Debs repackages part of second lien loan as note

UK department store Debenhams, which is owned by a private equity consortium comprising CVC, Merrill Lynch Private Equity and Texas Pacific, has become the latest borrower to raise debt through a second lien note in a bid to lock in additional liquidity.

Lead managers CSFB, Citigroup, Morgan Stanley and Merrill Lynch have repackaged part of the existing £300m second lien loan into a note giving investors that were not able to buy into the original facility the opportunity to get exposure to the name. Investors revealed in June that they had been approached with a proposal to repackage between £75m and £125m of the second lien loan in note form.

The second lien is part of the company’s £2.05bn recapitalisation, which includes £1.75bn of senior debt. As part of the refinancing, Debenhams has repaid its £210m 10.5% bonds and its €172m 9.5% bonds, both maturing in August 2012.

The second lien has been something of a headache for the leads, which were forced to flex up pricing by 50bp despite underwriting the tranche at 450bp after interest was muted. Moreover, the deal’s seven-strong sub-underwriting group was only completed after the initial 135bp fee was raised twice, first to 150bp and then 170bp. The senior element was syndicated easily, however, despite aggressive leverage of 5.6x and the €800m dividend to the sponsors.

The margin on the second lien is three-month sterling Libor plus 500bp and buyers will have to enter into a confidentiality agreement to get information on Debenhams’ performance.

Issuers have increasingly started to look to the second lien market over high yield to raise junior debt. The debt financing the acquisition of Wind, for example, includes a €700m second lien facility, a portion of which was repackaged into note form.