Realogy Completes Debt Swap; Remains At Risk

In the latest boom-era deal to seek more time to turn its troubled business around, Realogy Corp., the Apollo Management LP holding, extended the maturities on some of its debt, expanding the use of junior convertible notes that ultimately could dilute Apollo’s return.

The Parsippany, N.J.-based Realogy, a real estate holding company with a stable of national brands, announced this month that it had completed the exchange of $2.75 billion of notes due in 2014 and 2015 for others due in 2017 and 2018.

On its $1.6 billion in senior notes, the company pushed $1.1 billion of the debt into 2018 from 2014 in the form of convertible subordinated notes, raising the rate it pays to 11 percent from 10.5 percent and giving holders the right to convert $1.1 billion of debt to equity. Only $492 million worth of senior notes remain in the form of senior debt, now paying 11.5 percent and due in 2017.

Another series of senior debt, $421 million of 11.75 percent senior “toggle notes” due 2014, swapped for for $130 million in 12 percent senior unsecured notes that will be due 2017, and $291 million worth of 11 percent convertible subordinated notes that will be due in 2018.

An existing series of junior debt, $685 million of 12.375 percent subordinated notes due in 2015, were swapped for $10 million in 13.375 percent subordinated notes to be due in 2018 and $675 million in 11 percent series C convertible subordinated notes due in 2018.

In all, bondholders agreed to take on convertible notes worth $2.1 billion, giving them the right to convert that debt to stock. When it announced the offer in December, Realogy said that 64 percent of the existing notes were held by the hedge fund Paulson & Co. Inc., the money manager Avenue Capital Group and investment funds managed by Apollo.

Ratings agencies razzed the swap. Both Standard & Poor’s and Moody’s Investors Service declared the exchange to be the equivalent of default on the existing notes, even though the company conducted the exchange at par. S&P noted that the exchange “is not a deleveraging event, although Realogy will benefit from an extended maturity profile.“ The company’s leverage multiple is high at 14x EBITDA, S&P said. The agency maintained Realogy’s corporate credit rating remains at ‘CC,’ which S&P describes as debt that is “highly vulnerable.”

Moody’s, meanwhile, affirmed its Caa2 Corporate Family Rating, which it defines as debt of poor standing and subject to very high credit risk. The agency noted that about a third of Realogy’s debt going forward will consist of subordinated debt, compared to about 12 percent before the exchange. Most of the subordinated debt is in the form of convertible notes, which could be turned into equity in the future.

Realogy should have modest revenue growth in 2011, based on a stabilization of the housing market, and moderate profit growth based on cost reductions initiated in 2010. But the agency cautioned, “The ratings or outlook could be pressured if the housing market downturn continues into 2011 leading to a further material decline in Realogy’s profitability and liquidity.”

Apollo took Realogy private in April 2007, near the peak of the mid-decade buyout boom, in a deal valued at $8.85 billion. The company operates real estate franchising operations under the brands including Century 21, Coldwell Banker, The Corcoran Group, ERA and Sotheby’s International Realty. But Realogy was hammered by the credit crisis of 2008 and 2009, when real estate values plunged and sales slowed to a crawl.

This is at least the third time Realogy has restructured portions of its debt. In November 2008, the company exchanged up to $500 million in new second-lien incremental term loans for portions of its existing bonds. And it completed a $650 million second lien debt offering in September 2009.

Both Apollo and Realogy declined comment.