Banks facing losses on American Greetings buyout debt

By Andrew Berlin

NEW YORK, April 5 (LPC) - Nine banks are facing losses on a 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) after a weak response from investors, three sources familiar with the matter said.

The debt includes a Barclays (LSE: BARC.L - news) -led term loan B that has been upsized to US$470m from US$445m and a Deutsche Bank (IOB: 0H7D.IL - news) -led unsecured bond that has been downsized to US$300m from US$325m, as well as a US$250m five-year revolving credit facility, which will be undrawn at close.

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.

The deal struggled to gain momentum in syndication after investors shied away from buying debt in a company facing uncertainty, sources said.

Guidance on the term loan opened at 375bp over Libor with a 1% floor and a 99.5 original issue discount (OID), implying a yield to three-year call of roughly 6.24%, based on current three-month Libor rates, sources said.

Commitments were due on March 29, but the loan was not expected to clear until the bond pricing was set, as lenders looked to the bond for relative value.

The bond is expected to price on Thursday, after underwriters’ discussions with CD&R about potential changes to the capital structure resulted in the US$25m shift of funds from the bond to the loan and a change to the maturity profile of the debt.

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%.

Pricing on the US$470m term loan has widened to 450bp over Libor with a 1% floor and 98 OID, implying a yield to three-year call of roughly 7.5%, the sources said. In addition to the upsize, the maturity of the loan has been reduced to six years from seven originally. At those terms, the banks will remain within their market flex, earning in full the fees agreed to for underwriting the loan, two of the sources said. Commitments are due on Thursday.

The banks have also received full fees on the revolver, one of the sources added.

However, official price talk on the US$300m bond circulated on Thursday at an 8.75% coupon with an 85 OID, for an all-in yield of 12%, sources said. This is 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. In addition to the downsize, the bond’s maturity has been 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 break 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 proposed OID, the underwriting syndicate will take a loss of around US$18m, they said.

EBITDA PRESSURE

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 upsize, and 3.5 times total debt, according to another source close to the matter.

While this is below regulators' six times total debt-to-Ebitda cap, investors are 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.

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 (Dusseldorf: CAI.DU - news) . Deutsche Bank, Citizens Bank, ING, BAML and KeyBank declined to comment. HSBC, SMBC, CIBC and CD&R did not respond to requests for comment.

The size of the bond could change slightly as it is 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.

While roughly 94% of existing bondholders have tendered, underwriters expect 100% participation. 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. (Reporting by Andrew Berlin Editing by Tessa Walsh and Michelle Sierra)