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Apollo, Ares to hike leverage for consolidation and growth

  • Ares buying Kayne Anderson
  • Apollo buying AR Global Investments
  • Debt rating firms mostly positive on moves  

Apollo said August 6 that it will pay $378 million for newly formed AR Global Investment, a real estate business that was formerly led by property mogul Nicholas Schorsch.The move will more than double Apollo’s real estate assets under management to approximately $27 billion after the deal closes in October. Apollo is also paying $25 million in cash for the wholesale distribution business of RCS Capital Corp to help it sell its alternative investment products.  

Ares said July 23 that it will pay $2.55 billion, mostly in the form of operating units, for Kayne Anderson Capital Advisors LP. The move will boost its assets under management by $25 billion, folding in Kayne’s energy private equity, private energy income and energy infrastructure securities. The deal is expected to close around January 1.  

“These deals mark significant consolidation moves that had been expected since bigger firms have been already buying hedge funds and CLO shops,” Fitch debt analyst Meghan Neenan said in an interview. “The bigger guys continue to be acquisitive in order to offer different products and services.”

Apollo is getting AR Global for a good price in the wake of accounting problems at a predecessor of the firm, Neenan said.

Apollo’s leverage as measured by corporate debt divided by fee-related EBITDA will increase to about 3.41x from 2.74x as of June 30, Neenan said in a note to clients. The debt multiple assumes the $250 million cash portion of Apollo’s investment is funded with long-term debt.

Longer term, Fitch expects the firm’s consolidated leverage ratio will be managed in-line with its 2.5x tolerance level for A-category firms. Under its ratings system, Fitch assigns an A rating to companies with “good prospects for ongoing viability.”

“Leverage would be expected to be reduced, post-acquisition, by incremental earnings from the investment, organic growth in the core business, and the realization of scale and distribution benefits from the investment in ARC and RCS,” Neenan said in a research note. “Were this not to be achieved, ratings could be pressured.”  

Increased debt for Ares  

Standard & Poor’s said it expects Ares Management to issue about $750 million in debt to fund part of its Kayne Anderson acquisition.

The move will raise its leverage to a range of 1.5x to 2x adjusted EBITDA. The expected debt multiple falls within S&P’s “modest” financial risk profile assessment, the firm said.

S&P analyst Trevor Martin said Ares faces a “heightened financial risk” from the additional leverage, but added that the rating firm recognizes “some diversification benefit to Ares’ business profile from the acquisition.” Ares will issue between $1.8 billion and $2.05 billion of common equity to fund the majority of the deal, and then finance the rest with cash, primarily through debt issuance.

“The merger will allow for significant cross-selling opportunities,” Martin said. “Ares has more than 600 direct investor relationships, while Kayne has over 2,100 relationships with institutional and high-net-worth clients. We believe there is little overlap in these relationships and that the partnership should provide an opportunity for growth.”

Meanwhile, Fitch published comments on Ares Management for the first time by assigning a BBB+ rating on the firm. Companies with a BBB rating offer good fundamental credit quality and good prospects for ongoing viability, according to definitions from the firm.