JPM JP Morgan Chase and Co

By Matt Wirz 

Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. are struggling to sell $1.2 billion of loans backing the leveraged buyout of online clothing retailer FullBeauty Brands, investors said, the latest sign that global economic turmoil has forced a broad reassessment of risk.

The setback is the latest for firms seeking to raise funds in corporate-debt markets, as prices have declined recently and several large deals have had to be scaled back. The reversal follows record or near-record debt issuance in recent years that supported a surge of mergers and acquisitions in 2015.

Investors generally have been eager to buy debt backing companies being bought out because the securities tend to pay high interest rates, a quality investors valued when bonds and loans were trading at higher prices. But now that debt prices have fallen amid uncertainty about the prospects for global growth, there are plenty of high-yielding loans and bonds, making it harder for banks to sell new deals, investors said.

"It's a natural progression," said Marty Fridson, chief investment officer of Lehmann Livian Fridson Advisors LLC. "Unsecured bonds feel the pain first, then it moves to loans." Unsecured bonds aren't backed by collateral.

Goldman and J.P. Morgan in August committed to lend money to private-equity firm Apax Partners for its purchase of a controlling stake of FullBeauty, before stock and commodity markets were convulsed by China's decision to devalue its currency.

When Goldman and J.P. Morgan began trying to sell the loans in mid-September at about 98 to 99 cents on the dollar, mutual-fund managers and other traditional loan investors were unreceptive, investors said.

Now, the banks are calling hedge funds and distressed-debt specialists in a bid to shed the loans, investors said.

The debt is split between $820 million of "first-lien" loans, which would be repaid first in a bankruptcy filing, and $345 million of riskier "second-lien" loans and is being marketed at between 80 and 93 cents on the dollar, they said.

If Goldman succeeds in placing FullBeauty's second-lien debt in the 80-cents-on-the-dollar range, the loan will pay a yield of 12.5% to 13%. Hedge funds and other nontraditional investors are pushing for a lower price that would give them yields at about 15%, said fund managers to whom the deal is being marketed.

To be sure, high-yield bond markets have shown signs of strength this week following a rebound in U.S. stock markets. If corporate-debt prices continue to rise, investors will lose much of their bargaining power with banks selling FullBeauty's loans. Goldman and J.P. Morgan have until Oct. 14 to complete the loan sale, a person familiar with the matter said.

J.P. Morgan is the lead arranger of the first-lien debt, and Goldman is lead arranger of the second-lien loan. The firms, along with other banks, will be responsible for any difference between the face amount of the loans and the prices investors pay.

Losses from such a shortfall would mark a rapid turnaround from the boom in M&A activity earlier in the year. Fresh signs of a slowdown emerged in mid-September as debt investors began selling junk bonds, which are rated below investment grade, sending yields higher. As demand slumped, it became harder for banks to sell new bonds backing acquisitions.

In late September, J.P. Morgan cut a planned bond sale backing Altice NV's purchase of Cablevision Systems Corp. to $4.8 billion from $6.3 billion, making up the difference by selling more debt in the loan market. These leveraged loans are also rated below investment grade but are viewed as safer than bonds because they are secured by corporate assets.

Jefferies LLC was forced this week to cut prices on $350 million of loans it is arranging for software company Idera Inc.'s purchase of Embarcadero Technologies, a person familiar with the matter said. All of the loans are expected to be sold for more than 90 cents on the dollar, the person said.

An earlier sign of distress in the loan market was last winter, when a financing for Bain Capital LLC's purchase of Toms Shoes struggled and Sycamore Partners abandoned buyouts of Express Inc. and Chico's FAS Inc. because of choppy debt markets and concerns about specialty retailers.

While FullBeauty's revenue is steady, the proposed transaction would significantly increase its debt to about seven times earnings before interest, taxes, depreciation and amortization, investors said. The heavy debt load and volatility in high-yield bond markets caused the deal to struggle, they said.

Standard & Poor's Ratings Services reduced its credit rating of FullBeauty in September to single-B-minus from single-B, citing its increased debt burden after the buyout.

Fund managers evaluating FullBeauty are comparing it with Apax's 2013 purchase of teen-fashion chain rue21 Inc. Goldman, J.P. Morgan and Bank of America Corp. committed to lend about $780 million but were forced to sell the loans at deep discounts after the retailer announced a steep decline in earnings.

The price of rue21's loans has fallen to about 87 cents on the dollar from 91 cents on the dollar in August, according to pricing service Markit.

Write to Matt Wirz at matthieu.wirz@wsj.com

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(END) Dow Jones Newswires

October 06, 2015 19:17 ET (23:17 GMT)

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