By Gillian Tan
Jefferies Group LLC could lose as much as $15 million on the
debt backing Bain Capital LLC's investment in Toms Shoes as it
struggles to sell the loans, according to people familiar with the
matter.
The lender's stumble on the Toms deal comes amid a bumpy period
in the market for leveraged loans, which are issued to finance
mergers and private-equity buyouts, among other things. Demand for
such loans has been robust in recent years as investors flocked to
higher-yielding debt, but market volatility earlier this month put
a damper on new deals.
The $300 million in debt funding the Toms deal was initially
offered at 99 cents on the dollar, according to S&P Capital IQ
LCD, but will be ultimately issued at between 90 cents and 92 cents
on the dollar, according to people familiar with the deal.
Jefferies stands to lose between $10 million and $15 million at
that range, accounting for fees and its ability to adjust the
interest rates on the debt, the people said.
Jefferies began marketing the loan earlier in October amid a
turbulent period for the markets, during which investors broadly
sold off stocks and high-yield debt amid fears about the strength
of the global economy.
Investors also have expressed concern about Toms's heavy focus
on shoes, a product that is vulnerable to fashion whims, some of
the people said. Investor marketing documents reviewed by The Wall
Street Journal say the company's product portfolio is "anchored" by
its signature Alpargata, a casual canvas slip-on shoe which
accounts for 72% of the company's gross sales.
Bain's purchase of 50% of Toms was designed, in part, to fund
the company's expansion. The marketing documents outline plans to
launch a "comprehensive" handbag line beginning next year and to
begin selling in China next year. Toms, which donates a pair of
shoes or eyeglasses for every pair it sells, also plans to increase
its distribution channels to include brick-and-mortar retailers
like Foot Locker and Macy's, as well as online retailers like
Zappos and Shopbop, according to the marketing materials.
The loss marks a speed bump for Jefferies, which currently sits
in eighth-place on the ranking of banks marketing U.S.
leveraged-buyout loans, according to data provider Dealogic.
The firm, owned by financial holding company Leucadia National
Corp., has gained a greater share of the market for such loans as
traditional lenders come under pressure to avoid financing deals
regulators believe would put too much debt on a company. Jefferies
isn't subject to the same regulatory regime as bank-holding
companies.
Despite recent market turmoil, leveraged lending has been a
fruitful business for Wall Street. Low interest rates on
investment-grade and sovereign debt have prompted investors to
flock to riskier debt in search of higher returns. Demand for such
deals has helped push financing rates for some takeovers to
historic lows.
Still, some banks have stumbled in the race to fund buyout
deals.
Credit Suisse Group AG, Bank of America Corp., GE Capital and
KeyBanc took a nearly $10 million hit on the sale of loans backing
the merger of motorcycle parts and accessories providers Motorsport
Aftermarket Group and Tucker Rocky/Biker's Choice, The Wall Street
Journal reported in May.
Last year, J.P. Morgan Chase & Co., Bank of America and
Goldman Sachs Group Inc. sold the debt backing the takeover of teen
fashion chain rue21 Inc. at a steep discount for a loss of about
$100 million, the Journal reported at the time.
Write to Gillian Tan at gillian.tan@wsj.com
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