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Investors Weigh Digital Impact On Deluxe

The $733 million credit backing the leveraged buyout of Deluxe Film by MacAndrews & Forbes Holdings is offering rich pricing to investors who are weighing potential return against potential challenges for the company.

The $733 million credit backing the leveraged buyout of Deluxe Film by MacAndrews & Forbes Holdings is offering rich pricing to investors who are weighing potential return against potential challenges for the company. Deluxe, being sold by its parent The Rank Group, is a print film business in an industry that is marching toward digital imaging. "The question is: How fast is [the industry] melting away as compared to how fast does it pay back debt?" said one portfolio manager who attended the bank meeting last week but has not decided if his firm will invest.

The financing, led by Credit Suisse First Boston and Bear Stearns, comprises a five-year, $125 million revolver and a five-year, $458 million term loan "B." Pricing on the revolver and "B" loan is being talked in the LIBOR plus 4-4 1/4% range. A five-and-a-half-year, $150 million second-lien term loan was pre-marketed before the holidays and is not being offered to investors now. Priced at LIBOR plus 8 1/4%, that piece is oversubscribed, according to a banker.

The fat coupon seems to be enough to assuage any concerns about the move to digital. A banker said the leads have already received commitments north of $300 million on the "B" term loan. "A lot of guys who saw it early have printed for big tickets," he said. Investors agreed the deal will get done because of the high pricing. "People will go into it for the spread," one portfolio manager said. "If you do the analysis, it is a sunset business, but it has a lot of free cash flow." He agreed that the question really comes down to how fast the industry converts to digital. Referencing the Lowes-AMC bank meeting held last Thursday, one investor asked how soon digital conversion will be ready and the companies said they are already in the process. "That might hurt the Deluxe deal," this investor said.

Moody's Investors Service has assigned a B1 rating to the term loan and a B3 rating on the second lien. Deluxe, which operates out of Hollywood, Toronto, London, Barcelona and Rome, is the world's largest processor of 35mm film for the movie industry and the biggest distributor of trailer and release prints for motion pictures. A spokesman at Deluxe was unavailable for comment. Bankers at CSFB and Bear Stearns declined comment, as did a spokesman at MacAndrews & Forbes.

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