(Bloomberg) — Apollo Global Management Inc. is set to lose control of the former Philips lighting business it acquired in 2017. But in the easy money years leading up to Lumileds Holding BV’s bankruptcy filing this week, the buyout firm reaped a more than $500 million dividend bounty.
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The debt-laden lighting company gave out about $525 million in dividend payments to Apollo in 2017 and 2018, according to a person with knowledge of the matter, who asked not to be identified discussing private transactions.
The payouts were largely financed by new debt that Lumileds raised in the leveraged loan market, according to previous Bloomberg reporting and came less than 18 months after Apollo sold a $1.15 billion loan to help fund its purchase of an 80% stake in the business. Previous owner Koninklijke Philips NV retained about 20%.
Over the past few years, creditors on the hunt for yield were willing to buy leveraged loans that funded payouts through so-called dividend deals. Such offerings are typically deemed aggressive as they enable private-equity firms to load a company with more debt to cash out early.
A spokesperson for Apollo said the deterioration in the underlying markets and other factors beyond its control caused a precipitous decline in earnings and rendered the capital structure in need of “equitization.” A spokesperson for Philips said the firm is cooperating with relevant parties on the implementation of a debt restructuring.
A representative from Lumileds declined to comment.
Read more: Apollo to Lose Control of Lumileds in $1.3 Billion Debt Deal
Lumileds, which supplies energy-efficient LED lighting for automotive displays, succumbed to its $1.7 billion debt load after a sharp decline in demand during Covid-19 and filed for Chapter 11 bankruptcy this week. Its proposed restructuring plan would slash that debt pile by $1.3 billion and force Apollo to relinquish control of the company to existing lenders.
Dividend-linked leveraged loan deals have cooled recently with recession fears mounting and risk assets selling off, but they were sold at record volumes in 2021, according to data compiled by Bloomberg. Heavily indebted companies are currently more focused on dealing with shrinking margins and slowing economic growth.
Apollo agreed to buy a majority stake in Lumileds in a deal valued at $2 billion. In May 2018, S&P lowered its rating for the holding company by one notch to B, citing a $150 million debt-funded dividend payment that year, which followed a $240 million one in 2017, according to a report from the ratings firm.
Less than three years after the buyout, S&P downgraded the company to CCC+ — seven notches below investment-grade — citing both subdued demand for its products and high debt levels. A further downgrade to CCC in 2020 cited a severe decline in auto and smartphone markets due to the Covid-19 pandemic.
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