Thomson unit forced to up interest costs: sources

By Michael Flaherty

Investors forced the textbook publishing unit of Thomson Corp. (TOC.TO: Quote) to raise the interest rate on a loan backing its $7.75 billion leveraged buyout amid concerns about the company's high debt levels, sources close to the deal told Reuters Loan Pricing Corporation on Wednesday.

Pricing on the seven-year, $3.44 billion term loan backing the deal was increased by 25 basis points, the sources said, bumping up the company's borrowing costs. Investors also forced Thomson Learning to change terms on its revolver and pay-in-kind notes.

The company and its private equity buyers already faced high borrowing costs through the large chunk of debt borrowed for the buyout.

The raised terms could also have broader implications, signaling the start of a pull back in the frothy debt markets that have helped fuel the leveraged buyout wave. Most leveraged buyout loans have met little resistance in the current LBO boom.

"If there were difficulty in obtaining financing on the appropriate terms, that would obviously cause them to re-evaluate whether they wanted to acquire the asset or not," said Paul Bradley, director of research at Fraser Mackenzie.

Investors were slow to participate in the Thomson Learning loan on concerns about debt levels and discomfort with the loan's loose covenant structure, sources told Reuters LPC, a unit of Reuters Group PLC (RTR.L: Quote).

Apax Partners, a London-based private equity group, and Canada's OMERS Capital Partners, agreed to buy the company last month for a higher-than-expected $7.75 billion in cash, with Apax leading the deal.

Apax did not immediately return a call seeking comment. Thomson Learning declined to comment.

Bankers who participated in the auction previously told Reuters that the buyers paid much more than the second highest bid, agreeing in the end to pay more than 15 times the company's cash flow. The average leveraged buyout multiple for media deals is in the low double-digits, according to analysts.

Private equity buyers pay around one-third of a purchase price in cash, and borrow the rest. They seek companies with strong cash flows to pay down the debt quickly.

Sources also previously told Reuters that the financing structure of the leveraged buyout was such that Thomson Learning would not have enough cash flow to pay its annual interest payments. As a result, the deal has a pay-in-kind note attached to it, meaning the company could defer interest payments.

Shortly after the deal for Thomson Learning, Thomson Corp. struck a deal to buy Reuters Group Plc for about $17.2 billion.

Pricing on the $3.44 billion Thomson Learning loan has been increased by 25 basis points to 275 basis points over Libor, the floating interest rate set by banks, according to LPC. The loan will now be issued at 99-99.25 cents on the dollar, whereas before it was being sold at 100 cents on the dollar.

The LBO will leave debt to cash flow leverage at the Thomson Learning unit just under 10 times -- also a high multiple by private equity standards.

Commitments to the loan are due June 21, while the bonds are expected to price by the end of the week.

RBS Securities, JPMorgan Chase & Co. (JPM.N: Quote), Citigroup (C.N: Quote) and UBS AG (UBSN.VX: Quote) lead the loan financing deal.

(Reporters and editors involved in writing and editing this report may own Reuters securities and are bound by the Reuters Code of Conduct, which restricts dealing in securities in companies a journalist is reporting on).

(Additional reporting by Wojtek Dabrowski in Toronto. Reuters LPC reporting by Faris Khan and Caleb Frazier) [via]