Wall Street willing to offer Cerberus-backed Freedom Group more debt

Private equity fund manager Cerberus Capital Management LP, which vowed to sell Freedom Group a year ago in the wake of the shooting, had turned to an undisclosed financial institution for a $200 million mezzanine loan to pay off some investors, people familiar with the matter said.

But Freedom Group told its lenders later that it would instead try to raise $175 million from them in an effort led by Bank of America Merrill Lynch, people briefed on the matter said. Commitments from financial institutions willing to participate are due on the evening of Dec. 12.

The new debt deal was proposed following discussions with lenders this week, during which it became apparent there was appetite on Wall Street for more of the company’s debt, despite the controversy surrounding Freedom Group, the people said.

The new loan will not be subordinated in Freedom Group’s capital structure, as originally envisaged, making it much cheaper, and in line with its existing operating company debt, the people said. Under the latest proposal, the loan is priced at 4.25 percent above Libor, it will be covenant-lite, and it will mature in April 2019, the people said. 

Bank of America Merrill Lynch is marketing the deal and will not provide any of the new debt, one of the people added.

The sources were not authorized to discuss the new debt deal publicly with the media.

Cerberus and Bank of America Merrill Lynch declined to comment, while a Freedom Group spokesman did not respond to a request for a comment.

The new debt will help buy out Cerberus fund investors who want to quit Freedom Group. In discussions with investors, Cerberus has placed a $1.2 billion valuation on Freedom Group, according to people familiar with the matter.

On Dec. 14, 2012, 20-year-old Adam Lanza, who had grown up in Newtown, killed his mother before driving to the school, where he murdered 20 children and six adults. He then turned the gun on himself.

The massacre inspired a package of national gun control measures in Congress, as well as calls for better security in schools, including the presence of armed guards.

The bills, which included a national ban on assault weapons and expanding the use of background checks for gun purchases, were ultimately rejected after U.S. lawmakers decided they might infringe on the constitutional right to bear arms.

Speculation about legislation limiting gun rights persisted, however, driving up firearm sales, as well as the stock of gun makers. Sturm Ruger & Co Inc shares are up 59 percent so far this year and Smith & Wesson Holding Corp stock has risen 44 percent, while the S&P 500 Index is up 26 percent.

Freedom Group has posted bumper profits so far this year. On Dec. 9, the company said it expected net sales for 2013 to be in the range of $1.25 billion to $1.275 billion, compared with net sales of $931.9 million in 2012.

Adjusted EBITDA for the year is expected to be in the range of $235 million to $240 million compared with $156.5 million for 2012, Freedom Group said.

Fears about gun legislation are beginning to subside, weighing down gun sales. Moody’s Investors Service Inc said on Tuesday that it expected Freedom Group’s revenue and EBITDA to decline in 2014, but then grow in the mid-single-digit percentage range.

Cerberus has also come under pressure from several anti-gun groups and politicians, including New York City Mayor-elect Bill de Blasio, to expedite its efforts to sell Freedom Group.

Natalie Wright and Michelle Sierra are reporters for Thomson Reuters Loan Pricing Corp in New York; Additional reporting by Reuters News correspondent Greg Roumeliotis