Apollo Management Goes Deeper Into Debt


Apollo Management has spent much of 2009 recasting itself as a debt investor, and pounded home the point yesterday in a nine-page investor letter (as first reported by the WSJ).

Signed by firm founder Leon Black, the dispatch says that Apollo’s three investment themes are: Leveraged senior loans, distressed debt and portfolio company debt (you know, from when Apollo was primarily a mega-buyout shop). Here’s a brief overview of Apollo’s recent activities in each, based on the letter:

Leveraged Senior Loans
Apollo “selected credits totaling $24 billion of face value from the balance sheets of distressed financial institutions and secured long-term (7-9 year), low-cost (LIBOR+100bp) financing facilities… The vast majority of the margin that was posted has been returned and the investments are marked at or above cost as of September 30.”

The example Apollo points to is satellite operator Intelsat, which Apollo and other investors sold in early 2008 to BC Partners and Silver Lake Partners for $16.5 billion. Apollo subsequently bought subordinated notes with leverage at a discount to par, and the firm reports that Intelsat’s revenue and adjusted EBITDA increased by 10.1% and 6.7%, respectively, over the past year.

Distressed Debt
Apollo acquired over $8 billion of face-value distressed debt, via both its private equity and capital markets platforms. Within the PE platform, the three largest positions were in:

  • Charter Communications: Aggregate of $1 billion invested for a 31% stake (post-reorganization), at an implied cration multiple of approximately 6.2x estimated full-year 2009 EBITDA. 
  • LyondellBassell Industries: $2.6 billion of vace-value pre-petition first-term loans. Company is expected to exit bankruptcy in Q1 2010, at which point Apollo and other first-lien lenders will convert their positions into equity, and invest approximately $2.5 billion via a rights offering.
  • Swift Transportation: $307 million invested for total face value of $636 million on loans and bonds. Financing multiples against EBIDTA were 2.7x and 5.2x, compared to 2007 buyout multiple of 7.3x).

Portfolio Company Debt

Apollo portfolio companies now control over $10 billion of their own debt, including $7 billion of discount to par value. The firm points to two examples:

  • Harrah’s Entertainment: Total debt has been reduced by over $3.3 billion, by debt-for-ddebt exchanges, open market purchases and tender offers. It also has amended certain other agreements. “The company has more than $1.6 billion of availabile liquidity, over 35% headroom to its one maintenance covenant and no material debt maturities until 2013.” (Note: Most big buyout firms seem unconcerned with huge 2012-2013 debt maturities, as if the economy will have rebounded and all will be hunky-dory. They may be right, but it’s a dangerous game of kick the can).
  • Realogy: Apollo has bought around $960 million of bonds, and reduced total leverage by a little over 18 percent.
  • CEVA: €950 million bought via debt exchanges and open market purchases. “The company has over €290 million in cash, over 40% headroom to its one maintenance convenant and no material debt maturities until 2013.”

Apollo also sent some updated fund performance data, which you can find here.