(Adds company comment, financing details starting in sixth paragraph.)

Sept. 12 (Bloomberg) -- BJ’s Wholesale Club Inc., the third-largest U.S. warehouse-club chain, set the rate on $2.23 billion of loans backing it’s buyout by Leonard Green & Partners LLP and CVC Capital Partners,according to a person with knowledge of the matter.

BJ’s is proposing to pay 5.25 percentage points more than the London interbank offered rate on a $1.125 billion first-lien term loan, said the person, who declined to be identified because the terms are private. Libor, the rate banks charge to lend to each other, will have a 1.25 percent floor.

The company, based in Westborough, Massachusetts, may sell the seven-year debt at 97.5 cents on the dollar, the person said, reducing proceeds for the borrower and boosting the yield for investors.

A $200 million second-lien term piece may pay 8.5 percentage points to 8.75 percentage points more than Libor with a 1.25 percent floor, the person said. The 7.5-year debt may be sold at 97 cents on the dollar.

Deutsche Bank AG, Citigroup Inc., Barclays Plc and Jefferies Group Inc. are arranging the transaction and have set a Sept. 22 commitment deadline for lenders to respond.

Cathy Maloney, vice president of investor relations at BJ’s, didn’t immediately return a phone call seeking comment.

Covenant-Lite Loans

The loans are covenant-lite, meaning they won’t have financial maintenance requirements, according to another person with knowledge of the deal, who also declined to be identified because the terms are private.

The financing includes $900 million in asset-backed securities as part of the financing, including an $850 million revolving line of credit and a $50 million term portion, both due in five years, the second person said.

Interest on the asset-based revolver will begin at two percentage points more than Libor, while the asset-backed loan will start at 3.5 percentage points more than the lending benchmark. Pricing on both will be based on a grid, the person said.

Lenders to the first-lien term loan will get soft-call protection of 101 cents, meaning BJ’s would have to pay one cent more than face value to reprice the debt in its first year, the person said. Second-lien lenders will receive hard call protection of 103, 102 and 101 cents.

Borrowings under asset-based facilities are tied to a company’s accounts receivables and inventory. First-lien debt is repaid first in a bankruptcy or liquidation, second-lien debt is repaid next.

Costco Wholesale Corp. and Wal-Mart Stores Inc.’s Sam’s Club are the two biggest warehouse-club chain positions.

--Editors: Faris Khan, Chapin Wright

To contact the reporter on this story: Krista Giovacco in New York at kgiovacco1@bloomberg.net

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net