While leveraged loan markets virtually ground to a halt in August, financing for AEA Investors LP's acquisition of Houston retailer Garden Holdings LLC launched Wednesday with an equity portion of 50% of the $715 million transaction value.

Bank of America Merrill Lynch and UBS set a price range Thursday morning on a $250 million loan to be used to fund the buyout from New York private equity firm Three Cities Research Inc. The spread on the term loan is LIBOR plus 625 to 650 basis points, with a 1.5% LIBOR floor, according to Standard & Poor's Leveraged Commentary & Data. The acquisition, first reported by LCD, had not been announced.

Garden Holdings operates big-box retailer Garden Ridge, a home décor outlet with about 50 stores primarily in the South and Midwest. It had $338 million in trailing 12-month revenue, according to Moody's Investors Service, which assigned a B2 corporate rating and a B2 rating on the loan with a stable outlook.

That AEA, of New York and Stamford, Conn., is writing a 50% equity check, along with Three Cities Research, speaks volumes of the state of the credit markets.

Weak economic reports following the U.S. debt downgrade by S&P, combined with deep financial uncertainties in the euro zone and resulting market volatility, have made lenders extremely cautious across the board.

The financing is one of three sponsor-backed loans to be priced in September so far, with two still waiting to be priced.

In August only three sponsor-backed loans were launched and priced, according to LCD. These were for transactions involving Providence Equity Partners-backed George Little Management, which raised $88 million, and Flexera Software Inc., bought by Teachers' Private Capital, the private equity unit of Ontario Teachers' Pension Plan. Flexera raised $355 million, according to LCD.

Financing for Garden Ridge won't come cheaply. More than a third of the debt being raised to fund Garden Ridge buyout -- $85 million is being raised through mezzanine financing -- will be much more expensive capital than bank loans.

The remaining $80 million will be in the form of a revolving credit facility.

Terms of the financing also include several financing restrictions. The senior-secured loan agreement will include maximum-leverage and minimum-interest coverage ratios, according to LCD.

Moody's said the ratings reflect the company's "highly leveraged capital structure post-leveraged buyout." Its debt-to-Ebitda ratio will be about 5.5 times, Moody's said in a Wednesday report.

While revenues have fallen, Ebitda margins have "expanded significantly," and the company is expected to maintain high operating margins, though this may be undercut by growth-oriented investments.

However, Garden Ridge is expected to "only modestly deleverage as the company increases its investment in new store openings," it added.

If anything, the large equity check for the Garden Ridge buyout could serve as a template for buyout professionals in the near term, according to industry professionals.

Without access to high-yield or favorable financing terms, buyout firms may simply underwrite buyouts of up to $1 billion by bridging the financing themselves, in the hope that they'll be able to syndicate the leverage later at better terms, according to two attorneys structuring recent buyout proposals for PE clients.

Tapping mezzanine funding is another alternative, at least until the markets improve.