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Merrill Forced To Refashion High-Yield Offering


Merrill Lynch had to downsize, delay and increase yields by 100 basis points on a high-yield deal for an Italian fashion house last week to get the deal done.

bw.gifMerrill Lynch had to downsize, delay and increase yields by 100 basis points on a high-yield deal for an Italian fashion house last week to get the deal done. The struggles came amid European high-yield markets that were flat to slightly higher and the only other new issue in the market last week was priced tighter than initial guidance.

London-based investors say the reworking demonstrates an over-aggressive approach on the part of Merrill, which is looking to move in to the top five in the leveraged finance league tables by the end of next year (BW, 8/9).

Merrill was expected to price a €185 million, eight-year non-call four offering for IT Holding, a Milan-based fashion company, with a yield of 9.25-9.5% at the start of last week. But the deal was scaled back to €150 million and was priced at a discount to yield 10.5%--three days after it was scheduled to be wrapped up. The deal also changed to an eight-year non-call offering. Non-call structures are rare and industry professionals estimate it effectively added another 25-50 basis points of yield.

"If Merrill Lynch management wasn't aware of the damage Telecolumbus did to its franchise, it will be now," said one London-based investor. He is referring to a €475 million deal Merrill sole-managed for the German cable TV company in April, which was priced aggressively and traded down sharply in the after market.

Calls to Fabio Fusco, cfo of IT Holding, were referred to Niccoló Moschini, financial media press officer, who declined comment. Officials at Merrill did not return calls, including London-based Jeff Tannenbaum on the debt syndicate desk, Ian Gilday, European head of leveraged finance capital markets, and Todd Kaplan, global head of leveraged finance in New York.

As for the deal, market participants said Merrill was too aggressive upfront, especially since the fashion industry is seen as a challenging one and some investors said they have questions about the quality of IT Holding's management. One observer noted Safilo, the first rated high-yield deal out of Italy and also a fashion concern, has a yield of 10.25%-10.5% and is the closest comparable. "Merrill screwed up massively on the price talk on this deal," said one investor. Editis, lead-managed by Lehman Brothers with co-leads Credit Suisse First Boston and BNP Paribas, also was priced last week and tightened to 8.375% after being initially marketed in the 8.5% area.

Although Merrill was joint lead on the IT Holding with Italy's Banca IMI, investors said they looked to Merrill for high-yield expertise.

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