When public companies want massive loans to finance their operations, they typically go to a group of large banks that can lend hundreds of millions of dollars by banding together pools of money.
But lately, a big private-equity firm has been taking their place.
Apollo Global Management said on Wednesday that it would provide $600 million as the sole lender to YRC Worldwide in a refinancing of the $2 billion shipping company. The company has seen profits drag as a result of pricing pressure caused by customers preferring smaller competitors, according to news reports.
It’s just the latest deal that illustrates how Apollo and other large private-equity firms are increasingly becoming lenders, even in some rare instances, to big public companies. Apollo in particular has been doubling down on its lending push by approaching companies with existing Apollo debt and asking if they’d like to extend their loans or get new ones, according to a person familiar with the firm’s plans.
The size of the loan in the YRC deal — $600 million — is also significant in the direct-lending business, according to credit executives. Only a handful of firms have offered private loans of that size, with another being Ares, which financed the acquisition of Qlik Technologies with a $1 billion loan. But in that instance and others, there were multiple firms arranging it, whereas Apollo is the sole lender.
The YRC loan caps two loans to public companies in as many months. In August, Apollo also agreed to provide $1.8 billion of debt financing to a public-company newspaper merger — New Media’s proposed merger with Gannett.
Rise of direct lending
These arrangements are called “direct lending” and allow companies to access financing through a single lender, without a broker or investment bank involved. The loans have become more popular among private-equity firms ever since tough regulations were imposed on large banks after the US financial crisis that placed limitations on how much they can lend.
Private-equity firms, meanwhile, have expanded their credit divisions as their investors have sought to balance their portfolios with safer alternative to private equity investments.
According to data from Preqin, global private-credit fundraisings ticked up 81% from 2008 to 2018.
Not only is credit less volatile than other asset classes, but it is also scalable, making it attractive to private-equity firms, Tom Shandell, the CEO of the asset manager Marble Point, said.
“You can manage more money in credit with the same amount of resources than you could in equity,” he said.
Today, Apollo has a huge credit division, with $200 billion in assets under management — more than double the size of its private-equity portfolio. Other firms, too, have been raising massive credit funds, with Blackstone announcing in June a $4.5 billion credit fund for the energy sector alone.
Direct lending, however, has mostly been done in the middle market and with private companies. This is because large public companies have typically preferred to get their loans syndicated through a number of banks, as it’s cheaper than relying on a direct lender. For that reason, The Carlyle Group, for instance, focuses its direct-lending efforts toward middle market companies valued at around $50 million.
That a public company would get debt from a single private-equity firm is rare, consultants told Business Insider, but it can happen in special situations, like if a company can’t tap the public markets, or if a it faces business challenges that require leniency from its lender.
In the case of YRC, a direct lender was attractive because Apollo offered greater flexibility on terms than a syndicated loan, according to a person familiar with the deal .
Apollo had already been one of the company’s existing lenders, but YRC decided to turn entirely to Apollo for its lending this time, quadrupling the size of its debt with the firm, this person said.