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Private equity firm Apollo takes on Wall St with US$1.8b newspaper loan deal: sources

[NEW YORK] Apollo Global Management LLC has made its most significant move yet to encroach on a corner of finance long dominated by Wall Street banks.

The private equity firm has agreed to provide nearly US$1.8 billion of debt financing to support New Media Investment Group Inc's acquisition of Gannett Co, in a deal that will bring USA Today and over 200 other publications under the same roof.

The loan by Apollo is one of the biggest ever arranged outside of Wall Street to finance a corporate takeover, according to a person familiar with the matter who asked not to be named because the details are private. It will be structured as a five-year term loan paying an interest rate of 11.5 per cent. New Media also had bank financing available, but the debt provided by Apollo ended up being more attractive, another person said.

The deal underscores the inroads private equity firms and other direct lenders are making in originating corporate loans, often in competition with traditional investment banks. Apollo has the largest credit-investing business among its private equity rivals, with around US$200 billion under management as of the end of June.

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Transactions of this size are typically done in the broadly syndicated loan market, where groups of banks arrange deals and distribute them to institutional investors. Direct lenders have become an attractive alternative for companies seeking to secure financing quickly, especially during times of increased volatility in public markets, even though they often charge higher interest rates.

Proceeds from the Apollo loan will be used to fund the cash component of the purchase as well as to repay New Media and Gannett's existing debt, the companies said in a statement. The loan will be pre-payable with no penalty.

Total debt at closing will be equivalent to 3.5 times a measure of earnings for the combined company. Management said it expects to achieve US$275 million to US$300 million of annual costs savings, which would bring that ratio to around 2.3 times. Executives expect to realise the vast majority of those savings within two years of closing.