Pte Equity- TPG and Apollo

Profit in Adversity - Wall St Debt specialists back in demand. FT ~ 10Aug
When Michael Milken entered prison in 1991 from Drexel Burnham Lambert in LA, HY had revolutionised the mkt, developing a mkt for non-IG new companies and for corporate raiders who dont hv money. He is still banned by the mkt and 2nd career as philanthropist. Ex-colleagues at Drexel are applying lessons in 1980s to navigate the mkt and generate returns from risky debt. Unable to borrow money from the banks to take large companies private, they are looking to buy bombed-out debt at discount prices with the hope that a recovery will generate their customary big profits.

Turmoil has put a premium on credit analysis skills- the ability of companies to pay back their debt under a variety of economic scenarios. Apollo, Leon Black, was the first to recognize the significance of the deal. Apollo and GSO had bot $4.2bn LBO of the Clear Channel Communications from CSFB, DB and RBS. GSO was formed in 2005 by 2 ex-Drexel, Bennett Goodman and Tripp Smitth along with Doug Ostover, who worked in DLJ bot by CSFB in 2000. GSO had bot $13bn of debt with template for selectively buyout deals at bargain prices. They expect pte equity style high returns on the safest, most snr debt. Banks are still holding $500bn of loans and junks bonds ($40bn). Most of the buyout deals had few of the std terms and conditions - borrowers had the right to cease paying int in cash and issue more debt, with the slightest waiver fees. GSO, TPG and Apollo had been really active.

Its largest deal, it bought debt in Alltel at the same hefty discount and will be paid off at 100 cents on the dollar, as the telco company’s owners – GS and TPG – sold it to Verizon two months later. Another big payday came when GSO bought debt of Tribune, a troubled newspaper, at 66 cents on the dollar, watched it rise to 75 cents when Tribune sold Newsday, one of its crown jewels, and quickly sold out.

GSO locked in funding for 12 yrs. We hv learnt that there can be zero liqudiity when you most need it. We saw how quickly a firm can go down. We hv all lived through cycles.

"The last thing you want is to be big and junior in the capital structure," says Mr New. "If you are too early, you lose money." Last month, GSO bought Stolle Machinery, which makes the machines used to produce beverage and food cans. GSO also provided the bulk of the debt for the buy-out of Weather Channel by its parent, Blackstone, acting in a group with Bain Capital and NBC Universal. Also looking to clear out b/s for dresdner and csfb and take adv of the gap left banks to buy companies.

Apollo Management has pursued a similar brand of credit-oriented analysis. Along with Blackstone-owned GSO, it has been the most aggressive in buying up non-distressed debt from distressed sellers at bargain prices, steering clear of sectors such as car parts, automakers and airlines.

In a letter to investors five months ago, Mr Black boasted that only one of his investments, Linens-N-Things, had not worked out according to plan. Since then, however, Apollo’s portfolio of private-equity investments has taken a turn for the worse, with fashion retailer Claire’s Stores, property broker Realogy and Harrah’s Entertainment all ailing.