Apollo Pitches a Bond Deal Pushing Dividend Paydays to the Max
(Bloomberg) -- Even by the standards of a frothy credit market, the latest Apollo Global Management Inc.-backed bond deal is extreme.
It’s long been controversial for private-equity firms to pay themselves dividends by saddling companies with extra debt. Apollo wants to take it a step further: a dividend so big that it cancels out the cost of buying the company.
Lottomatica SpA, which was bought by Apollo in May, is marketing the 400 million-euro ($462 million) bond this week. If successful, Apollo effectively recoups its investment, just a few months after the acquisition.
It’s a deal that potentially offers investors huge rewards, with bankers indicating a yield of about 8%. Those are rare returns in the bond market, but it all depends if the Italian lotto company can rake in enough profits to pay off the gamble.
“Needless to say, this is an aggressive deal,” Jeffrey Cope, an analyst at Bank of America Corp., wrote in a note to clients this week.
A representative for Apollo declined to comment.
Private equity firms are increasingly cashing in with dividend deals this year as sponsors try to quickly claw back their investments. If Apollo’s bankers find enough willing investors, it will stretch the limits of what was once thought possible in leveraged finance, and underscore the appetite for yield at any cost.
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Some analysts have countered skepticism about the bond sale, saying that Lottomatica’s fast-growing business can support the interest payments. The company is dominant in Italy and the regulatory environment is friendly compared with other European countries, according to analysts at Lucror Analytics.
While other private-equity firms have squeezed out bigger dividend checks, this one is unusual for the multiples levels of risk. For one, Apollo hasn’t finished paying for the deal, with the final installment due before September 2022.
“It is particularly aggressive to bring a recap with this payment outstanding,” said Bank of America’s Cope.
Others criticized Apollo for piling on a mountain of debt that could put Lottomatica’s balance sheet at risk. The bonds are payment-in-kind notes, meaning interest can be repaid with even more debt. In the industry, they’re called “pay if you can.”
The deal “is only appropriate for investors with high risk tolerance,” analysts at CreditSights wrote in a note on Thursday.
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