NEW YORK (LPC) - Nine banks that were facing losses on the fully underwritten US$1.02bn loan and bond financing backing the buyout of US greeting cards and stationery maker American Greetings by private equity firm Clayton, Dubilier & Rice (CD&R) are taking less of a hit after an eleventh-hour reduction in the amount of debt that was raised, two sources familiar with the matter said.
The debt includes a Barclays-led term loan B that was upsized to US$470m from US$445m and a Deutsche Bank-led unsecured bond that was downsized twice to US$282.5m from US$325m, as well as an undrawn US$250m five-year revolving credit facility, decreasing the overall size by US$17.5m.
The term loan priced Thursday at 450bp over Libor with a 1% floor and 98 OID, wide to opening guidance of 375bp over Libor with a 1% floor and 99.5 OID. The maturity of the loan was reduced to six years from seven originally, and loan documentation was revised with lender-friendly enhancements. At the final pricing, which implies a yield to three-year call of roughly 7.5%, the banks remained within their market flex, earning in full the fees agreed to for underwriting the loan, one of the sources and a third source familiar said. The banks also received full fees on the revolver, a fourth source familiar said.
There was a possibility that the size of the initial US$325m bond could change slightly even after US$25m of it on Thursday was shifted to the term loan, as it was linked to the final participation rate by the company’s existing bondholders in a change-of-control tender offer for its outstanding US$400m bond due in 2025.
The company on Friday posted final tender results, which included participation from roughly 96% of bondholders, or US$382.5m in principal, leaving a US$17.5m stub that will remain outstanding. This reduced the amount of debt that needed to be raised, as reflected in the amount by which the new bonds were downsized a second time.
Underwriters had been expecting 100% participation given any holdouts would likely see their bonds, which carry a 7.875% coupon and most recently traded at 103 to yield 7.148%, trade down to a level providing a comparable yield to the new bond.
The new bond priced on Thursday with an 8.75% coupon and an 87 OID, for an all-in yield of 11.5%, versus guidance circulated earlier on Thursday at an 8.75% coupon with a steeper 85 OID, for an all-in yield of 12%, sources said. This was 100bp wider than price whispers at a 10.5%-11% all-in yield mid-week and 300bp wider than whispers at an 8.5%-9% all-in yield on Monday. The bond’s maturity was also shortened to seven years from eight originally, alongside certain covenant changes around additional debt incurrence, removing cash from the company and investments.
The underwriters would have broken even on the entire financing if the bond priced with an 8.75% coupon and an OID of 91, two of the sources said.
At the clearing OID, the underwriting syndicate will take a loss of around US$11m, versus around US$18m at the 85 OID and US$300m bond amount, they said.
The deal struggled to gain momentum in syndication after investors shied away from buying debt in a company facing uncertainty, sources said.
The financing puts American Greetings’ debt-to-Ebitda, or earnings before interest, taxes, depreciation and amortization, at roughly 2.1 times through the term loan, up from 2.0 times before the upsizing, and 3.5 times total, according to another source close to the matter.
While this is below regulators’ six times total debt-to-Ebitda cap, investors were concerned about the company’s ability to support this level of debt if the new owners fail to stabilize Ebitda.
Ebitda has fallen by around 20% since 2015, but CD&R’s projections suggest that the transaction will deliver more than US$75m of cost savings, representing more than 30% of last 12-months’ Ebitda, a fourth source said.
Proceeds will be used to partly finance CD&R’s purchase of a 60% stake in American Greetings in a deal that values the company at US$1.1bn, including debt and transaction fees.
CD&R is contributing US$204m of preferred equity to the buyout, representing roughly 18% of capitalization. Including rollover amounts from the founding Weiss family, which will retain a 40% stake, the equity capitalization is roughly 31%.
In addition to Deutsche Bank and Barclays, the underwriters include Citizens Bank, ING, Bank of America Merrill Lynch, HSBC, Sumitomo Mitsui Banking Corp, KeyBank and CIBC. The lead banks declined to comment. CD&R did not respond to requests for comment.