Dear Bondholders: Apollo Will Screw You Now

An interesting ream job is developing at Realogy, the former Cendant unit that Leon Black’s Apollo Management bought for $7 billion of cash last year.

Realogy, which owns Century 21, Coldwell Banker, and other real-estate companies, is suffering in the housing collapse. It hasn’t yet violated its bond covenants, but it likely will soon.

So at Apollo’s direction, the NYT says, Realogy is making its bondholders an offer they can’t refuse: trade in your existing bonds for senior bonds that will pay you something in the event of a bankruptcy (which the ones you currently own likely won’t). Of course, when you trade them in, you’ll only get a couple of dimes on the dollar. But, hey, that’s better than nothing, right?

The company hopes to eliminate $650 million of debt this way, thus preserving the value of the equity. Bondholders who don’t take the offer, meanwhile, will find themselves even further down in the capital structure and even less likely to recoup much in a bankruptcy.  Apollo and Realogy are thus playing the bondholders off against each other.

We are shocked that bond contracts allow the company to do this, and some bondholders (including, it appears, Carl Icahn) don’t think it does and are taking the matter to court. If the move IS allowed, it’s probably an indication of just how brain dead lenders got at the peak of the private-equity bubble.

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