(Bloomberg)—Deutsche Bank AG and its co-lenders were staring at tens of millions of dollars in potential losses.
The banks -- a who’s who of Wall Street’s top underwriters -- had promised to arrange loans to fund Apollo Global Management LLC’s buyout of discount grocer Smart & Final Stores Inc., which the private-equity firm planned to split in two.
But worried about razor-thin margins and intense competition in the industry, many investors had shown little appetite in recent weeks for the riskiest part of the deal -- a $380 million tranche tied to the company’s retail side. If the lenders couldn’t drum up interest, they’d be left on the hook for the financing. Smelling blood in the water, some funds began pitching deeply discounted offers. The banks’ confidence was wavering.
Then, a huge order came in. It was from Apollo itself.
In a rare move, the firm offered to buy about $100 million of the loan, according to people familiar with the transaction. While the lenders weren’t out of the woods yet, it spared them from having to swallow bigger losses, said the people, asking not to be named because the details are private.
Apollo’s decision to put more money on the line underscores how far buyout firms will go to stay on the good side of their bankers, who regularly help them raise billions of dollars to pay for takeovers. It also shows that after years of piling into riskier debt, money managers are growing more hesitant to finance companies that operate in challenging industries and with heavy debt loads as the credit cycle ages.
Apollo ultimately had to come up with only about half of the cash it had promised after outside investors bought more of the struggling deal at a final price of 90 cents on the dollar, according to the people. KKR & Co. was the other main anchor investor in the order book, one of the people said.
Without Apollo’s help, the banks may have been forced to offer the loan for as little as 80 cents to fully distribute it in the original format, the people said.
A spokeswoman for Deutsche Bank, which was the lead underwriter on the financing, declined to comment, as did representatives for Apollo and Smart & Final. Representatives for KKR didn’t respond to requests seeking comment.
In addition to taking out its checkbook, Apollo agreed to make a number of lender-friendly changes to the structure of the original financing, which also included a $405 million loan linked to Smart & Final’s wholesale division.
The size of the loan for the retail unit was ultimately reduced by $40 million, to $340 million. To help make up the difference, the banks involved in the deal bought a separate $20 million chunk that was subordinate to the original loan, the people said. They later sold it back to Apollo at a significant discount.
The other $20 million was shifted over to the wholesale-division loan, which grew to $425 million and priced at a discount of just 99 cents on the dollar.
Representatives from the six other banks that agreed to underwrite the deal, Bank of Montreal, Royal Bank of Canada, Bank of America Corp., Barclays Plc, Credit Suisse Group AG and UBS Group AG, declined to comment.
By the end of the syndication, the banks were left with combined losses of around $10 million for the piece they sold back to Apollo, but were able to roughly break even on the rest of the financing, the people said.
The loan tied to Smart & Final’s retail unit was the second to price at such a steep discount in less than three months. The other was a deal backing the buyout of NSO Group -- an Israeli spyware company accused of selling software to governments and agencies linked to human rights abuses. Before then, the last time a loan of similar ranking was offered at such a large discount was back in 2016, when a drop in oil prices roiled debt markets.
Earlier this month a group of underwriters led by Deutsche Bank and Barclays struggled to fully syndicate 1.5 billion euros ($1.7 billion) of loans they had agreed to provide Advent International Corp. for the purchase of an Evonik Industries AG plastics division. The banks that put together the financing had to cut the price and agreed among themselves not to distribute any unsold portion of the loan for less than 95% of face value for six months.
Apollo has owned Smart & Final once before, selling it to Ares Management Corp. in 2012. In April it bought it back in a deal valued at about $1 billion. But the grocery landscape has shifted dramatically over past few years. Competition across the sector has crimped margins, putting off some investors.
Its plan for Smart & Final will separate the wholesale unit, known as Smart Foodservice Warehouse Stores, which primarily serves small businesses such as restaurants, from the more challenged retail unit, which operates grocery stores.
Apollo, which is often criticized for its aggressive approach to protecting its equity investments, also owns gourmet grocer Fresh Market Inc., which has come under financial strain and seen the price of its bonds decline amid credit-rating downgrades.
--With assistance from Lara Wieczezynski.
© 2019 Bloomberg L.P.