Apollo seeks to convert multibillion-dollar equity deal into debt

Apollo Global Management is engineering one of the more creative financial transactions of the year: a $9 billion equity investment in pipeline operator ONEOK that’s built from the ground up to eventually become investment-grade debt. The deal, structured as a nonvoting minority equity stake through Apollo’s funds and affiliates, will funnel capital into ONEOK to accomplish two things simultaneously. First, it bankrolls ONEOK’s $4.425 billion acquisition of Brazos Midstream’s natural gas gathering and processing assets in the Permian Midland Basin. Second, it lets ONEOK pay down roughly $5 billion of existing debt, targeting a leverage ratio of about 3.25 times debt-to-EBITDA by 2027. The structure behind the structure Apollo’s investment takes the form of a Class B interest in a newly created holding company. That’s deliberately subordinate to ONEOK’s traditional debt obligations, which means if things go sideways, Apollo stands behind the senior creditors in line. In exchange for that risk, Apollo’s returns are capped at a 7% internal rate of return for the first nine years. Excess distributions gradually amortize Apollo’s capital. The transaction received unanimous approval from...