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LPC - Staples to repay investors on $2.5 billion Office Depot merger escrow loan

A shopping cart is seen outside a Staples office supplies store in the Chicago suburb of Glenview, Illinois, February 4, 2015. REUTERS/Jim Young/File Photo

By Kristen Haunss

NEW YORK (Reuters) - Institutional investors to a $2.5 billion (1.7 billion pounds) loan to back the merger between Staples (SPLS.O) and Office Depot (ODP.O) will have their commitments repaid and be forced to redeploy their money into a credit market where opportunities are scarce after the two supply retailers called off the deal.

While the repayment just three months after the loan was funded into escrow offers some buyers a quick return, the termination will return to investors a significant amount of money that will need to be re-deployed into a market where institutional loan volume fell 13% to US$39.41bn in the first quarter compared to the same period in 2015, the lowest quarterly total since $30.04 billion was arranged in the last three months of 2011.

Investors “own a huge amount of Staples – it’s a very large loan – and there are not a lot of new loans to buy,” one credit manager said. “Everyone will be wrestling with [how to deploy] the cash.”

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Issuance has fallen this year as market volatility, including pressure in the energy sector from low oil prices, has weighed on the market. The global default rate rose to 4% in April compared to 2.1% a year ago, with 46 defaults recorded in the first four months of the year, 18 in the oil and gas sector, according to a May 9 Moody’s Investors Service report.

Staples said on Tuesday that it and Office Depot plan to terminate their merger agreement following the US District Court for the District of Columbia’s ruling granting the Federal Trade Commission’s request for a preliminary injunction to block the transaction, according to a May 10 news release.

Barclays, the agent on the deal, told investors the loan will be repaid at par, or 100 cents on the dollar, within a few days after the termination announcement, sources said. Staples sold the loan at a discount of 99 cents in January, LPC previously reported. It was funded into escrow on February 2.

As part of the mechanics of the transaction, lenders were told in a January deal update that “in the event that the escrow funds are returned to lenders due to termination of the merger or expiration of the escrow, the escrow term loan will be repaid at par.”

A Barclays spokesperson did not return a telephone call seeking comment. A Staples spokesperson declined to comment. An Office Depot spokesperson referred a call to Staples.

Investors that bought the $2.5 billion loan at 99 cents in January may be happy with the quick return, sources said, while those that purchased the debt when it was trading above par – it was quoted at 100.25-100.5 May 3 – are stuck with a loss.

A $3 billion asset-based revolving line of credit that Bank of America Merrill Lynch, Barclays, Wells Fargo, HSBC, PNC, TD Bank, US Bank and JP Morgan had committed to provide will be terminated, according to a Wednesday regulatory filing.

Banks committed to the financing, which initially included a $2.75 billion term loan and the $3 billion revolver, in February 2015, according to a March 4 regulatory filing.

After some investors threatened not to fund the loan in January, the interest rate was increased to LIB+400 and the size of the term loan was cut to $2.5 billion from US$2.75bn. The loan had a minimum level that the London interbank offered rate could be calculated at of 75bp.

Staples said in 2015 it incurred commitment and other related fees of US$94m related to the term loan, according to the March 4 filing. Of that amount, $2 million was paid last year, US$68m was paid on February 2, and US$24m is payable upon closing or termination of the proposed acquisition.

Framingham, Massachusetts-based Staples previously tried to purchase Boca Raton, Florida-based Office Depot in 1997 when the rivals reached an agreement but regulators forced the cancellation due to antitrust concerns.

(Reporting by Kristen Haunss; Editing By Michelle Sierra and Jon Methven; Additional reporting by Jonathan Schwarzberg in New York)