Private equity attacks its own medicine in controversial debt battles
The barbarians are crying scandal. For decades, private equity firms have been viewed as aggressive intruders, using sophisticated practices to prevail in brutal corporate competitions.
Now this is reversed. In a wave of corporate restructurings following the coronavirus crisis, Apollo Global Management and other traditional private equity groups have taken to the courts to complain about the behavior of rival creditors.
It has not gone unnoticed that the legally aggressive tactics they challenge are those they themselves have deployed in the past.
Seeking new funds to weather the pandemic, mattress company Serta Simmons Bedding has taken $ 200 million in new loans a small majority of creditors who, in addition to putting in new money, have seen their existing loans rise to seniority in the capital structure. Holders of the remaining 49 percent of Serta’s loans, including Apollo, effectively saw their claim on the company’s assets become subordinate to senior debt holders.
Apollo sued, alongside other disgruntled creditors including Angelo Gordon and Gamut Capital. In a scathing response, Serta, owned by private equity group Advent International, noted that the plaintiffs had “sponsored and participated in numerous transactions structured in a manner similar to this transaction.”
A New York judge denied Apollo’s attempt to stop the deal.
Hot spots are multiplying and multiplying, as the pandemic pushes highly leveraged companies to the brink. Earlier this month, struggling movie channel AMC Theaters announced a rescue funding led by Silver Lake Partners, the private equity firm that already owns $ 600 million in AMC convertible bonds. A group of leading lenders, including Apollo, opposed the new financing and made their own competing proposal, believing the Silver Lake package to be inferior for AMC and undermining their own claims on the chain.
Apollo was also part of a group of creditors calling for an independent “reviewer” to investigate the corporate governance of the privately held energy company Sable Permian Resources.
The blurring of traditional roles has led private equity groups to take a different stance in such battles. Ever since Leon Black co-founded the group in 1990 from the ashes of bad debt house Drexel Burnham, Apollo has always taken opportunistic stances on distressed debt, trying to profit by trading in corporate loans and bonds. in trouble.
But today, the majority of Apollo’s assets under management come from a $ 216 billion debt arm, which lends to businesses and purchases regular corporate debt. Blackstone’s debt unit, GSO Capital, now exceeds $ 130 billion in assets.
$ 500 million
New financing provided to Travelport by its private equity owners, Elliott Management and Siris Capital
Steven Kaplan, a private equity expert at the University of Chicago, said this creates contradictions that are increasingly apparent among large, diversified alternative investment firms.
“This is a very natural development given the increased amount of alternative funding and the overlap of buyout, credit and hedge funds in the distress space,” he said.
Apollo’s rivals enjoy a schadenfreude moment. At one point, the private equity group had such a reputation for playing hard with the creditors of its holding companies, that it began to fear that traditional debt buyers would be wary of funding its future buyouts and in doing so. 2015, Apollo embarked on what investors called a “tour of apologies.”
Even though private equity pioneers dug deeper into credit, some large hedge funds are growing in the opposite direction. Elliott Management, founded by ex-lawyer Paul Singer, is best known as a fierce, troubled debt investor unafraid to take on big companies or even Argentina. In the Caesars case, for example, where she held a billion dollar debt, she filed a lawsuit accusing Caesars co-owner Apollo of “incredibly brazen corporate looting” for casino sales that the creditors, including Elliott, believed to have belonged to them. (Elliott eventually settled down with Caesars and Apollo).
Since then, Elliott has become a primary lender in technology buyouts. He even created his own private equity unit, Evergreen Coast Capital, which specializes in technology LBOs – and now finds himself in the crosshairs of credit hedge funds that have bought one of his holding company’s debts.
Travelport, a reservation software company acquired by Evergreen and Siris Capital, has been accused by existing lenders of “asset stripping” after $ 500 million secured in debt financing from its two owners to alleviate a liquidity shortage, in a deal that pushed intellectual property guarantees away from other creditors.
Travelport chose Elliott / Siris financing over a proposal from existing creditors, including Blackstone’s credit arm, GSO, and, faced with grunts from the aggrieved party, Elliott applied to a New York State court to affirm that the transaction was appropriate.
Ironically, Blackstone previously owned Travelport, taking money out of the company in 2007 through a dividend recapitalization that sparked a clash with bondholders in 2011.
Some long-time players in the debt market consider the current wave of disputes to be normal, even if the players find themselves in unusual roles. Debt investing is increasingly an accepted way, alongside traditional private equity, for savvy investment firms to use existing skills to gain control of firms.
But there is reason to believe that the current economic downturn could result in increasingly aggressive tactics from private equity owners seeking to protect their businesses.
Some insiders note fundamental changes in the ecosystem beyond the mere evolution of asset managers. The big Wall Street banks are no longer big holders of leveraged loans, and are also less active as loan “agents”, the paper administrators who sometimes play the role of mediator or traffic policeman. .
Another difference also this time, the debt without onerous covenants has skyrocketed. According to data compiled by Moody’s, its high yield bond covenants quality index is below its “lowest level protection” threshold since late 2014.
“There is a lack of discipline in the lending market and it has spawned a new era of ultra-aggressive transactions,” said one of the leading finance advocates. “Private equity firms have debt arms that are subject to the whims of other private equity firms. You can’t really have sympathy for any of them.