Why would a PE fund want to buy back the portCo company’s public debt if its trading cheap? I get that buying cheap is good, but just not sure if I understand why it’s good for the PE fund /what’s its incentives?
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For every $1 of equity you put in, you reduce your net debt by > $1 (so equity value by > $1). If you sell the business, you need to repay the nominal amount ($1).
PE fund might also have separate debt fund or their own balance sheet to play in different parts of the cap table. Maybe they can provide financing cheaper to the portCo than the market is willing to.
So they can give themselves waivers / remain in control via debt for equity swap
Given that the funds will have a different investor base (credit vs equity investments) it will not be as easy to do debt for equity swaps etc in practice. Sort of standalone investment companies/teams.
Yes and no. When I see a disclosure that XYZ Credit Fund has bought up bonds of XYZ Sponsored Company I'm like...ugh.
Would not say that this is necessarily correct. Fund statutes often say something like "invest in equity of the company or selectively in debt securities of a target in control situations / to obtain control". Clearly not the right wording but you get what I am trying to say.
I am working at a regular large cap buyout fund, but we have this wording in the statutes, so do others. We have done it before (successfully) and would usually look into it if the debt reaches a certain trading level.
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It's all ownership in one form or another. Understanding how to play cross-capital structure and capitalize on an opportunity like this (assuming it's actually prudent, I don't know anything else about this particular situation) is what differentiates good investors from the plethora of mediocre ones.
Lately you see instances of large cap sponsors participating heavily in the junior debt of their portcos. Then as the portcos struggle (esp in tech), these portcos and sponsors are buying small chunks of their 1L trading in the 70s and 2L trading in the 40-60s. Buying small positions strikes me as a pure value play. Would you need to make large purchases to have a seat at the table as a creditor in a LME or restructuring scenario?
Two reasons come to mind:
1) It is a good value play (e.g. the debt is cheap and the Company wants more exposure) 2) Rx Considerations: it may be advantageous to have a seat at the table on the creditor side when a PortCo goes through a restructuring...or certain debt might be unique that has better negotiating power and makes sense to own some of that debt
Apollo made a fortune doing this post-crisis
Wasn’t just Apollo. Strategy paid big dividends post-crisis. Cross fund issues are also less sticky than you might think as many fund docs explicitly anticipated this scenario. In many cases (not all) how flagship fund and debt split distressed investments in portco is spelled out in the fund documents.
Did Apollo buy Apollo portco debt primarily because they 1) knew portcos would make it and the debt was a great value play, Apollo would put money in if needed, etc? Or 2) Apollo bought PortCo A debt so they could block a lender proposal that was undesirable to Apollo, thus paying a few bucks of insurance by buying portco debt. Then using that "insurance" to make sure Apollo PE got the best deal via blocking votes?
I was also curious about this. I’m also wondering how you can move debt to other entities. Billions Spoiler: Bad example but in Billions when Bobby basically bankrupted a company by moving debt and turning the RE into a REIT. How is that legal and any books I can pickup to learn about it?
When did he turn RE to a REIT? Just from a technical perspective
What do you mean? Season 4 ep 12?
bump
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