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Caldor Deal Shows Private Junk Market Is Still Open to Borrowers

May 27, 1990

NEW YORK (AP) _ A discount retailer laden with takeover-related debt taps the junk bond market to raise $300 million.

That may sound like just another tale from the easy-money days of the 1980s. But the deal took place last week, notwithstanding the current talk of a credit crunch and the death of the junk market.

The fact that the Caldor discount chain was able to raise a hefty sum to refinance existing debt showed that some investors still have appetites for non-investment grade credits, bankers say.

Caldor and most other recent junk issuers have had to raise their funds via private placements rather than in the public bond market, however. They’ve also had to structure their financing deals more conservatively , with tighter covenants to lure buyers.

″The buyers are really in the driver’s seat,″ said John Crotty, a high- yield bond specialist at First Boston Corp. For insurance companies and other big institutions willing to buy junk, ″they can really tailor the bonds that they are buying.″

So far this year only four borrowers have made public offerings of junk bonds to raise a total of just $382 million, said David Unger, who tracks the high-yield market for First Boston.

In the same period last year, before the bankruptcy filing of Campeau Corp.’s retailing arms and the collapse of Drexel Burnham Lambert Inc. virtually shut down the market, the total exceeded $11 billion.

″For all intents and purposes, the public market is dead,″ said Anthony Napolitano, who tracks private placements at McCarthy, Crisanti & Maffei.

So Caldor looked for financing in the private junk market, which at an estimated $170 billion is nearly as large as the public market.

Caldor was taken private last October when a group of investors that included management and the investment bank Donaldson, Lufkin & Jenrette Securities Corp. bought the discount chain from May Department Stores Co. in a $552 million debt-financed deal known as a leveraged buyout.

Garrett Moran, a managing director of DLJ, said the bank sat down with insurance companies, pension funds, mutual funds and Japanese institutions to hammer out long-term financing to replace the buyout group’s temporary bridge loan.

The result was a three-part deal: $160 million of senior floating rate 7- year notes paying interest of 2 3/4 percentage points over the London interbank rate; $40 million of 7-year 12 7/8 percent senior notes, and $100 million of 10-year subordinated notes paying interest of 15 percent and carrying 7-year warrants to buy 12 percent of Caldor’s equity.

It took a month to hammer out the deal and sell it to about 50 institutions, Moran said, compared to the two to three weeks it used to take to launch a public bond issue. Caldor also had to include stricter covenants and include equity warrants, unlike the heydays of the junk market, he said. Still, it got the money.

″It shows that reasonable deals can get done in good size,″ Moran said.

In recent weeks, bankers say more than $1 billion in deals have been done for borrowers such as the furniture company Ethan Allen Inc., drug chain operator Jack Eckerd Corp. and Multimedia Corp., the publishing and broadcasting company.

Hal Guenther, senior vice president who handles private placements at Kemper Financial Services, said the private market could be capable of absorbing a couple hundred million worth of bonds a week. What’s more, borrowers can save money because they don’t have to pay the hefty underwriting fees of a public issue, he says.

Guenther says his company hasn’t found any of the recent deals attractive enough to buy. But he welcomed the trend toward giving bondholders better protection against default and away from notorious features like pay-in-kind bonds and coupon resets.

Homer Rees, president of Prudential Capital Corp., agrees. Terms are becoming more realistic than a few years ago, especially when equity options are included as in Caldor’s deal, he said.

″People are being paid more commensurately with the risks that are being taken,″ he says.

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