EFTA01192635.pdf

APOLLO Strictly Confidential Intercompany Loan A Discussion Document September 10th, 2014 EFTA01192635 Key Considerations The proposal is to interpose an intercompany note between AGM and APO Corp, which would be effected by way of a dividend. The intercompany note should result in future ongoing interest deductions which should in turn reduce AGM's ETR and cash taxes, which should in turn increase DNI and increase the trading price of AGM's Class A Shares. Key Considerations • Conflicts and disclosure Legal, tax or • Compliance with tax covenants reputational issues • Compliance with credit facilities • Commentary on Asset Manager peers • Tax risk to AGM • Note must be respected as debt for tax purposes • Note must contains arm's length terms and reflect market pricing Sizing and Pricing of the • Consistency with AGM's dividend policy Note ■ Size must be limited to ensure deductibility ■ Impact on projections including an analysis of whether a valuation allowance is required on the DTA • For US Shareholders of AGM (tax rate differential between interest income Tax Implications and qualified dividends) • For Non-US Shareholders of AGM (increase in withholding for ADIA) 2 EFTA01192636 General Background and Discussion Points The proposal is to interpose an intercompany note between AGM and APO Corp, which would be effected by way of a dividend. The intercompany note should result in future ongoing interest deductions which should in turn reduce AGM's ETR and cash taxes, which should in turn increase DNI and increase the trading price of AGM's Class A Shares. ClassA Shareholders Proposed Inttrcornpanv Note APOLLO GLOBAL MANAGEMENT, LLC ("AGM") between: AGM as lender and APO Corp as borronr I son% APO Asset Co LLC APO Corp I —AOG Partnenhip Units Founders and AGM Class AShares—es Contributing Partners currently own 'AOC Partnership CP Units' Professional Holdings, (Cayman) CP) 1.3 58.7% 41.3% 58.7% ;LA 58.7% A0G Partnerships A0G Partnerships A0G Partnership - AMH t t t GP Carry GP Carry Management Fees and Special Fees and AGM Co-Invest and AGM Co-Invest which we-block' which we don't need to "block' which we -block" for our AGII PIP for ourAGII PIP for ourAGM PTP because incaneis not eliejble because incaneMATiNt becasseincomemnynotbeehible for exemption for exemption for exemptico 3 EFTA01192637  APOLLO Economic Impact — Cash Taxes We arc proposing to issue a $950M note @ 6.74% coupon. The following tables shows the estimated impact on cash taxes: Cash Tax Projection !Yid FY 'IS FY'16 FY '17 n"is Budget Nam Pfau Plan Plea the note was sized at $950M as Apollo Pre-Tax DNI 1,232 892 1,236 1,130 1,552 should keep its debt-to-equity ratio under Total Taxable Income 555 507 680 853 1,039 1.5 to 1 as calculated under §163(j). Staying within these bounds allows AGM to benefit Cash Taxes @ Marginal Tax Rate 36.4% 35.9% 35.0% 37.2% 37.3% from a "safe harbor" from rules that could Corporate Taxes 42 28 54 79 107 disallow deductions for interest expense TRA Payment 37 39 40 42 44 Pretax Payment to Founders 115 102 142 183 229 Statutory Taxes 12 8 14 17 18 Corp Note Calculation Total Cash Taxes 206 176 249 320 398 Note 950,000,000 Interest Rate 6.74% Effect allnaaawntalUeatItron ea Interest Expense to APO Carp 19 64 64 64 64 Interest Expense 64,030,000 Pre-Tax DNI' 1,232 892 1,236 1,130 1,552 Months 12 Interest Expense Per Month 5,335,833 Corporate Taxes' 35 5 28 53 81 Sept 15th Issue Date TRA Payment' 37 39 40 42 44 Months 3.5 Pretax Payment to Founders° 104 67 103 144 189 2014 Interest Expense 18,675,417 Statutory Taxes' 12 8 14 17 18 Total Cash Taxes 189 119 185 255 333 Pretax Payment to Founders Rec Reduction in Cash Taxes (After-lax DNI Yiew) 18 57 65 65 65 INIthOut Note With NOte Difference Increase .n ONI Payments to Founders 11 34 39 39 39 Tax Payments 79 72 7 Inaease in DNI Payments to Common Unit Holders 7 23 26 26 26 Per Share 0.51 0.46 0 Net increase (decrease) in cash (0) - - - Founder Share 225.0 225.0 - 'Pre•Tax DNI would remain unchanged, however after-tax DNI would increase by the amount of the tax benefit (which would incense DNI Pretax Payment 114.74 104.17 