1. Documentation 📝

This is a big one. Sources said the designated asset sale provision — which governs the conditions under which Apollo could spin out Tenneco’s aftermarket auto parts business — was a major sticking point in premarketing discussions. This has now been significantly amended.

The previous docs would have allowed a sale of the so-called “Performance Solutions” division at 3.45x total net leverage. The new docs still permit Apollo to spin out any segment it wants, but at a tighter leverage threshold of 2.75x, according to 9fin’s legal analysis of the OM.

Although aftermarket sales is smaller than Tenneco’s core business of selling parts to OEMs for new vehicle manufacturing, it's a business that tends to do better during a recession.

That counter-cyclical nature of the business is a valuable safety net for lenders, so anything that raises the hurdle for Apollo to sell it could meaningfully increase the chances of a smooth debt sydndication.

“The market obviously didn't like that, and so you would need to eliminate that provision,” one banker familiar with the situation told 9fin last month, when premarketing discussions were happening. “That’s a stroke of the pen, you just have to get Apollo to agree to do it.”

Despite these concessions, many buysiders remain exceptionally skeptical of Apollo-sponsored deals, despite the sponsor’s recent efforts to rehabilitate its image as a warmer, friendlier sponsor than in times past.

“It’s an auto parts manufacturer focused on exhaust control, so the business is fine for now,” said a portfolio manager familiar with the credit. “The issue here is more about Apollo and covenants than it is about the business or leverage.”

2. Earnings 📈

As is the case for many companies with large amounts of floating-rate debt, rising base rates have put pressure on Tenneco’s liquidity position.

However, last time the banks tried to shift the debt, the market didn’t know how high rates would go. Today, investors are a lot more confident that the Federal Reserve is approaching something close to a peak in its rate-hiking program.

Perhaps just as importantly, Tenneco’s earnings seem to be on the up, according to our sources. The OM does not provide second-quarter results, but they should be ready for investors ahead of syndication — and bankers close to the deal said those results are expected to be good.

“We spent a few months shoring up their liquidity and replacing their cash flow with a much bigger asset-based loan, and their liquidity position is now in great shape,” said a second banker close to the deal.

That’s just as well, because Tenneco’s first quarter numbers weren’t hugely inspiring. For the quarter ended in March, revenue rose 7% year-over-year to $4.98bn, but adjusted EBITDA fell 3% to $250m, according to the new OM.

“The banks were waiting on the business to turn,” said a banker away from the deal who had previously expected syndication to come later in the year, after third-quarter results. “Through the first quarter, the business was not doing as well as people thought.”

3. Cost savings 🪙

Investors poked a lot of holes in Apollo’s proposed cost savings the first time around, but the company now has nine months of performance data to show its plan is working.

The company says it would have generated $1.655bn of pro forma adjusted EBITDA for the full year period ended in March when accounting for all of its yet-to-be-realized cost savings. The company estimates $660m of run-rate cost savings it hopes to fully achieve by the end of 2024.

Those cost savings are at the wider end of the $400m-$700m range of expected annual cost savings the company was projecting in its marketing materials last year.

Apollo says it has already taken action to achieve $300m of cost savings this year, and that it has achieved $75m of that already. The remaining $360m of the $660m target is set to be actioned this year but not fully realized until next year — although it’s worth considering it will cost $305m to achieve (as of June, some $100m of those costs have already been incurred).

Tenneco says these cost savings come from optimizing its manufacturing, raising prices on its low-margin products and enhancing its supply chain of direct materials, among other things. Sources said they are confident Apollo can now prove it’s achieved much of what was promised.

“Apollo has found some more cost saves,” said the second banker familiar with the situation. “And actually, so far for the first three or four months of the year, the company's doing better than budget.”

4. Automotive market rebound 🚗

Last year, the automotive market recorded its lowest sales volume in a decade, according to data from Cox Automotive. Low inventories constrained supply in the first half of the year, and rising rates damped demand in the back half.

Not to state the obvious, but this was not a particularly helpful backdrop for syndicating the debt of an autoparts supplier with a highly levered capital structure.

But the market has rebounded a good bit since then. In July, new-vehicle inventory levels were roughly 75% higher than they were a year ago, according to Cox. The seasonally adjusted annual rate of sales (SAAR) was up to $15.7m, compared to $13.3m a year ago.

Moreover, consumer confidence is up and leading to better auto sales, which should help the outlook for future Tenneco earnings.

5. Electrification ⚡️

There is, however, a big factor going against Tenneco, and it has only got stronger since the company was last in the market: the move towards electric vehicles.

While Tenneco does make some parts that are agnostic to electrification trends, the company largely focuses on combustion engine parts. EVs are still a small sliver of overall vehicle sales, but it’s growing fast.

Second quarter full battery-electric vehicle sales were the largest of any quarter and up 48% year over year, according to Cox.

Last time they looked at Tenneco’s debt, buysiders were skeptical of the company’s ability to pivot to an electrified world. Not much has happened in the intervening months to change that view.

“That's not really ever going to go away,” said the first banker of the trend towards electrification. “If anything, it's accelerating.”

Citi declined to comment. BofA, Apollo and Tenneco did not respond to requests for comment.