By Alexander Gladstone
The spike in Middle East tensions may have come too late for
Constellis Group, the defense contractor with roots in the
Blackwater mercenary training firm founded by Erik Prince.
The loss of key government contracts and a reduction in spending
on U.S. diplomatic security have pushed Constellis to the brink of
bankruptcy, wiping out a $455 million bet by its owner, Apollo
Global Management LLC, according to people familiar with the
matter. Constellis recently defaulted on its loan agreements and
agreed to a forbearance pact with lenders, which are poised to
wrest control from Apollo in a $1.2 billion debt restructuring,
these people said.
Apollo bought Constellis in 2016, when it was one of the most
dominant security contractors under the U.S. State Department
Worldwide Protective Services program, guarding overseas embassies,
consulates and military bases.
But the company lost contracts over time to other security
contractors that snagged government work, while the heightened
competition also eroded profit margins. In particular, Constellis
has suffered from declining activity under its WPS projects in Iraq
and Afghanistan, the people said.
State Department spending on security protection for diplomats
shrank by 19% in the 2018 fiscal year to $3.76 billion, in line
with an overall decline in State Department spending on foreign
operations, according to government data.
Contracting opportunities for the Defense Department in
Afghanistan and Iraq also dimmed, cutting the number of private
security personnel working for military operations in Iraq, Syria
and Afghanistan to fewer than 4,000 last year, down from a peak of
roughly 31,000 in 2012, according to Defense Department data.
The Wall Street Journal reported in October that Constellis
engaged the investment bank PJT Partners Inc. to advise on a
restructuring process. Constellis is hoping to hammer out terms
outside bankruptcy court, but a possible chapter 11 filing that
would convert lenders' claims into equity is on the table, the
people familiar with the matter said.
Apollo's equity interests, for which it paid $455 million, are
expected to be eliminated, the people said.
"Constellis plans to continue to operate our business, execute
our business strategy and meet our obligations to our
stakeholders," said a company spokesman. "We look forward to
continuing to support our customers through the successful
implementation of our sophisticated and specialized programs."
Constellis traces its roots to Blackwater, the private firm
founded by Mr. Prince in 1997. It acquired a facility in Moyock,
N.C., the following year as a base to train U.S. soldiers and
police before business boomed following the 9/11 terror attacks and
the U.S. conflicts in Iraq and Afghanistan.
After a 2007 incident in which Blackwater employees shot Iraqi
civilians, Mr. Prince changed the company's name to Xe Services LLC
in 2009, and later stepped down from management. A former
Blackwater security guard was sentenced to life in prison for his
role in the shooting.
The company changed its name again to Academi in 2010 and
subsequently formed Constellis Group through a merger with the
security firm Triple Canopy Inc., which had faced a lawsuit after
one of its employees fired at an Iraqi civilian vehicle, which it
later settled.
The incidents had tarnished the reputations of both companies,
said Sean McFate, a professor of strategy at the National Defense
University and Georgetown University's School of Foreign
Service.
"The Iraqis certainly haven't forgotten the shooting incidents,"
Mr. McFate said. "Apollo inherited a toxic brand that was not liked
by U.S. government officials."
Apollo acquired Constellis in 2016 for roughly $1 billion
including debt, inking the buyout shortly after the company
re-signed its WPS contract. While WPS provides a maximum of $3.7
billion for Constellis through 2021, the company must compete with
six other contractors for specific task orders under the
program.
Apollo made other debt-fueled acquisitions to combine with
Constellis, merging it with security-services firms Omniplex and
Centerra as well as American K-9 Detection Services LLC, which
trains dogs to detect drugs and explosives.
In 2018, U.S. officials shut down the U.S. Consulate in the
southern Iraqi city of Basra after tensions erupted with
Iran-backed militia in the area, terminating Constellis's contract
to provide security there.
Constellis also lost its role guarding the U.S. Consulate in
Erbil, Iraq, to a competitor, while its Omniplex subsidiary was
beat out by another contractor for business with the U.S.
intelligence community, said a person familiar with the matter.
Constellis subsidiary Olive Group was also hit with reduced
business providing security for U.S. oil companies as they scaled
down their operations in Iraq, the person said.
With revenue from its work in the Middle East falling,
Constellis also grappled with declining profitability on its
base-operations support work at Guantanamo Bay in Cuba and was hurt
by the U.S. government shutdown in late 2018 and early 2019, people
familiar with the matter said.
Facing a cash crunch, Constellis in mid-2019 sold its flagship
training facility in North Carolina for $40 million. Last month
lenders gave the company a $110 million credit facility to prop up
its liquidity as restructuring discussions continue.
Write to Alexander Gladstone at alexander.gladstone@wsj.com
(END) Dow Jones Newswires
January 19, 2020 05:44 ET (10:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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