Rue21 Said to Offer $530 Million Buyout Loan at Steeper Discount

Rue21 Inc., the teen-specialty retailer being purchased by Apax Partners Inc., is offering a $530 million loan to investors at a bigger discount than initially proposed after failing to sell the debt last month, according to three people with knowledge of the transaction.

The seven-year term loan is being sold to lenders at 80 cents to 85 cents on the dollar this week, compared with 99 cents in August, said the people, who asked not to be identified because the terms aren’t set. So-called original issue discounts reduce proceeds for the borrower and boost the yield for investors.

Sales at Rue21, which Apax agreed to purchase in May for $42 a share in a transaction valued at $1.1 billion, have been lower as the entire teen retail segment has slumped, according to a report today from Piper Jaffray Cos. Syndication of the loan was delayed last month as investors awaited an update on the company’s earnings, people with knowledge of the deal said at the time.

“The fact they are willing to sell at a nearly 20 percent discount -- they are looking to get the deal done, take the losses and move on,” Sachin Shah, a strategist in special situations and merger arbitrage at Albert Fried & Co LLC, wrote in an e-mail.

Rue21 reported preliminary comparable store sales for the current fiscal month ending Oct. 5 were down 12.8 percent, according to a regulatory filing today. Total sales for the third quarter to date are up 2.3 percent compared with a year earlier, the company said.

“RUE’s month-to-month decline is consistent with widespread traffic contraction, off of an already depressed level in August,” Piper Jaffray analysts Stephanie Wissink and Maria Vizuete wrote in the report today.

Debt Package

The bank debt, which was expected to be distributed to investors in mid-August, may pay interest at 4.5 percentage points to 4.75 percentage points more than the London interbank offered rate, the people said. The lending benchmark will have a 1 percent minimum.

Jared Levy, a spokesman for Warrendale, Pennsylvania-based Rue21 who works at Sard Verbinnen & Co. in New York, declined to comment. Todd Fogarty, a spokesman for Apax who works at Kekst & Co. in New York, declined to comment on behalf of the private-equity firm.

JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs Group Inc. have committed to provide the acquisition financing, including the term loan. The debt includes $250 million of subordinated notes and $269 million of equity contributed by the acquirer, according to an Aug. 7 report by Moody’s Investors Service. The bonds haven’t been marketed to investors yet, said the people.

Apax would have to pay a $62.7 million termination fee if it abandons plans to purchase Rue21, according to an Aug. 20 regulatory filing. Shareholders voted in favor of the acquisition, according to a Sept. 19 statement.

Rue21, which surged 23 percent to $41.96 after the buyout announcement, fell to $39.66 in New York trading today.

The original issue discount was reported yesterday by the Wall Street Journal.

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