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Apollo Investment: IQ 2020 Credit Review

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NEWS

We reviewed Apollo Investment’s (AINV)  calendar IQ 2020 earnings release, 10-K filing and Conference Call  transcript to prepare the Credit Review.

See the documents attached.


ANALYSIS

Realized Gains Or  Losses

In the first quarter of 2020,  net realized gains and losses were not material. 

Unrealized Gains Or Losses

Net Unrealized Losses were ($186.1mn), or ($2.81) per share, according to AINV.

Some of the most notable write-downs were aviation lessor Merx Financial ($29.4mn) and oil & gas companies Spotted Hawk ($39.9mn) and Glacier Oil & Gas ($12.6mn). Also written down was Maxus Carbon ($22.6mn) and dozens of other investments

Total Losses

To date, since coming to market in 2005, AINV’s aggregate “Accumulated Over-Distributed Losses ” (as per the terminology used in the 10-Q) are ($1,076mn), or 51% of equity capital at par.

Underperforming Companies 

At the end of IQ 2020, investment assets had an aggregate cost of $3.090bn, and an FMV of $2.787bn.

We focused upon a company by company review of the 152 company portfolio. 

Based on the valuation of the AINV investments and other publicly available information, we have identified 24 companies that are under-performing, and 128 that are performing.

Non Accrual Names: CCR 5

Of the under-performing, according to AINV’s 10-Q,  loans to 8 companies are on non accrual.

The companies involved are  9357-5991 Quebec, Inc.; Garden Fresh Restaurant Group; Glacier Oil & GasKLO Acquisition; Solarplicity Group; Spotted Hawk Development; Vari-Form Inc and ZPower Inc. We calculate that the total cost of the investments in the 8 non-performing companies is $220mn and the FMV $113mn

Four of the companies were newly on non accrual in the quarter and one had a second loan added to non-performing status (Spotted Hawk).  9357-5991 Quebec and KLO Acquisition relate to the same kayak manufacturer and were on non accrual previously, as was Vari-Form

Worry List: CCR 4

There are six companies which are rated Corporate Credit Rating 4 – our Worry List – where the likelihood of loss is greater than that of full recovery.

One – Accelerate Parent Corp – which relates to the failed American Tire – is non material and non income producing with a cost of $1.7mn and a FMV of $0.3mn.

The other five are Golden-Bear 2016-R LLC; Maxus Capital Carbon;, Paper Source; Solarplicity Group; Pelican Energy and Sequential Brands.

Both Paper Source and Sequential Brands were added to the underperformers category this quarter due to the BDC Credit Reporter’s concern about their business model in the wake of Covid-19. All the investments were written down in the period, most notably led by Maxus Capital and Solarplicity. 

These investments – mostly loans – have an aggregate cost of $139mn and an FMV of $71mn. That’s equal to 2.5% of total investment assets

We calculate that $7.0mn of current interest or CLO income is at risk of interruption or loss, spread out over 4 of the  companies. (Pelican Energy and Accelerate Parent are equity only, non income producing investments). 

Watch List: CCR 3

At the moment, there are ten under-performing companies on our Watch List (CCR 3 – where the odds of full recovery are higher than that of loss). Of these the most notable by far is AINV’s investment in Merx Aviation, which has a cost of $321mn and a FMV $334mn. Despite that valuation premium on the BDC’s equity stake in the aircraft lessor, we are concerned about the fact that the bulk of the company’s lessees have requested payment deferrals on their obligations because of the crisis. We are concerned that both distributions on the common stock and interest on the debt owed  to AINV at a 12.00% yield may end up not getting paid. Based on 2019 data $39mn of interest and dividend income is at risk, equal to 27% of AINV’s Net Investment Income in 2019. 

The cost of all CCR 3 companies is $526mn and the FMV $514mn.

Balance Sheet Impact

AINV does not undertake its own internal investment rating system.

We calculate the fair market value of all under-performing companies to be $699mn, or 25.1% of the entire investment portfolio at FMV and equal to 68% of net book value..

Investment Outlook

Based on available public information, the BDC Credit Reporter projects the credit outlook for every underperforming company. At time of writing, the outlook was poor for 21 of the 24 companies. Amidst the 21, Garden Fresh has recently filed for Chapter 7 liquidation. We also predict Sequential Brands will file for bankruptcy or undertake a major restructuring shortly. Three other names have “speculative” ratings from major ratings groups. The decrease in value in AINV’s 3 oil & gas companies is expected to continue. As mentioned above, the outlook for Merx Aviation is very worrisome. 

Overall, we could envisage further unrealized losses of ($100mn-$180mn), not including Merx.  The value of prospective losses will be greater should Merx fail, which is not yet being projected.  Note, though, that at 12/31/2019 Merx’s balance sheet included $1.9bn in liabilities and a net worth of ($1.1mn)

Conclusion

During the IQ 2020, both for idiosyncratic reasons as well as sector and general economic pressures brought on in March by the Covid-19 crisis, AINV’s investment portfolio broadly deteriorated from a credit standpoint. At quarter end 24 companies out of 152 were underperforming, and total assets affected reached $699mn, or 25.1% of the total portfolio. There were no material realized gains or losses but the ($186mn) of unrealized losses brought the aggregate AINV losses to date to 51%of equity capital at par. The number of non performing companies doubled from 4 to 8.  The outlook going forward remains poor, as the economic environment is weak and the energy and aircraft leasing sector face extreme negative conditions. The most worrying single investment is the BDC’s largest one: Merx Aviation.

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