Apollo Slaps Discount on Hard-to-Sell Grocery Firm Buyout Debt

(Bloomberg) -- Banks are offering a steep discount on a riskier loan used to finance Apollo Global Management’s buyout of grocer Smart & Final Stores Inc. in an effort to lure wary investors.

The loan is being offered at 90 cents on the dollar -- only the second time this year that such a steep discount has been seen on a loan of this type in the leveraged loan market, according to data compiled by Bloomberg.

Apollo and Deutsche Bank AG, the main lead on the loan, have also sweetened terms with a slew of investor-friendly changes, while cutting the size by $60 million to $320 million to try to offload the deal.

Apollo has owned the discount retailer before, but sold it to Ares Management Corp. in 2012. In April this year -- more than a decade later - it acquired the business again in a deal valued at $1 billion. But the landscape has changed since then as competition has intensified, while margins across the sector remain low -- factors that have put off some investors.

“While the company is expected to curtail its growth and therefore lower capital expenditures while embarking on a cost saving program under Apollo’s ownership, we do not expect metrics to improve meaningfully in the next 12 months,” analysts at Moody’s Investors Service wrote about Smart & Final in late May. “The business environment has become increasing competitive and pricing pressure continues.”

Apollo -- often criticized for more aggressive terms in loan offerings -- also owns gourmet grocer Fresh Market Inc. which has come under financial strain and suffered downgrades.

Representatives for Apollo and Deutsche Bank declined to comment. A representative for Commerce, California-based Smart & Final declined comment.

Loan Reduced

The commitment deadline for the Smart & Final loan was extended to June 14 from June 5. The yield was increased to 675 basis points above Libor from 650 basis points, and the price cut to 90 cents from an initial range of 97 to 98 cents.

The only other first-lien loan to be offered at such a discount was the loan backing the buyout of NSO Group -- an Israeli spyware company accused of selling software to governments and agencies linked to human rights abuses.

Smart & Final will have debt of about 5.8 times its earnings before interest, taxes, depreciation and amortization, according to Moody’s, which also singled out the grocer’s regional concentration, small scale and challenging geographic and demographic markets.

Plan to Split

Under the Apollo buyout, Smart & Final plans to split into two independent companies -- Smart & Final Grocers and Smart & Final Foodservice.

Both the Smart & Final and Fresh Market acquisitions have faced difficulties. One of Smart & Final Stores’s largest investors in May came out against the food retailer’s plan to sell itself to Apollo, calling the $497 million deal “untimely and premature.”

After Apollo agreed to buy Fresh Market in March 2016, one of the grocer’s investors sued to block the $1.36 billion acquisition by claiming the deal unfairly favored the buyer.

--With assistance from Lara Wieczezynski and Jeannine Amodeo.

To contact the reporters on this story: Sally Bakewell in New York at sbakewell1@bloomberg.net;Davide Scigliuzzo in New York at dscigliuzzo2@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Christopher DeReza, Natalie Harrison

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