Deals: Buyout Firm Favors Private Mart for Senior Debt

Freeman Spogli & Co. is focusing on the private-placement market, rather than on bank loans, as the main source of senior debt for its planned purchase of the Purity Supreme grocery chain.

The Los Angeles merchant banking firm announced late last month that it had agreed to buy the chain from Supermarkets General Holding Corp. for approximately $300 million, including the assumption of debt.

$100 Million in Senior Notes

Bankers Trust Co. and Donaldson Lufkin & Jenrette Inc. have been tapped to privately place roughly $100 million of senior notes to help finance the deal, which is expected to close within a few months.

Fred Simmons, a general partner at Freeman Spogli, said the firm can get more flexible financing terms in the private-placement market than in the bank-loan market.

"I can see quite easily paying a higher rate for something that provides more flexibility" in terms of covenants and amortization schedules, he added.

As it stands now, the only bank financing for the deal will be in the form of a $35-million working capital line, to be provided by Union Bank of Switzerland.

In addition to the senior debt, financing for the acquisition will consist of about $105 million of equity, and $50 million to $60 million of subordinated debt.

Freeman Spogli may try to raise the sub debt in the public junk bond market.

Despite the general reluctance among banks to fund leveraged buyouts, grocery store deals have remained popular, mainly because the grocery industry is considered recession-proof and noncyclical.

As recently as June, for example, a $440 million loan for a supermarket buyout was successfully syndicated by Bankers Trust, Citibank, and Manufacturers Hanover Trust Co.

The loan helped finance the purchase of American Stores Co.'s Alpha Beta chain by Yucaipa Cos.

Last fall, Freeman Spogli relied heavily on bank financing for its acquisition of American Stores' Buttrey Food unit.

Bankers Trust and Morgan Guaranty Trust Co. coagented a $141-million loan package for the Buttrey deal, which was also successfully syndicated.

Though the decision to rely on the private-placement market for the firm's latest deal was not driven by pricing considerations, Mr. Simmons said that rates in the private market are better now than a year ago, when the firm was buying Buttrey.

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