A $1 Billion Check Helped Apollo Clinch Year's Biggest LBO

When Apollo Global Management agreed to buy home security company ADT Corp. in February for $12.3 billion, it knew that financing a deal during a credit market slump would be hard. The private-equity giant found an ally in Canada.

A lending arm of one of Canada’s largest pensions, the Public Sector Pension Plan Investment Board, agreed to buy $1 billion of a type of bond that many investors were wary of at the time, according to people with knowledge of the matter. Affiliates of the private-equity firm committed to buy another $500 million of similar debt. 

The market for junk debt backing leveraged buyouts was in the dumps. And without those commitments, banks would have been reluctant to provide backing for the transaction’s planned $3.1 billion of second-lien bonds, said the people, who asked not to be identified as the information isn’t public. Second-lien bonds get paid after a company’s most senior lenders if the borrower fails.

On Thursday, banks on the deal led by Barclays Plc started the process of selling the rest of the debt, offering $1.6 billion of senior loans to institutional investors, along with a $255 million revolving credit line. The second-lien bond sale is expected in the coming weeks, the people said. A representative for Apollo didn’t immediately respond to requests for comment.

"Structural Damage"

Apollo cobbled together the purchase of ADT just weeks after the private-equity firm’s co-founder, Josh Harris, bemoaned the lack of financing available to get leveraged buyouts done. Credit markets were skittish, and investors were skeptical of such acquisitions that are often funded with large amounts of debt.  

To PSP, the dearth of financing was an opportunity to work with private-equity firms.

"The ADT deal was perfect for us at a time when the markets were struggling and we were looking for opportunities," said David Scudellari, who heads the pension fund’s credit office in New York. "After what happened in the market toward the end of 2015, there’s been a lot of structural damage in financing markets."

"These kind of opportunities will continue to be available for investors like us who can provide through a partnership approach the financing solution to private-equity firms," Scudellari said.

Apollo also sold $750 million of preferred securities to an investment unit of Koch Industries Inc., according to a company filing. That move was critical in preventing ADT bonds from getting downgraded by ratings companies, one of the people said. Such a cut in credit grades would have forced ADT to refinance those notes, the person said.

With those preferreds, as well as the $3.1 billion of second-lien notes and the $1.6 billion of first lien loans, there will be around $5.4 billion of new obligations backing the purchase of ADT and its combination with Apollo-owned Protection 1.

The financing for the deal is being provided by Barclays, Citigroup Inc., Deutsche Bank AG and Royal Bank of Canada.

Apollo is offering to pay at least 5.75 percent to 6 percent on the first-lien loan that is due in 2022, a person with knowledge of the matter said. Commitments for the floating-rate debt are due by April 20, the person said.

Funds managed by affiliates of Apollo committed to provide up to $3.6 billion of equity for the deal, according to an April 1 regulatory filing.

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