Apollo BDC leverage hike may boost assets by $1bn

The New York-based firm has spent $2.25m on lobbying costs in Washington since 2012, mainly on the BDC bill, public data show.

Apollo Investment Corporation (AINV) has proceeded with its plans to utilise additional leverage capacity, which could result in an additional $900 million-$1 billion in assets in excess of its current target leverage.

The New York-based firm adjusted its operating leverage ratio to 1.25x-1.4x, which follows a vote by the BDC’s board of directors to increase its maximum debt-to-equity ratio from 1:1 to 2:1. It is currently at 0.56x, while its net leverage ratio is 0.57x.

Previously that target had been 0.65x-0.75x, management said on Friday’s earnings call. Upping operating leverage from the middle of that range, 0.7x, to 1.4x would result in the above asset increase in dollar terms.

AINV is in negotiations with its lenders to alter its leverage covenants, management said on a Friday earnings call.

In addition, the firm adopted a tiered management fee structure, reducing that levy from 2 percent to 1.5 percent for gross assets up to a 1:1 ratio and a 1 percent fee for gross assets in excess of 1:1. The change will lessen, or mitigate, any increase in fees paid as a result of the leverage increase because management fees are paid on gross assets.

The firm also introduced a 12-month look-back total return requirement for its incentive fee, which will begin 1 January of next year. For 1 April to 31 December, the firm reduced its incentive fee from 20 percent to 15 percent. The hurdle rate will remain unchanged at 7 percent.

S&P announced on Monday it put AINV’s BBB- credit rating on negative watch due to its upping of its operating leverage target. The ratings agency had previously cut the BDC’s rating after its board approved a measure allowing AINV to increase its debt-to-equity ratio.

Chief financial officer Gregory Hunt addressed S&P’s downgrade on the call: “While we’re disappointed in S&P’s actions, which we believe are rooted in their view of the industry and not AINV specifically, we do not believe that their action is an impediment to our successful execution of our go forward strategy. We look forward to working with all the rating agencies in evaluating the impact of the new leverage rules.”

The 2:1 ratio is now the maximum leverage for BDCs after the US Congress passed the Small Business Credit Availability Act. Apollo Investment Management, AINV’s external manager, spent $2.25 million on lobbying costs since 2012 on legislation including the SBCAA, according to the Center for Responsive Politics, a Washington-based non-profit tracking money in politics. The database shows AINV has lobbied for various incarnations of increased leverage statutes since 2012.

AINV did not respond to request for comment on the lobbying.

Many of AINV’s competitors have said they are “willing to examine the possibility [of increasing] as time progresses”, the BDC’s chief executive Howard Widra said on a Friday earnings call, asserting the circumstances for AINV were different.

“We are fortunate to be in the unique position to already have all the origination necessary to implement a prudent and lower risk portfolio growth strategy with the increased leverage, and to have insight regarding how those assets perform over a cycle,” he said. “That is why we have taken such a clear position on our path forward upon passage of the act.”

The boards of FS Investment Corporation and Prospect Capital Corporation both voted to increase leverage capabilities, but following a negative guidance on BDCs from S&P, both boards later rescinded the measure.

AINV is not alone in moving forward with leverage increases, however. Other BDCs that have done so include Garrison Capital, while Ares Capital Corporation is supportive of changing its leverage ratio.

In addition to the leverage announcement and fee changes, several staff changes were announced. Widra took Jim Zelter’s place as AINV CEO, while Tanner Powell became president of the BDC, filling the role Widra is vacating. Powell will retain his title as chief investment officer.

AINV reported a net investment income of $31.9 million, or $0.15 a share, fully covering its $0.15 dividend. Net realised and unrealised losses of $11.3 million, or $0.05 a share, resulted in a $0.10 earnings per share. Its net asset value per share as of 31 March decreased slightly from the prior quarter to $6.56 from $6.60.

Some 50.35 percent of the BDC’s portfolio is in first lien senior secured loans, 31.41 percent is in second lien senior secured loans, 11.26 percent is in equity, 4.59 percent is in subordinated debt and 2.39 percent are in other securities, according to Thomson Reuters BDC Collateral.

That database also shows AINV’s largest sector exposures are to transportation (25.92 percent), business services (18.35 percent) and healthcare (11.26 percent). Of its book, 2.29 percent is on non-accrual at fair value and 3.34 percent at cost.