CLARIFICATION: Inman News has changed some language in this article to more specifically identify Realogy’s creditors as "debt investors" and "senior lenders."

Franchise giant Realogy Corp. is in the midst of a debt restructuring that, if the company chooses to go public again, could allow it to shed $2 billion in bond debt by exchanging it for shares of company common stock.

If Realogy does pursue an initial public offering, private equity firm Apollo Management could reportedly convert enough Realogy bond debt into shares to become the majority stakeholder in the company.

Realogy — whose brands include Century 21, Coldwell Banker and Better Homes and Gardens Real Estate — was acquired by an affiliate of Apollo Management in April 2007 and taken private in a leveraged deal that left the company deeply in debt.

The deal was valued at more than $8 billion at the time, but Realogy borrowed most of the money needed to buy the company’s publicy traded stock back from shareholders.

In its most recent quarterly report to investors — filed before the debt exchange was consummated — Realogy reported $6.85 billion in debt as of Sept. 30 that was associated with the deal to take the company private.

"The industry and economy have experienced significant declines since the time of the (deal) that have negatively impacted our operating results," Realogy said. "As a result, we have been, and continue to be, challenged by our heavily leveraged capital structure."

At 4.57 to 1 as of Sept. 30, the debt ratio on more than $3 billion that Realogy owed to its most senior lenders was within the 5-to-1 limit stipulated by an agreement with its most senior lenders. The debt-ratio limit is scheduled to step down to 4.75 to 1 on March 31, 2011.

Private-equity funds managed by Apollo Management and co-investors originally made a $2 billion equity investment in Realogy — meaning that the holders of the company’s debt had the biggest stake in the company’s fortunes.

After racking up a $1.9 billion loss in 2008, Realogy was dogged by speculation that it would be forced to file for Chapter 11 bankruptcy. At the end of 2008, the company reported $6.76 billion in debts, and Realogy was nearing the maximum allowed debt ratio on $3.25 billion owed to its most senior lenders.

Realogy got some breathing room last year in an initial debt restructuring that boosted Apollo Management’s ownership of Realogy bond debt to nearly $1 billion. The deal allowed Realogy to refinance $220 million in bonds held by Icahn Partners LP, which had blocked a previous plan for a debt exchange in 2008.

According to the New York Post, Leon Black, Apollo Management’s chairman and CEO, has been trying to salvage his investment in the real estate franchisor by purchasing more than $1 billion in Realogy subordinated debt, paying about 20 cents on the dollar, on average.

Apollo Management had no comment on the Post’s report. Realogy also declined comment, citing restrictions on communications about pending deals.

The Post reported Black has found an ally in billionaire John Paulson, the head of Paulson & Co., who has also been buying Realogy debt at a discount. Another more recent buyer is Avenue Capital.

Now, in another debt restructuring, Realogy is offering to let Apollo, Paulson, Avenue Capital and debt investors exchange bonds for notes with extended maturation dates — most of which will be convertible into company stock.

Although Realogy could have trouble attracting investors if it tried to go public now, three years after the debt exchange is completed Paulson will be granted two "demand" rights allowing him to request an initial public offering at any time.

The request must be granted if the estimated gross proceeds of the IPO would be equal to or greater than $75 million, Realogy said in another regulatory filing.

On Dec. 1, Realogy announced that Paulson & Co., Avenue Capital Management, and investment funds managed by Apollo Management VI, had agreed to exchange $1.95 billion in bonds scheduled to come due in 2014 and 2015.

Realogy said that with the exception of $250 million in bonds owned by Avenue, those bonds can be exchanged for notes convertible into stock, due in 2018. Realogy also offered to convert existing bonds into senior subordinated notes paying a higher interest rate and due in 2017.

Realogy said the deal would only go through if other investors stepped forward and offered to "tender" their bonds by Dec. 13 for a debt exchange totaling at least $2.65 billion.

On Dec. 15, Realogy announced that holders of $2.67 billion in bonds had agreed to the deal, which was expected to close on Jan. 5. Up to $2.3 billion in bonds may be exchanged for convertible notes, Realogy said in another filing on Dec. 10.

The debt exchange not only extends the maturity of Realogy’s bond debt, but if the company goes public and bondholders trade their convertible shares into company stock, Realogy will reduce its outstanding debt from $6 billion to about $4 billion, the Post reported.

Apollo will be able to convert its bonds into a 61 percent stake in Realogy, the Post said, citing an anonymous source "close to Paulson." But Apollo’s co-investors, who invested $900 million in the original deal to take Realogy private, will be almost entirely wiped out, the Post reported.

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