Apollo’s Affinion Risks Default as Cash Ebbs: Corporate Finance
Apollo Global Management LLC (APO)’s Affinion Group Holdings Inc. has less than a year to pare back $2.3 billion of debt before it breaches loan terms that would cause a default and accelerate payment to its lenders.
Chief Financial Officer Todd Siegel warned in a July 26 call that earnings at the company, which manages perks that banks and travel firms use to retain customers, would decline for the year. That’s likely to cause the company to exceed a requirement limiting how much debt it can have relative to cash flow, according to Moody’s Investors Service. After the call, Affinion’s bonds dropped to a record low, pushing yields above those of its speculative-grade peers.
Financial customers facing regulatory scrutiny over their marketing practices are shunning the junk-rated firm’s services, causing Affinion’s quarterly sales to drop for the first time since at least 2010. The Stamford, Connecticut-based company, which hasn’t turned a profit since being taken private in 2005, paid owners including Leon Black’s Apollo dividends of at least $248 million last year even as debt surged 43 percent.
“They’ve continued to put debt on this company,” Suzanne Wingo, a senior analyst at Moody’s in New York, said in a telephone interview. “It would be nearly impossible for them to meet their June 30 covenant” without an amendment or alternative debt-reduction options such as an asset sale.
Affinion’s $475 million of 7.875 percent senior unsecured notes due in December 2018, which traded as high as 92 cents on the dollar in March, have dropped to 72 cents to yield 14.9 percent on Aug. 29, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That level indicates that the bonds are distressed.
While the company said in a July 26 earnings statement that its ratio of debt to adjusted earnings before interest, taxes, depreciation and amortization was 5.22 for the 12 months ended June 30, a percentage decline in Ebitda of “mid-to-high single digits” may boost leverage above the 5.25 limit that comes into effect next year.
“We have successfully managed our covenants and obligations since we became an independent company, and we remain highly confident in our ability to continue doing so,” Siegel said in an e-mail. “There are a number of different paths and options that provide us with the flexibility to meet our obligations while continuing to invest in the business.”
Apollo took control of the company from Cendant Corp. in 2005 for $1.8 billion. Affinion’s leading marketing partners by revenue as of year-end included Wells Fargo & Co. (WFC), Bank of America Corp. (BAC) and Citigroup Inc. (C), according to the company’s annual report. Revenue generated from Wells Fargo and the lender’s customers accounted for 14 percent of sales last year.
A 5 percent drop in adjusted Ebitda from $367.9 million in 2011 would produce a leverage ratio of 5.4, according to data compiled by Bloomberg based on a debt level of $1.89 billion on June 30 provided by the company. A decrease of 9 percent would bear a ratio of 5.65.
“They’re probably going to trip the covenant at some point,” Todd Morgan, a high-yield debt analyst at Oppenheimer & Co. in New York, said in a telephone interview. “But I don’t think there’s going to be a huge, contentious discussion with lenders over amending the covenant.”
Average yields on the company’s bonds surged to 22 percent yesterday, the highest among diversified media companies including Nielsen Holdings NV (NLSN) and Lamar Advertising Co. (LAMR), according to Bank of America Merrill Lynch index data. Affinion’s borrowing costs were about 16 percent July 25, before the company announced second-quarter earnings, the fourth- highest among peers, index data show.
Affinion’s $356 million of 11.5 percent, senior subordinated bonds due in October 2015, which reached a high of 106.5 cents two years ago, have dropped about 15 cents since July 25 to 71.8 on Aug. 28, Trace data show. The securities yield 25 percent. The company’s $1.1 billion of term loans due Oct. 2016 have fallen to 87 cents today from a year high of 95.4 cents on April 11, Bloomberg prices show.
Moody’s downgraded Affinion one level to B3, six levels below investment grade, and said a negative credit outlook partially reflected the company’s dependence on partnering with large financial institutions. Sales may decline as much as 6 percent over the next 12 months, Wingo wrote in an Aug. 16 report.
Standard & Poor’s analysts led by Hal Diamond said that Affinion’s B rating was at risk of a downgrade with performance “under pressure stemming from financial institution reregulation,” according to an Aug. 20 report.
Capital One Financial Corp. (COF), a former Affinion customer, agreed last month to pay $210 million to settle charges of deceptive marketing of credit card “add-on” products such as payment protection and credit monitoring.
Capital One didn’t admit or deny wrongdoing in the first public enforcement case brought by the Consumer Financial Protection Bureau that was established by the Dodd-Frank Act to increase oversight of consumer financial products.
“It should be fairly obvious even to a casual observer that the intensity of regulation in the domestic banking system” has increased considerably over the past year, Affinion’s Chief Executive Officer Nathaniel Lipman said on the conference call with analysts to discuss second quarter earnings. “This has resulted in significant delays in launching new programs” with financial firms, he said.
Affinion’s total debt surged to $2.3 billion last year from $1.6 billion in 2005, Bloomberg data show, as Ebitda more than tripled over the same period. Apollo owns about 68 percent of Affinion’s common stock, according to the annual filing.
Affinion paid a $115.4 million cash dividend to its shareholders in January 2011, and a month later used some of the proceeds of Affinion’s incremental term loans to pay stock and options owners $133.4 million, according to a July 26 regulatory filing.
Apollo “has basically taken their money out,” Oppenheimer’s Morgan said. “They are essentially playing with house money.”
Melissa Mandel Kvitko, an Apollo spokeswoman who works for Rubenstein Associates Inc., declined to comment on the dividend payments. Apollo shares have returned 14.7 percent this year.
While second quarter revenue dropped 2.45 percent to $378 million from a year earlier, annual sales jumped 12 percent to $1.5 billion in 2011, the biggest jump on record, Bloomberg data show.
The company’s loans include a so-called equity cure provision that would permit Apollo to make cash contributions to Affinion to remedy a financial covenant breach, Justin Forlenza, an analyst with Covenant Review in New York, said in a telephone interview.
“If they didn’t address the financial covenant default before it happened, then the required lenders would be able to accelerate the loans,” Forlenza said. “Apollo may be able to postpone or eliminate a financial covenant default by making use of the equity cure provision.”
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