Orchard Supply Hardware to sell $235 million eight-year notes

By Paul Deckelman

New York, Nov. 2 - Orchard Supply Hardware Stores Corp. was heard by high-yield market sources Wednesday to be getting ready to start marketing a planned $235 million issue of eight-year senior notes.

The issue will be brought to market by an underwriting team consisting of Lehman Brothers, Citigroup and JP Morgan following a roadshow that is slated to begin on Thursday and run through Nov. 15.

The Rule 144A offering will be sold with registration rights. The notes will be non-callable for the first four years after issue, except for the standard three-year equity clawback provision for buying back up to 35% of the issue using equity sales proceeds.

The issue is expected to carry a B2 rating from Moody's Investors Service and a CCC+ rating from Standard & Poor's.

The San Jose, Calif.-based specialty retailing company is a wholly owned subsidiary of Sears Holdings Corp. - best known for its Sears, Roebuck and Co. and Kmart department stores - and it operates a chain of 84 home improvement stores. The anticipated new-deal proceeds will be used as part of a broad recapitalization of Orchard Supply Hardware announced by Sears Holdings on Oct. 7.

Under terms of that planned transaction, Ares Management LLC, a Los Angeles-based investment company, will pay $58.7 million in cash via its Private Equity Fund for a 19.9% stake in Orchard and will also get a three-year option to purchase an additional 30.2% of the company for $126.8 million. The recapitalization also envisions a debt issue by Orchard - although the coming $235 million eight-year deal is less than the $405 million initially announced in October.

Sears Holdings also announced at that time that it expects its wholly owned Sears, Roebuck subsidiary to receive a dividend from Orchard of about $450 million.

Sears Holdings said that assuming consummation of the initial $58.7 million investment by Ares, it will retain an 80.1% equity interest in Orchard Supply Hardware, which would be reduced to about 49.9% should Ares exercise its option to purchase the additional stake in Orchard over the next three years.

The recapitalization transaction is expected to close in the current 2005 fourth quarter, subject to regulatory approval, completion of Orchard's debt issuance and customary closing conditions, Sears said.

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