11 cistributable to common shareholders by the same tax benefit) 'Overt year period corporate taxes are reduced by 5107M CM% avg. marginal rate on S275M of new interest expense 'TRA Payments are unchanged in total over the five year period but are deferred to later years due to the decrease in taxable income in initial years 'Total cash cgstributions to Founders remains the same (equivalent to the Founders share of pretax DNI). The reduction in corporate taxes and TRA payments incenses the amounts the regular dividend payment to the Founders and decreases the pretax payment (gross-up) by an equivalent amount 'Statutory taxes are unchanged as interest expense is at the P1, 0 Corp level 4 EFTA01192638  APOLLO Economic Impact — ENI Tax Provision The following table shows the estimated impact on AGM's Tax Provision: ENI Tax P ojection PIC14 PIPIS FY'16 FY '17 FY 'Is oommogo Budget Pint Plan Plan Plan Total ENI 1,107 1,223 1,574 1,779 1,666 I ncentive Co. - Pass thru ENI 266 471 565 625 493 Tax Base Management Company Pre-Tax ENI 552 426 545 635 675 Management Company Tax Adjustments (243) (272) (128) (53) (35) Interest expense is at the APO Corp level. As such, Incentive Company Taxed ENI 310 327 464 519 498 the tax benefit for GAAP Incentive Company Private Equity Taxed EN! 79 99 119 132 88 and ENI Provisions are the Incentive Company Credit/RealEstate Taxed ENI 142 140 182 241 287 same. Incentive Company Taxable Balance Sheet 53 87 163 146 123 Total Tax Base 619 481 881 1,101 1,138 . ENI Tax Provision ENI Corporate Tax Provision 222 178 333 419 444 2 Assumes $950M note at Tax True Up (Due to Changes in State Tax Rates) 3 6.74% coupon. Assumes Statutory Taxes 11 10 10 10 10 only 3.5 months of interest expense for 2014. Total ENI Provision 236 189 343 429 454 EN! Effective Tax Rate 21.3% 15.4% 21.8% 24.1% 27.3% GAAP Provision 98 80 140 174 183 Effect of Incremental $56 Million of Interest Expense (19) (64) (64) (64) (64) Total Tax Effect # 4035% Marginal Rate (7) (26) (26) (26) (26) ENI Tax Provision 229 164 318 404 429 20.7% 13.4% 20.2% 22.7% 25.8% GAAP Provision 91 55 115 149 158 5 EFTA01192639 Appendix Pricing and Support The credit rating, size and interest rate on the corporate note were determined based on comparison to existing Apollo debt and industry benchmarks. Intercompany Loan The starting point for the credit rating was the ten year bonds we recently issued in May 2014 @ 4% with an A- rating, but given the following factors we concluded that a BB is appropriate for the intercompany loan: [ Characteristics of the Intercompany Loan 1. The 4% Bonds issuance is guaranteed by the APH and AMH entities and the APO borrowings from related Rating: BB parties is not guaranteed. 2. In bankruptcy proceedings third party debt is (and in fact Maturity: 10 years many other payments to third parties are also) senior to Amount: $5OOm - $1,OOOm related party debt. Thus, related party debt is Int. Rate: 5.22% - 7.07% structurally subordinate to debt like that in the I44A Convertibility: None issue. 3. The APO loan includes a PIK provision and prepayment rights without penalty. 6 EFTA01192640  APOLLO Appendix — Pricing and Support ( Given the above features, we ran a screening of all recently issued comparable fixed income securities. We ran two analyses, each based on a different set of comparable securities: I. a broader Finance industry including diversified firms and banks 2. a set focused on the Capital Market sector including asset management firms Both analyses arrived at similar ranges with Median Interest Rates of 6.13% and 5.93%, respectively. Transfer Pricing Study — Interest Rate Analysis We engaged Deloitte to assist with a Transfer Pricing Study to help determine the optimal characteristics of the potential intercompany financing. Based on their finding, a similar 10 yr loan would require a rate between 5.22% and 7.07%, with a median of 6.21%. Low ()- Notes Min Median Up Q-tile )Jax tile 10-Year Note 5.22% 5.57% 6.21% 6.74% 7.07% 8-Year Note 5.00% 5.34% 5.97% 6.52% 6.83% 5-Year Note 111 4.20% 4.53% 5.15% 5.72% 6.02% 3-Year Noall 3.18% 3.47% 4.06% 4.70% 4.93% 7 EFTA01192641