Jan. 7 (Bloomberg) -- Apollo Management LP, the private- equity firm led by Leon Black, holds $2.2 billion of loans from Lyondell Chemical Co., the bankrupt chemical maker.

Apollo is now a member of a lending group providing so- called debtor-in-possession financing to fund Lyondell’s operations through bankruptcy, according to a court filing. The firm holds Lyondell’s bank loans through LeverageSource, an Apollo fund listed in a court filing as the fifth-largest secured creditor.

The buyout firm bought Lyondell bank loans from Citigroup Inc. last year at about 85 cents on the dollar, said bankers with knowledge of the deal. The loan has tumbled to 44 cents on the dollar, according to London-based pricing service Markit, as the global economic slump forced Lyondell to file for bankruptcy. Lyondell’s problems add to Apollo’s woes as its buyout investments including Harrah’s Entertainment Inc. and Realogy Corp. struggle amid the worst financial crisis since the Great Depression.

“Apollo may be trying to protect an earlier error in judgment with Lyondell,” said Jonathan Macey, a law professor at Yale University. Apollo may avoid deeper losses by providing bankruptcy financing, he said.

Steven Anreder, a spokesman for Apollo, declined to comment. Lyondell spokeswoman Susan Moore didn’t return phone calls seeking comment.

Seeking Bigger Share

Apollo said in today’s filing with the U.S. bankruptcy court in New York that it deserves a larger share of the new loan.

“Apollo, as one of the largest holders of the senior secured credit facility debt, elected to participate in the DIP financing to protect its economic interests despite being challenged by disproportionate allocations,” the filing said.

Apollo also lost money last year after agreeing to pay $1 billion to Huntsman Corp. to terminate an acquisition of the chemical maker by its Hexion Specialty Chemicals Inc. unit. Apollo paid Huntsman $425 million in cash and bought $250 million of convertible notes, Woodlands, Texas-based Huntsman said in a statement on Dec. 30. Huntsman also received a $325 million termination fee from Hexion on Dec. 19.

Harrah’s Losses

Harrah’s, the casino company Apollo and TPG Inc. of Fort Worth, Texas, bought last January for $17.1 billion, has reported $463 million of losses in the last four quarters. Realogy, which Apollo bought for $6.6 billion in April 2007, reported $209 million of losses in the last three quarters.

Apollo bought Lyondell bank loans from Citigroup in April, bankers familiar with the sale said at the time. Citigroup sold about $1.9 billion of the debt, about a fifth of a $9.45 billion term loan in April, according to a CreditSights Inc. report on April 29.

Goldman Sachs Group Inc., Merrill Lynch & Co. and the other banks that held the loans then offered to sell the debt above 90 cents on the dollar in May to investors, according to a Standard & Poor’s LCD report that month.

Black, 57, started Apollo in 1990 with former Drexel Burnham Lambert Inc. colleagues Joshua Harris and Marc Rowan.

Apollo, TPG Inc. and Blackstone Group LP’s GSO Capital Partners were among buyout firms that bought high-yield, high- risk debt last year at discounted prices. The average high-yield loan price fell 28 cents on the dollar last year to 66.6 cents, according to Standard & Poor’s, as Wall Street firms whittled down $230 billion of loans they’d promised to private-equity firms to fund takeovers before credit markets seized up.

Drop in Demand

Lyondell Chemical cited waning demand for its products in its bankruptcy filing yesterday in New York. The Houston-based unit of LyondellBasell Industries, a chemical maker based in Rotterdam, the Netherlands, said it arranged for up to $8 billion of debtor-in-possession funding, including $3.25 billion of fresh cash as well as refinanced debt.

The interest rate on the one-year term loan is 10 percentage points over the London interbank offered rate, a lending benchmark, according to bankruptcy court documents. Libor, which is 1.39 percent, will be set at 3 percent and the lenders will be paid a fee of 3.5 percent, the filing said.

Lenders including Credit Suisse AG, Merrill Lynch, Goldman Sachs and Apollo that owned large pieces of Lyondell’s debt were approached in Mid-December to provide financing, David Ying, senior managing director at Evercore Partners Inc. in New York, said in a filing to support the new debt.

Debt Load

Access Industries, which owns LyondellBasell, is also providing $750 million of the debtor-in-possession funding. Billionaire Len Blavatnik is founder and chairman of Access.

The chemicals maker has struggled with the debt that financed the $12.3 billion acquisition of Lyondell Chemical Co. by Basell AF in December 2007.

Buyout firms that purchased loans may be required to offer bankruptcy financing as banks restrict lending to preserve capital, said Chris Taggert, a New York-based senior loan strategist at CreditSights.

“Debtor-in-possession lending is caught up in the same malaise as credit markets generally,” he said.

To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net; Jonathan Keehner in New York at jkeehner@bloomberg.net

Last Updated: January 7, 2009 18:37 EST