Leonard Green & Partners is seeking nearly $1 billion in bank financing for its pending purchase of the PayLess drugstore chain, banking sources said.

The proposed financing is larger than had been expected.

Representatives from a handful of major banks were scheduled to meet with the Los Angeles buyout firm Thursday and today to discuss the deal.

Among the banks said to be in talks with Leonard Green are San Francisco-based Bank of America and Wells Fargo, and Bankers Trust, Chemical Bank, and Citibank, all of New York.

It's expected that some, or all, of these banks will compete to lead the bank financing.

While the terms of the financing will not be known until after a winner emerges from the bidding, banking sources said the pricing of the deal will reflect its leveraged nature.

Borrowing rates on leveraged buyout loans generally start at around 250 basis points over the London interbank offered rate.

Earlier this month, Leonard Green signed a definitive agreement to buy K mart Corp.'s PayLess operation for more than $1 billion in cash and securities, including the assumption of $170 million of debt.

Total Said to Be $950 Million

Bankers familiar with the buyout firm initially anticipated that Leonard Green would seek anywhere from $500 million to $800 million in bank financing.

Instead, Leonard Green is requesting a total of about $950 million, including a $300 million credit line for working capital, banking sources said.

A term loan of roughly $650 million would refinance the existing $170 million of PayLess debt, and the remainder would help finance the $592 million cash portion of the purchase price, sources said.

It's expected that the additional funds needed to cover the cash portion of the buyout will be raised through a public offering of subordinated debt. Leonard Green officials couldn't be reached for comment.

K Mart to Get 47% Stake

As reported, PayLess will be combined with Thrifty and BiMart, drugstore chains controlled by an investment partnership Leonard Green manages.

K mart will receive a 47% stake in the combined entity, which is expected to have sales of about $4.7 billion next year.

Based on combined results for the year just ending, cash flow would have exceeded debt costs by about two times, had the buyout already taken place, banking sources said.

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