The bank debt of troubled teen retailer Rue21 sold Friday much like the clothes in its stores — at a steep discount.
In a highly unusual move, the banks selling debt to finance the $1.1 billion acquisition of Rue21 by private equity firm Apax Partners had to discount the debt by 20 percent to get it out the door.
The deal has been under pressure and highly unorthodox nearly since the day it was announced in May.
For starters, one Apax fund was selling the chain to another fund run by Apax CEO John Megrue.
That instantly raised eyebrows as the higher the sale price went it would have benefitted the investors in the older — now liquidating — fund over those in the newer fund that was buying it.
Complicating matters, right after the deal was signed, the retailer’s business hit an iceberg.
Same-store sales dropped sharply, and profit forecasts were trimmed.
The $42 a share seemed too high, but Apax was locked into the deal since the banks —
JPMorgan, Bank of America and Goldman — guaranteed financing.
They syndicated the debt — but had to resort to extreme measures.
Even then some financing pros expected the deal to come apart.
But Rue21’s Chief Financial Officer, Keith McDonough, is expected within days to sign a certificate asserting that Rue21 is solvent, a source close to the situation said.
If he does that, there is no legal out for the company’s buyer or the lenders backing the deal, the source said.
This despite the chain’s deteriorating financial picture.
The deal legally needs to close in mid-October. The company will not disclose the date.
Rue21 closed Friday at $40.22 as traders still wondered whether the buyers will look to get out of the $1.1 billion buyout.
The banks are taking a roughly $100 million hit selling $544 million in debt for what is expected to be a 20 percent discount.
In the next week they are expected to sell $314 million in bonds at as much as a 50 percent discount, or fund that part of the deal themselves, a source investing in the credit said.
Apax and the banks may only have themselves to blame, sources said.
The financing does not include covenants, a source with direct knowledge of the situation said.
If there were maintenance covenants, there would be a much bigger question about solvency, sources said.
An Apax spokesman declined to comment on whether Apax was still committed to the deal or had hired a solvency expert to determine whether the business could survive following its heavily levered buyout.
Rue21 declined to comment.