Maybe buying all those heavily discounted loans from the banks wasn't such a good deal after all. It appears that Apollo Management LP is the first to get burned on the debt that buyout shops bought (supposedly) on the cheap from Wall Street banks in 2008, as the private equity firm is left holding the bag on $2 billion in debt from now bankrupt Lyondell Chemical Co.
Sources with direct knowledge of the matter
are telling Bloomberg that
Leon Black's firm holds the debt in its LeverageSource fund after
buying it from Citigroup Inc. last year at about 85 cents on the
dollar. Apollo's 15% discount has turned into a big loss with the value
of the paper tumbling to 44 cents on the dollar, following Lyondell's
bankruptcy filing Tuesday. The same sources also said that Apollo is one of the firms providing DIP financing in order to help salvage the value of the debt.
Unable to pull off as many buyouts last year due the credit crunch, a
number of private equity shops saw an opportunity last spring to turn a tidy profit
by buying leveraged debt from Wall Street banks at a discount. Banks
including Citigroup, Deutsche Bank AG, Goldman, Sachs & Co. and
others were moving aggressively to sell big blocks of leveraged loans
and high-yield bonds to private equity firms, and were willing to take
quite a haircut to do it.
-
Citigroup is reported to have sold Apollo, Blackstone Group LP and TPG
Capital about $12 billion of loans and bonds at an average price of
under 85% of par.
- Deutsche Bank was talking with Apollo and Blackstone
about buying roughly $5 billion of debt at 85% of par at the same
time.
- The steepest discount came from Goldman Sachs though, which
accepted 65 cents on the dollar on the €100 million ($158 million) of
senior debt from Bain Capital LLC's June 2007 buyout of Germany's
biggest yacht builder, Bavaria Yachtbau GmbH.
But since the spring of 2008, the economic picture has deteriorated considerably, and many
of the companies that the buyout shops expected to be able to handle
their debt loads are now struggling. The loss of confidence has shown
up prominently in debt markets, as the average high-yield loan price
fell 28 cents on the dollar last year to 66.6 cents, according to
Standard & Poor's. With all the changes private equity firms are
dealing with now, big losses from leveraged debt bets are the last
thing they need. -
George White
See Bloomberg story See Dealscape post on PE firms buying debt
