By Lisa Lee, Mike Stone and Mariana Santibanez
NEW YORK (Reuters) - (This story filed on January 22, 2015 has been refiled to clarify proposed creditor terms of the Caesars bankruptcy and related quotation)
The term debt financing backing Apollo Global Management LLC's [APOLO.UL] buyout of information technology services provider Presidio Inc is facing pushback from loan investors wary of an unpopular sponsor, the deal's high leverage and issues related to the credit itself.
The $650 million term debt facility has been struggling to attract enough buyers since the deal was launched in early January, people familiar with the planned borrowing said.
To entice investors wary of Presidio's lack of hard assets, high leverage and business model, lead arranger Credit Suisse this week made some adjustments to the credit, sources said. Buyer Apollo may also be paying a price for its involvement in restructuring Caesars Entertainment Co, at a time when debt and bondholders stand to face losses on roughly $18 billion of debt.
"Because Apollo is wiping out the Caesars debt holders, the 'debt buyer universe has shrunk' for the Presidio transaction," a source close to the financing said, referring to the hardest hit Caesars creditors.
An Apollo spokesperson declined to comment.
The sweetened terms will hike Apollo's borrowing costs, but are seen as necessary to get the deal done. The spread over Libor was increased to 525bp from prior guidance of 475bp, the original issue discount slashed to 97 from 99, and the call protection extended to one year from six months.
The loans consist of a $600 million seven-year term loan and a $50 million revolver. A notes issuance of $400 million also supports the $1.3 billion acquisition.
Investors want to be better compensated for the risk taken as the company is increasing its financial leverage to fund the buyout. Apollo's buyout boosts leverage to the mid-six times Ebitda range, according to Moody's Investors Service. Loans that cross the six times leverage threshold have been criticized by regulators for overloading on risk, and could potentially lead to penalties for bankers.
Investors are also frowning at the IT services outsourcing company, a reseller of other technology company products, low margins, overconcentration on one client, Cisco Systems Inc (49 percent), and lack of hard assets.
"We passed on Presidio. We dislike the business to begin with and it's too much leverage and no assets," said a loan investor.
"We just didn't like the credit. We didn't think the current level of performance could be maintained. There is not a big recurring revenue generation," said a second loan investor.
The offer of additional yield moved the syndication forward, however. More than 75 percent of the deal has been placed among investors, according to loan market sources, and the transaction is now moving towards closing. There is still some chance for further changes to ensure that the $600 million term loan trades well in the secondary market, they said.
Apollo Premium
An important wrinkle for marketing the Presidio loan is the presence of Apollo as the financial sponsor. The private equity firm is in the midst of restructuring of debt-burdened Caesars Entertainment Co, and fielding accusations of misappropriating assets at the expense of debt and bondholders.
"People are hesitant to finance Apollo type deals because the covenants are very weak and they have shown in a number of situations that they will do whatever they can to protect their interests at the expense of bondholders," a bond investor said.
Under the Caesars restructuring support agreement (RSA), second-lien bond holders would get $0.30 cents on the dollar if they sign up for the restructuring, less if they do not. First-lien bond holders would wind up with a recovery valued at $0.938 cents on the dollar and bank lenders would receive a full recovery. The RSA was proposed by Caesars as a voluntary bankruptcy plan and still needs to be approved by the court.
Though Caesars's contested bankruptcy is a sharp reminder of Apollo's unpopularity among debt investors, the impact may not put a kibosh on the transaction.
"Having Apollo involved can be a negative given how they treat debt holders and bond holders," explained the second loan investor. "But it's usually not a deal killer."
Apollo's unpopularity, paired with credit issues, has increased Apollo's borrowing costs before. In late 2014, the sponsor paid up heavily on a $1.1 billion bond buyout deal for Canadian oil and gas company Jupiter Resources Ltd. Investors cited credit specific issues and Apollo's bad reputation as reasons for their snubbing the transaction.
But, particularly given the skimpy primary calendar for new leveraged loans, investors need to put their money to work and do not have the luxury to pass on a deal simply because Apollo is the financial sponsor, several investors said.
"They really don't have much recourse though. There's always an Apollo premium on things. Investors not liking Apollo is a thing," said another leveraged finance source.
Credit Suisse did not provide comment by press time.
Apollo is purchasing Presidio from American Securities LLC, a middle market private equity firm.