Investor resistance to Rue21's takeover deal forced banks to slash the discount, which in all likelihood will lead to a steep loss to banks on a $544 million loan to the troubled retailer, sources told Thomson Reuters LPC.

The company finalized terms on the seven-year term loan B at LIB+462.5 basis points with a 1 percent Libor floor and an original issue discount of 80 to 82 cents on the dollar, sharply below where the initial 99 discount.

At the current discount, proceeds from the financing will be reduced by between $98 million and $109 million. Typically, at these low levels banks take significant losses.

"This is probably one of the biggest losses to banks in recent years," one loan investor said.

Lenders have been asked for commitments to the loan by 5 pm ET on Friday.

Lead banks Bank of America Merrill Lynch, JP Morgan and Goldman Sachs struggled to distribute among investors a $944 million financing backing the $1.1 billion buyout of Rue21 by Apax Partners.

BAML, JP Morgan and Goldman Sachs declined to comment on Friday.

Investor demand for the original deal was muted after the clothing retailer revealed an 87 percent decline in earnings from May, when Apax Partners announced its plans to buy the company, until the shareholder vote in mid-September, which approved the deal. The buyout is expected to close by October 10.

The loan package, which failed to draw investor demand by the original deadline of August 16, was circled among investors at reworked terms in one-to-one meetings in late September.

The overall financing consists of a $150 million asset-based lending revolver, the $544 million, seven-year term loan, which was increased from $533 million during syndication, and a $250 million bridge loan to bonds.

RE-LAUNCH

The three lead banks had been expected to fund the full term loan if failing to meet demand for the financing before the anticipated closing of the buyout on October 10. However, as market sentiment improved this week the lead banks re-launched the deal to a wider set of investors at the aforementioned terms, according to sources.

The banks will take a loss regardless. BAML and JP Morgan have committed to provide 45 percent of the financing each. Goldman Sachs committed to provide the remaining 10 percent, according to one source.

The $250 million bridge-to-bonds accompanying the financing will be held by the three banks and is expected to be distributed at a later date. The revolver, which will remain mainly undrawn, is also anticipated to be held by the banks.

Corporate family ratings are Caa1/B- and facility ratings are B3/B-.

On May 23, Rue21 announced that Apax Partners was acquiring all outstanding shares of Rue21 for $42 in cash, or an approximate 23 percent premium to Rue21's May 22 closing price. On September 19, Rue21 said in a release that based on a preliminary vote tally from the special meeting of stockholders, Rue21 stockholders have approved the previously announced merger agreement.

Warrendale, Pennsylvania-headquartered Rue21 offers value-priced clothing to young men and women through 959 stores across 47 states.