Banks sell $250 million Rue21 buyout bond at loss

NEW YORK, United States - Bank of America Merrill Lynch, Goldman Sachs and JP Morgan have sold the USD250m senior high yield notes backing the buyout of teen clothing retailer rue21 at a steep discount of 73, market sources said on Thursday.

The bond, which matures in 2021 and carries a coupon of 9%, priced at the end of last week, two of the sources said.

The retailer's dwindling sales, in what analysts describe as a "faddish" teen market, irked investors and left the underwriters with a total loss in the region of USD150m, market participants estimate.

The deal stood out as leveraged finance markets are red-hot with record issuance for high-yield bonds in September and riskier deals including payment-in-kind bonds being sold as investors chase yield.

The underwriters sold the USD538.5m leveraged loan that also backed the buyout by private equity group Apax at a discount of 81.5 earlier this month - that accounted for about two thirds of the overall losses for the banks.

IFR reported last week that the underwriters were trying to gauge the clearing level for the bond based on where the loan was trading. It had risen to around 85 in secondary markets.

Investors had demanded an even greater discount on the bridge due to its subordination in the capital structure, and the company's high leverage. Moody's estimates rue21's pro-forma debt/Ebitda at about eight times for the 12 months ended August 3 2013.