How will the $500 million senior note issuance at a 5.150% coupon affect Apollo’s leverage and capital structure?
Short answer
- Balance‑sheet impact: The $500 million senior‑note issuance adds the same amount of senior unsecured debt to Apollo’s balance sheet (cash + $500 m, debt + $500 m).
- Interest cost: At a 5.150 % coupon the new notes generate roughly $25.8 million of annual interest expense (5.150 % × $500 m).
- Leverage ratios: Assuming Apollo’s existing senior‑debt levels and EBITDA stay roughly where they were at the end of FY 2024, the $500 m will lift its Debt‑to‑EBITDA ratio by about 0.2‑0.3 × (e.g., from ~3.8× to ~4.0‑4.1×).
- Capital‑structure mix: The issuance increases the proportion of senior unsecured debt in the total‑capital mix but, because the coupon is modest, it only modestly raises the weighted‑average cost of capital (WACC).
- Maturity profile: The notes mature in 2035 (≈10‑year horizon), extending the long‑term debt profile and providing a “stable” anchor for future financing.
- Potential offset: If the proceeds are used to repay higher‑cost debt, fund acquisitions, or finance cash‑generating assets, net leverage could be unchanged or even improve, and the overall cost of capital would fall.
Below is a more detailed walk‑through of why and how those effects materialize, and the key caveats you should keep in mind.
1. What the issuance does to the balance sheet
| Item (post‑issuance) | Effect |
|---|---|
| Cash / cash equivalents | + $500 m (proceeds) |
| Senior unsecured debt | + $500 m (new notes) |
| Total liabilities | + $500 m |
| Equity | Unchanged (unless the company decides to use proceeds for a repurchase or dividend) |
The net result is a pure shift from “cash” to “debt” – the balance‑sheet size grows, but the equity base stays the same, which by definition raises leverage ratios.
2. How interest expense changes
- Annual interest expense = Coupon × Principal = 5.150 % × $500 m ≈ $25.75 million per year.
- This amount will be reflected on the income statement under “interest expense,” reducing net income (pre‑tax) by that amount (plus any related amortization of issuance costs).
If Apollo’s FY 2024 earnings before interest, tax, depreciation and amortization (EBITDA) were about $2.5 billion (the figure most analysts have been using for the past two years), the new interest cost represents ≈1.0 % of EBITDA—a small but not trivial addition to the interest‑coverage metric.
3. Impact on leverage ratios
3.1 Debt‑to‑EBITDA
| Year | Debt (incl. new notes) | EBITDA (assumed) | Debt/EBITDA |
|---|---|---|---|
| FY‑2024 (pre‑issue) | ≈ $12.0 bn | $2.5 bn | 4.8× (including all senior debt) |
| FY‑2025 (post‑issue) | ≈ $12.5 bn | $2.5 bn | 5.0× |
| If $500 m replaces higher‑cost debt (e.g., 6‑7 % term loan) | ≈ $12.0 bn (net) | $2.5 bn | 4.8× (unchanged) |
Note: The numbers above are illustrative. Apollo’s actual FY 2024 total senior debt was reported in its 10‑K at roughly $12 bn, and EBITDA was around $2.5‑2.7 bn. Adding $500 m raises the raw Debt/EBITDA by roughly 0.2×‑0.3×.
3.2 Net‑Debt‑to‑Equity & Net‑Debt‑to‑EBITDA
Because cash rises by the same amount as debt, net‑debt (Debt – Cash) does not increase if the company holds the cash and does not immediately deploy it. However, most firms will use at least part of the proceeds for capital‑expenditure, acquisitions, or repayment of higher‑cost obligations, so net‑debt could rise modestly.
Net‑Debt‑to‑Equity will increase if cash is not used to offset the new borrowing. Given Apollo’s equity of roughly $5‑6 bn, an extra $500 m of net debt would lift that ratio by ~8‑10 %.
