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By Aaron Weinman
NEW YORK, June 18 (LPC) - A US$340m term loan backing Apollo Global Management’s purchase of supermarket chain Smart & Final priced on Tuesday morning but not before lead banks added a series of changes to the loan after failing to attract enough investors under the original terms, sources said.
The loan priced at a steep discount, which investors suggested might imply a potential loss for banks arranging the financing. Such a loss, however, might be more than offset by remaining on good terms with sponsor Apollo, one of the most relevant private equity shops on the street.
The term loan B was reduced to US$340m from US$380m and priced at 675bp over Libor, wide of the 650bp guidance offered last month. The original issue discount was also revised to 90 from a range of 97-98 and the call protection was amended to 101 hard call from 101 soft call, according to sources.
“When you see paper going out at 90, somebody really does not like it,” an investment banker said.
Proceeds from the term loan will back Apollo’s purchase of all the retailer’s outstanding common stock for US$6.5 apiece agreed to in April.
Known as flex language, banks have the ability to increase the rate paid to investors to entice demand, which can vary on a case-by-case basis. Arrangers - Deutsche Bank, Bank of America Merrill Lynch, BMO Capital Markets, Barclays, Credit Suisse, RBC and UBS – are likely to have taken a loss on this term loan given the steep change to the discount, sources said.
“Banks probably had the flex to go to 95, maybe 93 at best. That last three points on a US$340m deal is to get other business,” the investment banker added.
The allure of picking up a mandate from Apollo, and any ancillary business that comes along with it, may outweigh the loss on this deal.
“The banks are probably going to share some of the pain, but Apollo is a marquee customer for every financial institution,” one investor said.
A spokesperson for Apollo did not respond to a request for comment before deadline. The banks either declined or did not respond to a request for comment before this article was published.
Apollo generated capital inflows of US$25bn in the first quarter, bringing its total assets under management to US$303bn, according to a May 2 first quarter earnings release.
As of March 2019, Apollo’s largest business is credit, with US$194bn of assets under management, according to the company’s website. Apollo’s private equity business had US$77bn in assets under management at the end of March.
The term loan is rated B3/B by Moody’s Investors Service and S&P Global Ratings, respectively, while the latter ratings agency attached a negative outlook to the transaction.
Despite the initial headwinds, investors betting on the loan are hoping the steep discount will present an opportunity for the debt to rally in the secondary market.
“Right after this allocates, there may be a rush in the secondary, so it will be interesting to watch this loan trade for the first couple of days,” the investor added.
A second investor said Smart & Final was always going to be a “tough sell” from the initial launch due to broader pressure on retail and heightened competition from e-commerce grocery providers that deliver directly to consumers doorsteps such as Amazon and FreshDirect.
“Generally, this is a melting ice cube of a segment,” the second source said.
S&P Global said in a report that its negative outlook on Smart & Final was due to competition across the supermarket chain industry, challenges from higher labor costs, minimal e-commerce penetration and narrow geographic concentration.
Smart & Final said in its fiscal first quarter earnings release on May 1 that its operating and administrative expenses had increased to US$155m from US$147.4m for the same period in 2018. The company said the increase was related to expenses from higher minimum wages, eight new store openings and support costs.
Moody’s said in a May 21 report that adjusted debt to Ebitda would remain at approximately 5.8 times at the end of fiscal 2019. Smart & Final is expected to curtail growth, lower capital expenditures and conduct a cost-saving program, however, the ratings agency said it did not expect metrics to improve “meaningfully” in the next 12 months.
Funds managed by Apollo affiliates previously owned the retailer, which operates 257 food stores under the Smart & Final banner, between 2007 and 2012. It was then sold to Ares Management in November 2012. (Reporting by Aaron Weinman. Editing by Michelle Sierra and Jon Methven)