Apollo is behind a $600 million loan to a public company and it's the latest sign that it's serious about taking on big banks in the lending business

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Leon Black, Chairman and CEO Apollo Global Management, LLC, takes part in Private Equity: Rebalancing Risk session during the 2014 Milken Institute Global Conference in Beverly Hills

• Private equity firm Apollo Global Management is doubling down efforts to be a big lender as it expands its massive $200 billion credit business.
• In the rare example of a private equity firm lending to a public company, Apollo announced on Wednesday that it is providing $600 million to shipping company YRC Worldwide.
• Private equity firms broadly have expanded their credit divisions since the financial crisis as their investors have sought to balance their portfolios with safer assets.
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When public companies want massive loans to finance their operations, they typically go to a group of large banks that can lend hundreds of millions of dollars by banding together pools of money.

But lately, a big private equity firm has been taking their place.

Apollo Global Management said on Wednesday that it will provide $600 million as the sole lender to YRC Worldwide in a refinancing of the $2 billion shipping company. The company has seen profits drag as a result of pricing pressure caused by customers preferring smaller competitors, according to news reports.

It's just the latest deal that illustrates how Apollo and other large private equity firms are increasingly becoming lenders, even in some rare instances, to big public companies. Apollo in particular has been doubling down on its lending push by approaching companies with existing Apollo debt and asking if they'd like to extend their loans or get new ones, according to a person familiar with the firm's plans.

The size of the loan in the YRC deal - $600 million - is also significant in the direct lending business, according to credit executives. Only a handful of firms have offered private loans of that size, with another being Ares, which financed the acquisition of Qlik Technologies with a $1 billion loan. But in that instance and others, there were multiple firms arranging it, whereas here Apollo is the sole lender.

The YRC loan caps two loans to public companies in as many months. In August, Apollo also agreed to provide $1.8 billion of debt financing to a public company newspaper merger - New Media's proposed merger with Gannett.

Rise of direct lending

These arrangements are called "direct lending" and allow companies to access financing through a single lender, without a broker or investment bank involved. The loans have become more popular among private equity firms ever since tough regulations were imposed on large banks after the US financial crisis that placed limitations on how much they can lend.

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Private equity firms, meanwhile, have expanded their credit divisions as their investors have sought to balance their portfolios with safer alternative to private equity investments.

According to data from Preqin, global private credit fundraisings ticked up 81% from 2008 to 2018.

Not only is credit less volatile than other asset classes, but it is also scalable, making it attractive to private equity firms, said Tom Shandell, the CEO of asset manager Marble Point.

"You can manage more money in credit with the same amount of resources than you could in equity," he said.

Today, Apollo has a huge credit division, with $200 billion assets under management - more than double the size of its private equity portfolio. Other firms, too, have been raising massive credit funds, with Blackstone announcing in June a $4.5 billion credit fund just for the energy sector alone.

Direct lending, however, has mostly been done in the middle market and with private companies. This is because large public companies have typically preferred to get their loans syndicated through a number of banks as it's cheaper than relying on a direct lender. For that reason, The Carlyle Group, for instance, focuses its direct lending efforts toward middle market companies valued at around $50 million.

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That a public company would get debt from a single private equity firm is rare, consultants told Business Insider, but it can happen in special situations, like if a company can't tap the public markets, or if a it faces business challenges that require leniency from their lender.

In the case of YRC, a direct lender was attractive because Apollo offered greater flexibility on terms than a syndicated loan, according to a person familiar with the deal .

Apollo had already been one of the company's existing lenders, but YRC decided to turn entirely to Apollo for its lending this time, quadrupling the size of its debt with the firm, said this person.