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Feb. 5 (Bloomberg) — Less than a year after Apollo Management LP paid $6.6 billion for real estate broker Realogy Corp. bond prices show the deal may be worthless.

Debt used to finance the April purchase trades at 61 cents on the dollar, and derivatives tied to the securities indicate an 83 percent chance that Parsippany, New Jersey-based Realogy will default. Apollo, the private-equity firm run by Leon Black. put up about $2 billion of cash to buy the owner of Coldwell Banker and Century 21, borrowing the rest.

The bonds show Apollos equity in Realogy «has no value right now, said Sabur Moini. a money manager in Los Angeles at Payden & Ragel, which oversees $50 billion in fixed-income securities. «If bonds are trading in the 50s or 60s, the market is saying that these guys are headed toward bankruptcy.

Falling bond prices are jeopardizing private-equity returns after easy access to cheap debt fueled a record $1.4 trillion of leveraged buyouts in 2006 and 2007. New York-based Morgan Stanley estimates buyout funds raised in 2003 have returned an average of 42 percent, and now Apollo. Bain Capital LLC, Cerberus Capital Management LP and their competitors may face losses.

Twenty-seven percent of the approximately $74 billion in bonds used in LBOs the last two years classify as «distressed because they yield at least 10 percentage points more than Treasuries, Bloomberg data show.

Distressed Defaults

About 18 percent trade at less than 80 cents on the dollar, below the 91-cent average for high-yield bonds, Bloomberg data show. Freescale Semiconductor Inc.. an Austin, Texas-based maker of chips for mobile phones, and OSI Restaurant Partners Inc. the Tampa, Florida-based owner of Outback Steakhouse, are in both categories.

Debt is 20 times more likely to default within a year once its crossed the distressed threshold, according to research by Martin Fridson. chief executive officer of high-yield research firm FridsonVision LLC in New York.

«Theres going to be some blow-ups as the economy slows, said Eric Bushell. the chief investment officer at Toronto-based Signature Funds, which oversees $17 billion and invests in publicly traded buyout funds. LBO firms «paid prices that maybe werent necessary, he said.

LBO firms typically seek out investors such as pension funds or university endowments to fund 32 percent of the cost of any buyout on average, according to Standard & Poors. They borrow the rest through high-yield, or junk, bonds and loans in the target companys name. Junk bonds are rated below Baa3 by Moodys Investors Service and lower than BBB- by S&P.

Purchases Slow

Investors supplied a record $212.7 billion in 2006 and $189 billion in 2007, according to research firm Private Equity Intelligence in London. Buyout firms made 3,231 acquisitions — almost five a day — and paid an average per-share premium of 20 percent, Bloomberg data shows.

Purchases dried up at the end of last year as losses on subprime mortgages deterred money managers from all except the safest government debt. Investors last month demanded an average 21 percentage points more in yield to own distressed bonds rather than Treasuries, according to Merrill Lynch & Co. index data. The spread was as narrow as 13 percentage points in September.

«It was in 2007 when everything was incredibly frothy and prices increased, said Scott Sperling. co-president of Boston-based buyout firm Thomas H. Lee Partners LP, at the World Economic Forum in Davos, Switzerland, last month. «It might have been a golden age in one way, but I dont think so for the buyers of companies. The class of 07 will be a difficult one for the industry.

Realogy Bonds

New York-based Apollo, with $41 billion under management, has the worst-performing bonds of any buyout firm that did a deal in 2006 or 2007, Bloomberg data show.

The Realogy bonds, sold last April, yield 24 percent. Investors in credit derivatives are paying $3.6 million upfront and $500,000 a year to protect $10 million of Realogy debt from default, an increase from $3.35 million and $500,000 a year yesterday, according to London-based CMA Datavision. The prices imply an 83 percent chance the company will miss debt payments within five years, according to a valuation model from New York-based JPMorgan Chase & Co. the biggest underwriter of junk bonds in 2007 as measured by Bloomberg.

«The equitys underwater, but if the real estate market recovers, the equity value should come back, Moini said.

Apollo said the price of a bond isnt the best measure of how a deal is performing.

«Although its not unimportant, said spokesman Steve Anreder. a better gauge is «how an acquisition is performing, especially how it was capitalized and the debt structured.

Residential Capital

Cerberus, founded in 1992 by Stephen Feinberg. in November 2006 bought 51 percent of Detroit-based GMAC LLC, which controls Minneapolis-based home lender Residential Capital LLC. Residential Capital bonds trade at 61 cents on the dollar, down three cents on the dollar today, according to Trace, the bond-price reporting service of the Financial Industry Regulatory Authority. Credit derivatives imply an 82 percent chance of default within five years, according to the JPMorgan model.

Moodys today cut the senior debt of Residential Capital two steps to B2, the fifth highest junk bond level, from Ba3 after the company reported a fourth-quarter loss of $921 million, its fifth straight. Residential Capital lost $4.3 billion in 2007, GMAC said.

The New York-based rating company cited the risk that Residential Capital could fall below a minimum net worth covenant in the absence of support from the parent and a belief the franchise is impaired.

The senior unsecured rating of GMAC was also cut, to B1 from Ba3. GMAC said it had a fourth-quarter loss of $724 million because home buyers didnt keep up with their mortgage payments.

«Our business model is based on seeing value where others dont and creating value where others cant, said Timothy Price, a managing director at Cerberus in New York. The risk of defaults on LBO loans is the highest in at least four months, according to the benchmark Markit LCDX9 index of credit-default swaps on 100 U.S. high-yield loans. The index, which falls as lender confidence declines, dropped as much as 0.55 to 92.2 today, according to Goldman Sachs Group Inc.

Bain, Blackstone

Bonds for OSI trade at 64 cents on the dollar, and for Freescale, 72 cents, according to Bloomberg and Trace data. A group including Boston-based Bain, founded in 1984 by current Republican presidential candidate Mitt Romney. agreed to buy OSI in June for $3.2 billion. New York-based Blackstone Group was one of several firms that bought Freescale for $17.6 billion in December 2006.

Charlyn Lusk, a spokeswoman for Boston-based Bain, declined to comment, as did John Ford of Blackstone.

«You have to respect a bonds market price, said Howard Marks. chairman of Los Angeles-based Oaktree Capital Management LLC. «Markets arent always right, but if a bonds trading at 60 cents on the dollar, there has to be someone with a reason to think its not worth par.

Marks said in a November interview the firm had raised more than $10 billion in the previous 12 months to invest in distressed securities. He declined to comment on fundraising activities.

To contact the editor responsible for this story: Emma Moody at emoody@bloomberg.net