Apollo Global Management LLC Outlook Revised To Negative On Proposed Senior Debt Issuance; New Notes Rated 'A'

  • Apollo Management Holdings L.P. (an indirect subsidiary of Apollo Global Management LLC) is issuing 10-year senior unsecured notes. It will initially keep proceeds in a custody account, but it can draw upon them at any time.
  • Even though proceeds will offset the debt initially, we view the debt issuance as a credit negative given our expectation that the company will eventually use the proceeds, likely leading to a deterioration in leverage and interest coverage versus our previous expectations.
  • We are revising our outlook on Apollo to negative from stable and affirming our 'A' issuer credit and senior unsecured debt ratings and our 'BBB+' preferred unit rating. We are also assigning our 'A' rating on the new senior unsecured notes.
  • The negative outlook on Apollo incorporates our expectation that the company could draw on the contingent liquidity over our ratings outlook horizon, such that leverage and coverage metrics are likely to move closer to, or surpass, our 1.5x and 10x downside thresholds.
NEW YORK (S&P Global Ratings) Feb. 4, 2019--S&P Global Ratings said today it 
assigned its 'A' rating on Apollo Management Holdings L.P.'s proposed 10-year 
senior unsecured notes due 2029. At the same time, we revised our outlook on 
Apollo Global Management LLC (Apollo) to negative from stable. We also 
affirmed our 'A' long-term issuer credit and senior unsecured debt ratings and 
our 'BBB+' rating on the company's perpetual preferred units.

The size of the proposed 10-year senior unsecured notes due 2029 will be 
determined by market conditions, but for our analysis, we are assuming the 
senior unsecured notes will be between $500 million and $750 million. 

The senior unsecured notes will be issued by Apollo Management Holdings L.P. 
(AMH), an indirect subsidiary of Apollo Global Management. The senior 
unsecured notes will be fully and unconditionally guaranteed on a joint and 
several  basis by Apollo Principal Holdings I L.P., Apollo Principal Holdings 
II L.P., Apollo Principal Holdings III L.P., Apollo Principal Holdings IV L.P.,
 Apollo Principal Holdings V L.P., Apollo Principal Holdings VI L.P., Apollo 
Principal Holdings VII L.P., Apollo Principal Holdings VIII L.P., Apollo 
Principal Holdings IX L.P., Apollo Principal Holdings X L.P., Apollo Principal 
Holdings XI LLC, Apollo Principal Holdings XII L.P., and AMH Holdings (Cayman) 
L.P.

The company plans to keep the proceeds in a custody account for contingent 
liquidity. As a result, initially cash will offset debt in our leverage ratio 
and have no effect on leverage. However, we will consider the proceeds as debt 
in our leverage metric once drawn from the account. The negative outlook 
revision on Apollo incorporates our expectation that the company could draw on 
the contingent liquidity over our ratings outlook horizon, such that leverage 
moves closer to, or surpasses, our 1.5x debt-to-EBITDA threshold. We also 
expect the firm's interest coverage (including the negative carry on this 
issuance) could be lower than our 10x threshold, depending on the potential 
timing of and returns on invested proceeds. 

As of year-end 2018, Apollo had $280 billion of total assets under management 
(AUM) (up 13% year over year), of which nearly half was in permanent capital 
vehicles, which we view favorably. We expect the company's fee-paying AUM 
(FPAUM), which grew 27% last year, to increase more moderately in 2019, by 
approximately 8%, including growth in Apollo Investment Fund IX L.P. We also 
expect the firm to continue to broaden its franchise and geographical 
footprint, increase product offerings, and grow existing businesses, such as 
its MidCap Financial direct origination business, as well as its relationships 
with Athene Holding Ltd. and Athora Holding Ltd.

We base our assessment of Apollo's financial risk on our expectation that debt 
to adjusted EBITDA weighted (20% for historical results for 2018, 40% for 
full-year projected results for 2019, and 40% for full-year projected results 
for 2020) could approach or possibly exceed 1.5x, a deterioration from our 
prior expectation for debt to EBITDA to remain at approximately 1.0x-1.2x. We 
apply a 50% haircut to the five-year average of net realized performance fees 
and net realized investment income in the calculation of adjusted EBITDA. In 
the calculation of debt, we include an adjustment to reflect the present value 
of operating leases (which increased last year), and we net surplus cash 
against debt.

We believe that the custody account structure, which will house the proceeds 
of this debt offering, supports our current view of Apollo's liquidity as 
exceptional. The company ended the year with cash balances of $1.0 billion and 
access to an undrawn facility ($750 million due 2023).

The negative outlook on Apollo incorporates our expectation that the company's 
debt to adjusted EBITDA could approach or possibly exceed 1.5x. If the company 
operates with leverage above 1.5x on a sustained basis, we would lower the 
ratings. 

We could revise the outlook to stable if Apollo maintains debt to adjusted 
EBITDA less than 1.5x and closer to pre-issuance levels (approximately 
1.0-1.2x) on a sustained basis and interest coverage above 10x.