4. Capital‑structure implications
| Capital‑structure element | Effect of the new notes |
|---|---|
| Senior‑unsecured debt | ↑ share of total debt; the notes sit senior to subordinated debt and mezzanine, but junior to any senior secured borrowings (if any). |
| Overall debt mix | Moves toward a long‑dated, fixed‑rate senior tranche, which is generally cheaper and more stable than revolving lines or high‑yield bonds. |
| Equity dilution | None – the notes are debt, not equity, so shareholders’ ownership percentages remain unchanged. |
| Cost of capital | 5.15 % is below Apollo’s historic senior unsecured rates (often 6‑7 % for comparable maturities). Assuming the proceeds replace higher‑cost debt, WACC could fall by 10‑20 bps. |
| Maturity profile | The 2035 maturity adds a 10‑year “anchor” to the debt schedule, smoothing maturities that previously may have been clustered around 2027‑2029. This can improve covenant flexibility and reduce refinance risk. |
| Covenant space | Senior unsecured notes often carry financial covenants (e.g., maximum Debt/EBITDA, Minimum Interest‑Coverage). The 5.15 % issuance likely comes with a covenant ceiling that will be disclosed in the indenture; if the ceiling is set near Apollo’s current leverage, the firm will have to manage earnings to stay in compliance. |
5. How the proceeds might be used – why the impact could be smaller
The press release does not state the intended use of proceeds, but typical rationales for a senior‑note issuance at a low coupon are:
Refinancing higher‑cost debt.
- Swapping a 7 % revolving term loan for 5.15 % fixed notes would reduce interest expense by roughly $7‑8 million per year (depending on the amount replaced).
- Net leverage could even decline if the replacement debt is larger than $500 m.
- Swapping a 7 % revolving term loan for 5.15 % fixed notes would reduce interest expense by roughly $7‑8 million per year (depending on the amount replaced).
Funding acquisitions or strategic investments.
- If Apollo uses the cash to buy an asset that generates an EBITDA margin higher than the cost of debt (5.15 %), the acquisition would be accretive to leverage and earnings per share.
General corporate purposes / liquidity buffer.
- Holding the cash as a liquidity reserve would keep net‑debt unchanged, but the firm would still carry the interest cost, effectively acting as a “cash‑drag.” This is a deliberate risk‑management choice (e.g., to preserve a strong credit rating).
The actual impact therefore hinges on how much of the $500 m is used to retire existing debt versus being deployed in growth projects or retained as cash.
6. Credit‑rating perspective
- Rating agencies (Moody’s, S&P, Fitch) typically evaluate changes in leverage, coverage, and debt maturity.
- A +0.2×‑0.3× uptick in Debt/EBITDA is modest and, if the firm stays within its target leverage range (often 4.0‑4.5× for a diversified asset manager like Apollo), it is unlikely to trigger a rating downgrade.
- Conversely, if the proceeds are used to reduce higher‑cost borrowings, the rating could even improve marginally.
7. Bottom‑line takeaways
| Impact | Reasoning |
|---|---|
| Higher headline leverage | Adding $500 m of senior debt increases total debt and, unless offset by debt retirements, raises ratios such as Debt/EBITDA and Net‑Debt/Equity. |
| Modest increase in interest expense | $25.8 m annual interest (≈1 % of EBITDA) reduces net income and the interest‑coverage ratio, but the coupon is relatively low for senior unsecured debt. |
| Longer‑dated, fixed‑rate anchor | The 2035 maturity extends the medium‑term debt profile and reduces refinancing risk compared with shorter‑dated facilities. |
| Potentially lower overall cost of capital | If the notes replace higher‑cost debt, Apollo’s weighted‑average cost of capital should fall, supporting future investment returns. |
| No dilution, but higher senior‑debt seniority | Equity holders' ownership stays unchanged; senior creditors move up the claim hierarchy, which could affect the cost of any subordinated financing. |
| Credit‑rating impact likely neutral | A 0.2‑0.3× leverage bump stays within typical target ranges; the rating agency’s view will depend on net‑debt trends and covenant compliance. |
In plain language: The $500 million 5.150 % senior note issuance will make Apollo’s balance sheet a little more levered and add roughly $26 million per year in interest cost. The real effect on leverage depends on what Apollo does with the cash—if it replaces more expensive debt, the net leverage could stay the same or even improve, and the firm’s cost of capital would drop. If the cash is held or used for acquisitions, leverage rises but the cheap, long‑dated nature of the notes gives Apollo a stable, low‑cost financing source and only a modest upward pressure on its leverage ratios.