By Greg Roumeliotis
(Reuters) - Apollo Global Management LLC (N:APO), the buyout firm that agreed last month to acquire U.S. security company ADT Corp (N:ADT) for $7 billion (£4.9 billion), will buy up to $500 million (£353 million) of that deal's debt, according to people familiar with the matter.
The move will help finance the acquisition at a time when banks have been reluctant, due to volatility in credit markets, to provide as much junk-rated debt as buyout firms would like to be able to squeeze lucrative returns from deals.
While several private equity funds have a mandate to also invest in corporate debt, the unusually large size of Apollo's credit investment underscores the lengths that it had to go to put together this year's largest leveraged buyout.
Apollo and its co-investors agreed to provide $4.5 billion for the deal, a big equity check by leveraged buyout industry standards. The majority of the deal, however, will be funded with bank debt and other financing.
Apollo secured $1.6 billion in first lien term loans and $3.1 billion in new second lien financing for the ADT deal. It also plans to merge ADT with a smaller peer it already owns, Protection 1, in a move that will allow $3.8 billion of ADT's existing bonds be rolled over into the deal.
Apollo and its co-investors will split the credit investment, which could reach up to $500 million, among themselves on a pro rata basis based on their equity contributions, the people said this week.
Apollo's debt investment in ADT will come from its private equity arm rather than its credit division, which has a policy of not buying the debt of companies where another Apollo fund owns the equity in order to avoid potential conflicts, the people added.
The sources asked not to be identified because the investment is not yet public. Apollo declined to comment.
Barclays Plc (L:BARC), Deutsche Bank AG (DE:DBKGn) and Royal Bank of Canada (TO:RY), some of the banks which funded Apollo's acquisition of small ADT peer Protection 1 last year, also agreed to finance the ADT deal.
Credit Suisse Group AG (VX:CSGN) and Jefferies LLC declined to participate in ADT, however, even though they also financed Protection 1 last year. Citigroup Inc (N:C) and the credit investment platform of Canadian pension fund PSP, which were not in the Protection 1 deal, stepped up for the ADT deal.
The investment arm of Koch Industries Inc also agreed to provide $750 million in financing in the form of preferred securities.
Last month, tough credit markets forced Apollo to finance its $1.1 billion acquisition of for-profit education provider Apollo Education Group Inc (O:APOL) with the equity of its funds and co-investors.