Wising up

3 June 2003 By Suzanne Miller

Using relative value pricing, lenders can now force companies to pay the going market rate if they dig into unfunded commitments. While borrowers in trouble might have to pay higher rates just when they can least afford it, they still get their money.

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Dominion Resources, the big US oil and gas company based in Virginia, has just signed a new $1.45bn loan which is comprised of a $1.25bn senior unsecured revolving 364day credit facility and a $200m threeyear senior unsecured revolving facility.

The credit, arranged by JP Morgan Chase as a commercial paper backstop, will link interest payments to the current yield on the company's bonds. The idea is to link the loan spread to going bond spreads should Dominion draw on the loan. The fact that the loan was 30 times oversubscribed shows how popular this kind of pricing structure promises to be with banks keen to lock in this rare kind of pricing protection.

In September last year Dominion cut its 2003 profit forecasts and had its credit rating changed to negative by Moody's Investor Services. Although Moody's didn't cut the Baa1 rating, it said it was concerned about the company's debtfinanced growth, noting that Dominion had about $15 billion in debt securities at the time.

That said, bankers are quick to note that Dominion Resources is several credit cuts above the other three companies that have been forced as it were to use relative value pricing Tyco International, Teco Energy and Oncor, the Texas utility group. In that respect, Dominion Resources may be a pivotal test case for other, more mainstream companies ringing their bankers for new credit lines.

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