A deal that was supposed to be the biggest leveraged buyout of 2018 has been delayed into next year by recent turmoil in the credit markets, The Post has learned.
Billionaire Leon Black’s Apollo Global Management was hoping in December to sign a roughly $20 billion deal to buy Arconic, the New York-based aluminum parts maker that mostly serves the aerospace industry, sources close to the talks said.
Worries over liabilities about last year’s Grenfell tower disaster in London had recently complicated negotiations, as an Arconic subsidiary had supplied construction panels that were blamed for the quick spread of the fire that killed 72 people in June 2017.
As reported by The Post, Paul Singer’s Elliott Management, which is spearheading the Arconic sale, has recently agreed to shoulder the Grenfell liabilities despite continued criminal investigations and questions from British politicians about Arconic’s role.
Nevertheless, insiders pointed to the quick and unexpected tightening of credit markets for the delayed deal.
“Would you commit to raise $14 billion in this market?” a source said. “There is no market to finance a buyout of that size.”
Indications are that Apollo would move if the markets were to loosen, the source said.
The leveraged loan market is experiencing similar outflows to the S&P 500 index, which has plunged 15 percent since its Sept. 21 apex. Less leverage for buyouts means fewer public companies will be taken private, and those that do will attract lower prices.
“You’ve seen massive retail loan mutual fund outflows,” said the head of capital markets at a large lender, referring to funds run by firms like BlackRock and Franklin Templeton. “The sell-off has been quite dramatic throughout the course of December.”
Next month, banks are planning to syndicate loans for two large completed buyouts — a $6.9 billion buyout of Dun & Bradstreet, and a $13.2 billion buyout of Johnson Controls’ battery business — that closed in November. How they fare will be a bellwether for the leveraged-loan scene, the capital markets boss said.
If Barclays, Credit Suisse and JPMorgan, for example, cannot sell their loans to fund the Johnson buyout, or have to sell them well below par, the banks will get slammed with the losses.
“If they go poorly, the whole markets will be re-priced,” the source said. “I think the banks will lose money if they launch (Monday,) January 7th.”
Thomson’s Lipper & Wealth Management reports that December’s $9.4 billion in net outflows is the largest since it began tracking loan funds in 2003.
Lipper senior analyst Patrick Keon believes the Federal Reserve signaling it will slow down rate increases is hurting loan funds. “Investor demand for loan funds is fueled by rising interest rates,” he said.
“While the Fed did raise rates another 25 basis points (a basis point is one-hundredth of a percentage point) at its meeting last week, they also reduced their forecast for rate increases in 2019 down to two from three.
“Therefore the recent exodus from the loan fund peer group appears to be the result of … the Fed turning off the interest rate increases.”
The falling stock market doesn’t help. “If equities sold off 15 percent, why should I buy a leveraged loan at the same price?” the capital markets head asked, citing risk of a further downturn in bonds.
Arconic and Apollo declined to comment.