Precision Drilling Trust, Calgary, (Toronto: PD-UN; NYSE: PDS) reported the expected principal terms of the credit facilities related to its acquisition of Grey Wolf Inc., Houston, (Amex: GW) for some US$2 billion in cash and units will be more expensive than originally anticipated, likely resulting in a reduction or suspension of monthly cash distributions following completion of the merger.

Precision’s bank syndicate consists of Royal Bank of Canada, RBC Capital Markets, Deutsche Bank AG Cayman Islands Branch, Deutsche Bank Securities Inc., HSBC Bank Canada, HSBC Bank USA, National Association and The Toronto-Dominion Bank.

Credit facilities will consist of US$800 million of senior secured term-loan facilities and a US$400 million senior unsecured facility that will be used to finance the merger consideration. The facilities also include a US$400 million senior secured revolving facility that will be primarily used to finance working capital needs and general corporate purposes of Precision.

The terms include a blended annual cash interest rate of approximately 11% before upfront costs, increased from the 8% originally estimated. Additional upfront costs in the form of original issuance discounts and fees of approximately US$76 million will reduce the proceeds of the financing by approximately US$133 million.

The terms also limit distributions based on 20% of Precision's operating cash flow before changes in working capital, provided that 50% of operating cash flow generated in excess of certain base-case projections will also be permitted to be paid as distributions, subject to an overall cap of 30% of aggregate operating cash flow before changes in working capital. Debt covenants will limit Precision's capital expenditures above an agreed base case.

The bank syndicate also retained the right to further increase interest rates, discounts or fees subject to certain market-based indexing.

As a consequence, Precision will pursue a debt-reduction program and re-evaluate its planned capital expenditure program following completion of the merger in addition to re-evaluating its distribution policy.

Precision reports it remains firmly committed to close the merger with Grey Wolf. The special meeting of Grey Wolf shareholders is scheduled for Dec. 23, with closing expected immediately following.