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Apollo Management deal paves the way for more structured issuance

admin | December 20, 2019

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Apollo Management (APO) recently launched a unique new structure in the financial space, with a 30NC5-year subordinated note that resets to a fixed current 5-year (plus the launch spread-to-Treasury level) on the 12/17/24 call date. Given the performance of the bonds since launch, the APO deal could open the door for more varieties of structure from a broader subset of issuers; particularly since it provides a viable alternative to LIBOR-based floating rate structured back-ends.

Most outstanding bonds within APO’s direct peer group – which includes brokers, money managers and private equity – are senior unsecured bullets (Exhibit 1). Structured bonds in the broader financial sector typically utilize a 30NC10 fix-to-float structure and are issued predominantly in the insurance sector.

Axis Specialty Finance (AXS) very recently issued a junior subordinated (AXS: Baa2/BBB) 20NC10 as well, which had a floating rate set to the 5-year constant maturity Treasury rate, but that bond behaves a little more like a traditional floater (Exhibit 1). Issuers are moving away from LIBOR on longer-dated floating notes, utilizing either SOFR or swaps rates. The bonds also offer holders the option of a $101 change-of-control put—with a carve-out for management led buyouts, or a step-up rate of +5.0% in the event of a leveraged takeover that results in non-investment grade ratings.

Description: APO 4.95% 01/14/50 (12/17/24 par call); CUSIP: 03765HAE1
Issuer: Apollo Management Holdings LP, Gtd by Global Management LLC (APO: A/A)
Issuer senior rating: A/NEG, A/STB; subordinated rating: BBB+/BBB+
Amount outstanding: $300 million
144A
Closest operating peers: KKR, CG, BX, BAMACN; Additional index comps: LAZ, IVZ, LM, AMG

The use of proceeds is to partially fund a proposed $350 million Athene share issuance. APO last brought 10-year debt in February of 2019. The deal was unique in that the company had no immediate use for proceeds and instead placed the capital in a custody account as a source of future contingent liquidity. The strategy was akin to some of the outstanding 10-year notes in the insurance industry from issuers such as Prudential (“Five Corners Funding Trust” 2023s) and Voya (“Peachtree Corners Funding Trust” 2025s), in which the management teams saw an opportune time to tap the debt markets without an immediate need for capital. The difference in those instances was the creation of a formal trust versus the use of a custody account, but both serve the same purpose and neither is technically debt on the balance sheet at the time of issuance. It appears that APO chose to issue further debt rather than draw down on a portion of that $675 million in contingent liquidity. S&P assigned a negative outlook at the time of the 2029 liquidity deal, and could potentially respond negatively this issue as well, but has not weighed since launch.

Exhibit 1. Private equity, broker and money manager bullets vs broad financial 30NC10s

Source: Bloomberg, Amherst Pierpont Securities

Relative value

After initial price talk of a 5.25% coupon (roughly +356 spread), the bonds wound up launching at a coupon of 4.95%, which was about +326 to the 5-yr at the close (12/10).

The bonds have been trading actively in the secondary market over the past week and are being valued with somewhat dollar sensitivity, currently priced in the $101.0-101.5 range or roughly 4.72-4.61% yield-to-call (+300-289).

Bonds still offer value in this context, taking into account: a) the relatively untested nature of the structure in the IG market, which could eventually impact long-term liquidity; b) these being the first subordinated notes in the APO capital structure; and c) that the issuance itself is technically a negative to credit, since APO is issuing debt rather than tapping into the prior liquidity they accessed in January 2019. Bonds appear likely to outperform the segment given our continuing expectation for investors’ to pursue risk-on strategies in the financial sector.

Additional APO credit considerations

Earlier this year, APO’s total assets under management (AUM) increased to over $300 billion, with roughly $230 billion held in fee-generating assets under management (FGAUM). The +15% increase in AUM capped an impressive >80% trend of break-neck growth since YE2015.

With its roots from Drexel, credit (roughly $200 billion of AUM) remains the most prominent segment versus either private equity or real assets. A larger percentage of credit now lies within its permanent capital vehicles – or more specifically, the Athene Holding Ltd and Athora Holding Ltd intermediate holding companies in the insurance segment. Increased exposure to these entities creates a more stable base of fee-generated income, but does put APO’s risk profile closer in line with the insurance sector.
APO is tremendously well-capitalized, with leverage that remains commensurate with single-A ratings (with or without a draw-down on the contingent liquidity of the most recent debt deal).
Last week, APO closed on its deal to buy PK AirFinance, a part of General Electric’s (GE) larger aircraft-least business (GECAS). Apollo had been reportedly among those investors seeking to put together a bid (likely with partners) for the entirety or bulk of GECAS late last year, and as recently as January/February. This no longer appears a likely outcome for any buyer. GECAS as a whole had been estimated to draw a potential valuation in the $40 billion neighborhood, and was widely considered the relative crown jewel of the remaining legacy GECC with around ~$5 billion in annual revenue. GE repeatedly shot down the prospect of an outright sale/exit of the entire aircraft leasing business, maintaining that GECAS is core to not only the remaining pieces of GE capital, but also the industrial aviation business as well, even though it is technically not captive.
It is worth noting is that APO Founder/Chairman/CEO Leon Black is among the high profile people who have been in the news over the past year due to close professional and personal ties to Jeffrey Epstein. Epstein provided tax and estate-planning services for Black personally, not for APO. In addition, he served as director for Black’s charitable organization – and as has been recently reported, maintained that position for several years after having struck a plea deal in Florida in 2008. While an ugly association, it seems to mostly put Black on an extremely long list of high profile business executives, presidents, politicians, celebrities, royals, etc. who appear to be caught up in this story.

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john.killian@santander.us 1 (646) 776-7714

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