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Private Equity Weighs Nuclear Option: Westinghouse Electric

  • Apollo’s $800 million DIP loan puts it in a favored position
  • Angelo Gordon, Oaktree, Goldman also said to have bid on loan

On the eve of the bankruptcy of Westinghouse Electric Co. -- a major blow to the nuclear industry -- around 10 private investment firms were circling.

Victorious among them was Apollo Global Management LLC, which won a bidding war to lend Westinghouse $800 million to fund operations as it tries to reorganize. The loan now gives the private equity firm a prime seat at the table where the company’s future will be determined.

That future is far from certain. But the hoard of distressed investors clanging at Westinghouse’s gates indicates at least one thing: for all the Trump administration’s fears that the company’s nuclear secrets will fall into the hands of a Chinese buyer, it’s just as likely if not more so that the company -- whose name once symbolized American industrial might -- is snapped up by a buyer closer to home.

Representatives for New York-based Apollo and Westinghouse of Cranberry Township, Pennsylvania, declined to comment. No plans to sell the company have been announced, and the bankruptcy is still in its early days.

‘Mile Ahead’

Apollo’s “debtor-in-possession” loan gives the private equity firm a foot in the door should it decide to be more involved, because DIP lenders can demand to be included in key reorganization decisions. They also impose spending limits and deadlines on everything from how quickly an auction must be held to when a company must complete its bankruptcy case.

“People who want to acquire something will get to know the business, and one way you can do it is lending money to them,” said Jonathan Landers, a bankruptcy attorney with New York-based Scarola Zubatov Schaffzin Pllc. “You’re there, you get to know the business and the people. When the race starts, you’re a mile ahead of anyone else.”

While the nuclear business is complex and daunting, that’s exactly the kind of situation that might attract distressed-debt buyers -- a group often referred to as loan-to-own investors who look for undervalued assets that they can turn around, said Douglas Baird, a University of Chicago bankruptcy law professor.

“Even though it looks a bit crazy on the face of it, there really is a business there that you can think about taking care of, if you can get it at the right price,” Baird said. “If you can organize a bankruptcy so you can cap and ring-fence the problems with the reactors, you can manage it well.”

Heavy Competition

Apollo won the loan after competitive bidding with 14 binding offers, including one from a consortium of Goldman Sachs Group Inc., Highland Principal Strategies Investment Partners LLC and Silver Point Finance LLC, court records show. According to a letter filed with the court, Goldman Sachs even tried to best Apollo after the auction ended.

Blackstone Group LP’s GSO Capital Partners, Angelo Gordon & Co. and Oaktree Capital Group LLC, which offer combinations of private equity and distressed investment strategies, were also among parties vying to extend the loan, a person familiar with the situation said. Another person said at least 10 bidders had some form of private equity component to their business and could be interested in owning the company’s assets. The person said none were from countries that would raise national security concerns.

Representatives for Goldman Sachs, GSO, Angelo Gordon and Oaktree all declined to comment.

Next Steps

For Westinghouse, the next step is an April 28 deadline to decide whether to continue its four U.S. reactor projects, a move that will shed light on whether it will continue in its current form.

A bid for final court approval of the loan, initially scheduled for Wednesday, has been adjourned to May 10. Its use of funds for non-bankrupt affiliates has been questioned, and a group of utilities has said the money may not be enough to last long -- something that would give Apollo, a savvy distressed investor, even more sway over the fate of the nuclear company as well as the future of parent Toshiba Corp., which has guaranteed some of Westinghouse’s debts.

For more on Westinghouse’s bankruptcy and Toshiba, read this Company Research Primer.

While putting money to work in a low-interest-rate environment may have been a motivating factor in lending to Westinghouse, many bidders also had private equity profiles, indicating loan-to-own scenarios could be part of the appeal, especially as competitive bidding drove the rate several basis points lower.

End Game

Apollo wouldn’t have to decide on its end game for Westinghouse now, and while the loan is fully funded by five of its affiliates, it has a provision that would allow it to open the loan up to participation. It has made plenty of such loans without ever taking an ownership role. Of 694 companies getting DIP loans since 2002, Apollo participated in 10, according to data compiled by Bloomberg.

Yet over Apollo’s 27 years of investing, 40 percent of its private equity deals have involved distressed buyouts and debt investments, often with “significant downside protection in the form of a senior position in the capital structure,” according to its website.

Apollo had invested $7.8 billion in distressed-for-control transactions as of Dec. 31, and the investments had generated annualized returns of 29 percent, according to the firm’s annual report filed in February.

Westinghouse’s debt is concentrated in fewer hands compared with most bankruptcies, not having other layers of secured debt outside the Apollo loan and Toshiba’s claims. That means the fate of its restructuring is largely in the hands of businesses -- like Toshiba and the owners of unfinished reactors in Georgia and South Carolina -- rather than groups of bondholders with purely financial aims. 

The case is In re Westinghouse Electric Co., 17-10751, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

— With assistance by Lara Wieczezynski, Marcus Lefkandinos, Eliza Ronalds-Hannon, Steven Church, Devin Banerjee, and Dan Wilchins

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