Apollo BDC reports disappointing quarter

Management believe that recent co-investment relief from the SEC will allow AINV to more frequently act as lead lender and access new opportunities.

Energy investments were a drag on net asset value during the first three months of 2016 for Apollo Investment Corporation (AINV), according to executives on its earnings call. Total investment income was down, from $102 million for the three-month period that ended in December to $85.3 million at the end of March.

The results were worse than many analysts’ expectations and prompted a decline in the company’s stock, which opened at $5.50 per share and reached a low of $5.22 per share before closing at $5.35 per share.

Apollo reported net investment income of $44.6 million, down slightly from $48.1 million in the previous quarter. The BDC declared a $0.20 dividend and reported total assets of $3.09 billion, down from $3.22 billion at the end of December.

“The credit markets were negatively impacted by renewed concerns about overall global growth and further declines in the price of oil,” explained chief executive officer James Zelter. “That volatility pushed investors to [the] sidelines and forced most investors to build liquidity by selling higher quality credit names, which put downward pressure on secondary prices and caused the primary markets to slow considerably,” he said.

AINV said the company’s oil investments were responsible for most of the 3.7 percent decline in net asset value experienced so far in 2016. The company’s $347 million in oil and gas investments made up 11.9 percent of AINV’s portfolio at the end of March, down from the $395 million, 12.9 percent share the sector claimed in the quarter ended December 2015.

Management said that while investors can expect the company’s oil and gas portfolio, consisting of seven core investments, to shrink in quarters to come, there was still potential for recovery in oil markets and future rewards from those investments. AINV invested $35 million in renewable energy during the quarter to the end of March, increasing the share of the portfolio from 7.7 percent to 8.7 percent.

“I don’t think we are exiting the energy business per se, but I think you will see that portfolio shrink rather than grow over the next couple of quarters unless there is a material increase in oil prices,” Zelter said.

Chief financial officer Greg Hunt reported that AINV’s leverage for the quarter was 0.76x, the same as it had been at the end of December 2015. In response to a question from Rick Shane of JP Morgan, Hunt said that AINV management views a reduction of leverage into the mid-0.6x range as a goal for the company over the next few quarters.

On the call, Zelter also hailed the steps that the company had taken to safeguard shareholder interests, especially its fee waiver and stock repurchase programmes. In March, Apollo announced that it would reduce base management fee to 1.5 percent on gross assets from 1 April 2016 through 31 March 2017.

Jonathan Bock of Wells Fargo commended the move, while Ryan Lynch of KBW asked why the BDC had moved to make the reduction only for the next year and not permanently. Zelter replied that the board had chosen to stick with one-year rolling contracts in part because of a belief that the stock price might suffer if the company were to change from its established practice of reviewing such decisions on a year-by-year basis.

With regard to the company’s wider portfolio, AINV executives said that the company is invested in 89 companies across 25 industries. In the quarter ending in March, AINV had what it characterised as relatively modest level of originations, with $179 million deployed to four new companies and 12 existing investments. Non-accruals accounted for 8.4 percent of the portfolio on a cost basis, an increase from the 6 percent figure reported last quarter.

On the call, Apollo executives also discussed their expectations for the impact of the recently-granted SEC approval to invest with other funds within the wider Apollo platform. While under the current conditions, the biggest loans the BDC could make were between $50 million and $75 million, the co-investment exemptive relief would allow it to participate in negotiated joint transactions of larger size and improve ability to drive outcomes in portfolio companies.

“We will be able to originate a broader, higher quality product set, hopefully with better structure and better economics for us,” Zelter said. “I think it’s a big, big, big advantage for us on a go-forward basis,” