Contract Losses Sink Apollo's Defense Bet

Date : 01/19/2020 @ 10:59AM
Source : Dow Jones News
Stock : Apollo Global Management Inc (APO)
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Contract Losses Sink Apollo's Defense Bet

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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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