Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Apollo Global Management is reaching back into its playbook. 

The private equity investor has been buying up bonds of Claire's Stores, the jewelry chain it acquired in 2007, Bloomberg News reported late Tuesday. It's a move that lets Apollo better control the company's fate, which has been bleak since the firm's buyout saddled it with more than $2.3 billion of debt. 

Discount Shopping
Apollo has been buying Claire's Stores bonds that mature next June
Source: Bloomberg

The purchases of the bonds due in 2017 will buy the ear-piercing chain some time as it aims to return to relevance, with initiatives including selling branded merchandise in partnership with pop stars like Katy Perry

Before and After
Claire's Stores has been struggling since Apollo's 2007 buyout burdened it with more than $2.3 billion of debt.
Source: Bloomberg

It's also a bit of a throwback. Apollo hasn't dabbled in the discounted debt of companies it owns (or if it has, it hasn't disclosed this) since the quarter ended September 2013, according to its filings. Back then, the firm said its sixth private equity fund had invested in discounted debt in portfolio companies including CEVA Logistics, Caesars Entertainment, Realogy and Momentive Performance Materials. It added:

In addition to the attractive return profile associated with these portfolio company debt purchases, we believe that building positions as senior creditors within the existing portfolio companies is strategic to the existing equity ownership positions.

In layman's speak, that means Apollo stands to benefit twice: 1) if the discounted debt rallies toward par and 2) it can protect its equity by steering the company away from a debt default that could push it into bankruptcy.

The poster child for this maneuver was real estate brokerage Realogy, which Apollo bought for $9 billion (including debt) in April 2007, just before the property-induced financial crisis. As the owner of Century 21 and Coldwell Banker teetered on bankruptcy, Apollo snapped up the company's debt, paying 10 cents on the dollar for portions of it. That debt was exchanged for convertible notes which had a later maturity, giving the company time to turn around its fortunes.

Eventually, those notes were converted to equity upon Realogy's initial public offering, reducing its debt pile and interest payments and helping the company to become both profitable and cash flow positive. That allowed Apollo to double its money. 

But not all such scenarios result in wins like that. Other private equity firms have tried their hand with arguably less success , and Apollo is still working to salvage investments in Caesars and Momentive Performance Materials. And although CEVA Logistics has been restructured, it still hasn't been sold, meaning Apollo has owned it for nearly 10 years which is outside the norm.  

Apollo's buying time, by buying debt, may not work at Claire's. The retailer, whose jewelry and accessories target girls and women aged 3 to 35, operates roughly 2,800 stores in North America and Europe. Those stores generated net sales per square foot for fiscal 2015 of $469, according to filings, which is in line with recent years.

The retailer's sales per square foot have plataued since its buyout by Apollo
Source: Company filings

While that's positive because it appears somewhat unaffected by declining foot traffic at malls and changing consumer spending dynamics, it also indicates that any growth needs to be derived elsewhere. For its part, the company is targeting online sales and concessions in other retailers' stores, as well as franchises in Asia, the Middle East and Africa. 

There's no doubt that Apollo's debt purchase is designed to protect its own interests. But whether it also gives Claire's Stores a lifeline or just delays a bankruptcy remains to be seen. Unlike the private equity owners of some other beleaguered retailers such as Sports Authority (now in liquidation) and J. Crew, it's at least giving the chain a fighting chance.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Apax Partners's purchase of Cengage Learning loans before its bankruptcy comes to mind

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Gillian Tan in New York at

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