Apollo LBO Pipeline Dried Up as Lending Stalled, Harris Says

  • Financing markets are 'shutting down,' co-founder says
  • Firm is also increasing investments in distressed debt

Apollo Global Management LLC’s list of potential leveraged buyouts disappeared this month as the debt market stalled, co-founder Josh Harris said.

“The financing markets are shutting down,” Harris said Friday at the Wharton Private Equity & Venture Capital Conference in Philadelphia. “We had a huge pipeline going into the holiday period. We were on the verge of signing these deals. The market shut down. Our entire private equity pipeline dried up.”

Widespread stress in high-yield bond and loan markets have slammed investors and are increasingly punishing companies seeking to issue debt, especially to finance acquisitions. Selling riskier corporate loans has become so challenging that in the last quarter of 2015, banks were forced to boost yields on more than $23 billion of loans because of waning demand, up from $11.7 billion in the previous three months, according to data compiled by Bloomberg.

“Banks have been suffering severe indigestion over high-yield loans to which they were committed,” Erik Gordon, a professor at the University of Michigan’s Ross School of Business, said after Harris spoke. “It will be a while before their appetite for new loans reappears.”

Distressed Debt

Apollo, which manages $162 billion in credit and private equity holdings, is increasing its investment in distressed debt for the first time in “a long time,” said Harris, one of the New York-based firm’s three billionaire founders. In addition to traditional LBOs, Apollo has historically built debt positions in companies that it expects to struggle and be restructured, after which it hopes to emerge with an ownership stake. Its most profitable deal, an investment in chemicals maker LyondellBasell Industries NV, was done that way, yielding $10 billion in profit.

“We’re slowing down our classic private equity but we’re speeding up in our distress-for-control business,” Harris said. “There’s a buying opportunity here, but we’re going to be cautious about how we leg into it.”

Harris sees a prolonged downturn coming to industries affected by slowing economic growth in China. “We are entering a massive recession in aluminum, oil, gas, lead, copper, soybeans, nickel that could last a while,” he said.

With crude prices still low, Apollo also sees oil producers as an investment opportunity -- “albeit not one for the faint of heart,” said Harris. Oil will rise to $60 a barrel in one to three years, he said, when supply eventually contracts, but the coming year will be “very, very difficult for energy companies.”

Oil has pared its decline this year to about 9 percent after plunging to a 12-year low. West Texas Intermediate for March delivery rose 40 cents to settle at $33.62 a barrel on the New York Mercantile Exchange on Friday. January crude output by the Organization of the Petroleum Exporting Countries climbed to the highest level in data compiled by Bloomberg going back 20 years as Indonesia’s membership was reactivated.

“The oil markets have over-corrected,” Harris said. “The price is below where the fundamentals ultimately will ascribe the price. Nothing fixes low prices like low prices.”

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