly take place during acquisitions.

Since downgrades below investment grade can significantly increase a company's borrowing costs, Ashland has been making efforts to delever by selling assets. On March 30, the company used proceeds from the sale of its distribution business to repay the full amount of its term loan A balance of $289 million, bringing total debt to $907 million.

Lending To A Unicorn Is Attractive For Number Of Reasons
For one, funded debt of a quasi investment grade credit is more expensive than that of revolvers for investment grade companies that remain, for the most part, undrawn. In other words, lending banks have access, at more favorable rates, to funded debt with an extremely low risk profile.

Tapping the loan market is also attractive from a highly rated company's perspective. The loans serve as a bridge to the capital markets, expected to occur once the company achieves investment grade status. The loan market offers these companies a flexible capital structure that would allow them to repay the loans with high-grade bonds when the right time comes.

The potential to take part in the ancillary business when the company becomes investment grade further increases its attractiveness.
Citigroup, Bank of Nova Scotia, Bank of America Merrill Lynch and US Bank are leading the underwritten financing. JP Morgan, RBS, Wells Fargo, Credit Agricole, BBVA, Fifth Third Bank, PNC, SunTrust and SMBC have been invited to participate as senior managing agents, according to sources.
The company is asking for commitments of $125 million. The SMA round launched Wednesday.

General syndication is expected in the next two weeks, sources said.

Ashland's average cost of debt will be approximately 3.8%, according to the company's presentation. Gross debt/EBITDA will be approximately 3.5 times. Ashland's adjusted Ebitda for the trailing 12 months ended March 31 was $735 million.

The acquisition is expected to close by September pending U.S. and European Union regulatory approval. If the financing falls through, the deal includes a termination fee of $413 million. ISP is a specialty chemicals manufacturer for the personal care, pharmaceutical, home care and agricultural industries.