Apollo, Cerberus LBOs Suffer Most Defaults, Moody’s Says

Companies owned by Apollo Global Management LLC and Cerberus Capital Management LP defaulted on their debt more than those owned by 12 of the other largest private-equity firms, according to Moody’s Investors Service.

For deals structured before the financial crisis, 57 percent of companies, or 12 of 21 borrowers, controlled by Leon Black’s Apollo defaulted, according to a report published today by the ratings firm. Cerberus came next at 50 percent with three out of six issuers defaulting.

If the use of covenant-light loans wasn’t so high, the default rate for sponsor-owned companies “likely would have been higher,” John Rogers, a senior vice president at Moody’s, wrote in the report.

Borrowers that were subject to leveraged buyouts by private-equity firms were often able to take advantage of a low interest-rate environment and investors’ willingness to accept minimal debt covenants. Issuance of covenant-light loans, debt that doesn’t include typical lender protections, reached a record $312.6 billion last year, according to data compiled by Bloomberg.

“The biggest surprise was how varied the default rate was between various firms,” Rogers said in a telephone interview. “Apollo had 21 deals, 12 of which defaulted and six of those are low rated, which is a relatively high percentage to go bad over time.”

‘Minimal Defaults’

KKR & Co., the buyout firm run by Henry Kravis and George Roberts, ranked lowest with a 10 percent default rate. Included in the defaults are distressed exchanges, according to the report.

“Companies in which Apollo funds have invested have been among the most active in using opportunistic exchange offers and buybacks to reduce debt and extend maturities,” Fran McGill, an Apollo spokesman at Rubenstein Associates, wrote in an e-mail. Excluding these transactions “companies in which Apollo funds have invested would have minimal defaults.”

The average annual default rate for companies backed by the private-equity firms was 6 percent, according to the report. That compares with 6.4 percent for all U.S. speculative-grade non-financial companies with an estimated senior unsecured rating of B1 or lower, excluding borrowers owned by the buyout firms.

‘Doesn’t Measure’

“The study only appears to evaluate a small number of leveraged deals we successfully executed during this time period,” Chip Smith, a Cerberus spokesman, wrote in an e-mailed statement. “It certainly doesn’t measure our actual performance or the distinction between growth equity investors and those that specialize in deep-value, distressed investing like Cerberus. The data, while interesting, doesn’t measure that much.”

Out of the 55 private-equity controlled companies that defaulted, 37 occurred between 2008 and 2009, and the remainder between 2010 and 2013, according to the report. Of all the deals that defaulted, 53 were structured prior to the financial crisis.

The average annual default rate during the recession period of 2008 and 2009 for private-equity owned companies was 12.8 percent, less than the 13.9 percent default rate for Moody’s benchmark comparison portfolio.

The average annual default rate for “mega-deal”, those with more than $10 billion of debt, was higher at 17.8 percent, Moody’s said in the report.

“Some firms are clearly more aggressive,” Rogers said of some private-equity firms having higher default rates.

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