Small Market Deal of the Year: Loehmann’s Holdings –

The high yield debt market has served as a fertile financing ground for several buyout firms over the past couple of years, and for Crescent Capital Investments, it was the perfect venue in which to structure a deal to fund its $178.1 million buyout of Loehmann’s Holdings, a discount retailer specializing in high-end women’s apparel.

The $110 million, two-tranche high-yield note offering was not only unique in that it partly funded Crescent’s first public-to-private transaction, but it was also the first high yield debt issue to adhere to Islamic law. (Crescent Capital is the buyout arm of Bahrain-based First Islamic Investment Bank and as such, must comply with the rules of Islamic finance that prohibit the earning of interest on loans.)

“We have worked to develop structures that document the financing differently so as to comply with Islamic law, but are commercially identical to typical term loans and lines of credit,” says David Crosland, executive director of Crescent.

Crescent financed the Loehmann’s acquisition through a sale lease-back structure that essentially mimicked a high-yield note offering. The buyout firm established a special purpose vehicle (SPV), which entered into a sale lease-back agreement with Loehmann’s, whereby the value of the assets purchased was the same as the high yield notes issued by the SPV. Crescent leased the assets back to Loehmann’s, and instead of paying the debt back through interest, Loehmann’s will be paying rent.

“We documented the transaction as a lease so as to be true to our charter, which is to respect Islamic law,” Crosland said.

As an added hurdle, the acquisition, before it could be cleared, had to overcome some dissent from major shareholders, who did not want to see the company sold at a discount. Crosland, though, says this reaction is typical in a public-to-private buyout deal, and that the price paid for Loehmann’s was fair value.

Of course, Crosland could just be acting humble. The firm agreed to pay shareholders $23 a share, and prior to the vote, Crescent had received promises from Alpine Associates and management – together representing 42% of all shareholders – that they would side in favor of the acquisition.

Steve Martin, the president of Slater Equity Partners, which was the second largest shareholder with 8.7%, had voiced dissent, but ultimately conceded, “Voting against the deal really doesn’t work here, because they only need 50 percent.” Meanwhile, one analyst, C.L. King & Associate’s Gary Giblen, had valued the company at about $30 a share.

Despite the opposition, the sale price did represent an almost 6% premium to the stock’s closing price in the session ahead of the deal’s announcement. And it’s finding these gems that make the buyouts game what it is.

Loehmann’s operates 48 stores in 17 states and the District of Columbia and generates about $400 million in net sales. The company is successful in that it has the ability to source large quantities of goods at the high end and move them along quickly, says Scott Buschmann, a principal at Crescent. “The company has a very loyal customer base and a distinctive and unique access to high-end womens’ apparel,” he says. “It also has a refined program for direct mail marketing”

Crescent also has great things to say about Loehmann’s management team. “Their vision is one of balanced growth, reflecting moderate expansion of existing stores,” Crosland says. “They also plan to have dedicated shoe stores, and we think they have a great chance to generate revenue through their website in partnership with Smart Bargains, a leading Internet provider of off-price merchandise.”

In addition to the high-yield note offering and a $35 million revolver from the CIT Group, which was unfunded at closing, Crescent invested approximately $75 million of equity for the purchase of Loehmann’s. Given the success of the high yield offering and the fact that the deal was compliant with Islamic law, Crescent is likely to follow that financing route for future acquisitions.

“High yield is a very attractive market and there is a lot of demand for high yield instruments,” Crosland says. “We will use the knowledge we gained in the Loehmann’s deal for future acquisitions.”

The purchase price for the Loehmann’s deal was approximately 6x debt-to-EBITDA, and the debt multiples on the deal were about 3.7x cashflow.

Crescent Capital is located in Atlanta and does deals ranging from $30 million to $300 million. The company has invested in a broad range of industries, but focuses on niche businesses with defensible growth characteristics. Its parent, First Islamic Investment Bank, was founded in 1997.