Buyout Firms Made to Sweat as Picky Lenders Demand Concessions

(Bloomberg) -- Is there a card for that?

American Greetings Corp. is offering one of the biggest discounts on debt in recent years to help finance a private equity fund’s purchase of a stake in the card seller, according to a person familiar with the matter. It’s offering the bonds at around 85 cents, a rare low for freshly sold securities, and also reducing the sale’s size.

The price is a further sign the debt’s been difficult to sell after investors sought stronger protections to limit cash the company could funnel to owners as dividends. It’s not the only deal to have floundered as buyers become more discerning amid a pickup in market volatility. Construction company McDermott International Inc. had to offer significant discounts for debt backing its $6 billion acquisition of Chicago Bridge & Iron Co. while investors objected to provisions in a refinancing deal by beauty company Coty Inc.

“The market is finally high-yield again,” said Ken Monaghan, co-head of high-yield at Amundi Pioneer Asset Management. “Some of the fast money in the high-yield market is sitting on the sidelines and when they are willing to play, they are pushing back on some loose terms.”

’Herd Mentality’

Clayton, Dubilier & Rice agreed in February to buy 60 percent of American Greetings in a $1.1 billion deal, which S&P Global Ratings said would leave the company with a substantial debt burden. Sales are under pressure after it lost three customers, though some is being offset by new business in Canada, S&P said.

American Greetings is selling $300 million of bonds after initially seeking $325 million. The company shifted the $25 million to a loan it’s also offering as part of the financing package. The bonds, carrying a 8.75 percent coupon, will fund a buyback of existing securities under change-of-control provisions in the debt.

Representatives for Deutsche Bank, which is arranging the bond sale, and Clayton, Dubilier & Rice declined to comment. Representatives of Cleveland, Ohio-based American Greetings weren’t immediately available.

In the McDermott deal, the banks arranging the debt had to carry out a series of maneuvers to finally place the debt with investors, which included shifting the capital between loans and bonds and dangling juicy yields to win over investors. It had to offer $1.3 billion of bonds at an almost 12 percent yield after it was sold for less than 95 cents on the dollar. The average yield on similarly rated debt is about 7 percent, index data show.

“Investors have not exactly said fool me once, shame on you, fool me twice, shame on me, but they are saying you cannot keep fooling them over and over,” said Vincent Pisano, a senior analyst at Xtract Research. “They are saying there are terms you simply cannot force on us and backing it up by refusing to lend unless the largest problems are eliminated.”

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