Western Digital (WDC) shareholders must wait, patiently, in hopes that lenders line up for about $10 billion in sub-investment-grade debt that just rolled out Tuesday. Otherwise, the debt may take a bite out of earnings if lead investment banker J.P Morgan needs to sweeten terms of the credit.
The loan package represents the biggest leveraged-loan offering of 2016, and will support Western Digital's merger with data-storage peer SanDisk (SNDK), which management has cited as crucial for widening the tech giant's market scope and ability to trim costs through business overlap.
Western Digital hosted a special shareholder meeting Tuesday to approve the issuance of common stock for the deal, and J.P Morgan hosted a meeting with lenders to unveil aspects of new mega-loans that will support the transaction.
The Irving, Calif.-based company has long maintained the new debt will not translate into an unmanageable interest burden, with CEO Stephen Milligan saying on the January earnings call that it can be partially offset by near-immediate repayments.
"As we approached the end of the year, we all know that we were looking at the potential for an increasing rate environment here in the U.S," he said on the call with analysts. "We expect to quickly deleverage our debt to the tune of specifically $3 billion within a short period of time after the closing of the transaction. That deleveraging will incur in those areas of the market where we are more exposed to interest rate exposure."
But the new debt will result in a sharp hike in interest expense, even assuming the interest guidance unveiled to investors Tuesday, which may rise if J.P Morgan is unable to fully subscribe its syndicate offering. Western Digital paid only $50 million in interest on its existing $2.5 billion in loans over the last four reported quarters, implying an annual interest rate of just 2%.
The new loan package is not just four times larger, but the rate is expected to be much higher.
As Real Money reported, in order to support the roughly $18 billion merger, J.P. Morgan rolled out the credit package to risk-prone investors this week in three major tranches: a $4.2 billion seven-year term loan B, known as an institutional loan; a $550 million similar tranche denominated in euros; and a $3 billion five-year term loan A, which uses an amortizing structure. (Bank of America, Credit Suisse and RBC are secondary bookrunners on the deal.)
All three tranches are rated just a notch below investment grade by Moody's and Standard & Poor's, and the term loan B tranches have set tentative interest-rate guidance at 5.5%-5.75%, according to documents provided by a source close to the deal, who spoke on the condition of anonymity because talks are private. As opposed to high-yield bonds which pay a fixed income, Western Digital has opted for senior secured loans, which pay a floating rate interest tied to Libor.