Apollo’s Reflexivity (a.k.a. George Soros)

I tried reading George Soros’ “The Alchemy of Finance: Reading the Mind of the Market”, but gave up with its endless monotony. Now I am in the process of reading “The Credit Crisis of 2008 and What it Means.” As far as I can tell, Soros’ theory of reflexivity says that participants influence the markets that they are evaluating. I have not finished this book either, but still intend to try.

The Financial Times “Apollo company halts cash payouts” reports that a fourth company from private equity firm Apollo Management LP issued stock instead of cash as payment in kind (PIK) to meet interest payments. At the same time, Apollo has invested over $10B in deeply discounted levered buy-out debt.

I guess that’s reflexivity. Apollo indirectly is able to drive down the value of assets it is actively buying. Apollo is smartly taking advantage of both sides of covenant light financing.

The benefit of PIK was touted as insurance that highly leveraged companies would not go bankrupt in an economic downturn. Private equity firms argued that loan terms would have to be relaxed or at least renegotiated anyway during slow periods, so why not include an escape hatch from the start. Banks tripping over each to provide financing couldn’t disagree.

Apollo Management LP is the limited partnership owning Momentive Performance Materials cited in the article for issuing PIK. Momentive was a buy-out of General Electric’s (GE) Advanced Materials unit. Apollo Investment Corporation (AINV) is a publicly traded closed-end fund, advised by Apollo Investment Management LP. Apollo Management LP is an affiliate of Apollo Investment Management LP.

No disclosures.

Sphere: Related Content