The billionaire boys of the buyout world are having their wings clipped this year.
The new kings of Wall Street are not only suffering through a terribly slow period in mergers and acquisition – thanks to the credit crunch and economic slowdown – but some of the largest deals of the past few years are now showing some stress.
The bonds that backed Cerberus Capital’s $7.4 billion purchase of GMAC, Blackstone Group’s acquisition of Freescale Semiconductor for $17.6 billion and Bain Capital’s $3.5 billion deal to acquire OSI Restaurants have all hit rough waters.
The bonds floated to fund the highly-leveraged deals are trading in the 60s and 70s, far down from full price, signs that the finance community is losing their appetite for buying such risky debt.
The big buyout firm that have seen its bonds suffer the most is Leon Black’s Apollo Management, according to a recent report.
Independent bond research firm FridsonVision issued a report last month that found 40 percent of the deals sponsored by Apollo in the past five years have seen their bonds sink to distressed levels – compared to 33 percent of deals put together by their competitor Blackstone and only 10 percent of the portfolio companies of Kohlberg Kravis.
Among’s Black’s hardest hit acquisitions are:
* Linens’n Things, the Clifton, NJ-based housewares chain, was saddled with over $600 million in new debt when acquired by Apollo for $1.3 billion in 2005. Now, with an operation that is hemorrhaging money, its bonds are trading at less than 50 cents on the dollar.
* Girls and young women’s fashion chain Claire’s Stores – bought out by Apollo in May 2007 for $3 billion – has seen its bonds trading at a 25 percent discount to par as the firm struggles to shore up its balance sheet.
* The company from Black’s portfolio that has caused the most jitters in the credit market is Reaology Corp., which Apollo purchased for $6.6 billion last spring. The Parsippany, NJ-based parent of Century 21 and Coldwell Banker brokerage franchises, has seen its bonds sink like a stone thanks to the one-two punch of tightening credit and a dead housing market.
Market observers point out the driving factors for bond prices in each of these cases is unique to each company. With the current liquidity crunch, depressed prices can reflect a lack of buyers as much as they do a concern over the long-term prospects of the issuer.
Additionally, “the nature of Apollo’s business is contrarian – so the fact that they bought into businesses that are suffering from the current downturn may reflect an overly-early entry rather than a total misstep,” according to one analyst.
Still, it’s quite a comeuppance for Black, who was a “wonder boy” of Wall Street in the 80s when – while only in his early 30s – he turned the M&A department at Drexel Burnham into a powerful machine able to create buyout deals as fast as Drexel kingpin Michael Milken’s junk bond department could finance them.
With Apollo, Black has consistently hit the ball out of the park. In fact, while Linens’n Things may be suffering, the Fund V portfolio it operates in has returned 3½ times investors money over 5 years. Today, at 57, Black retains both his boyish looks and his reputation as one of the shrewdest players at the poker table.
While the recent sub-par performance of some of his deals has dimmed the luster of his performance, it comes as no surprise to many that the recent pain won’t be putting a damper on business prospects of his fund.
Last summer when the private equity bubble reached it’s peak, he deftly sold an 18 percent stake in Apollo to the California Public Employees Retirement System and the Abu Dhabi Investment Authority – taking a cool $1.2 billion off the table while avoiding the wrath of angry shareholders that his rival, Steve Schwarzman at Blackstone, is now contending.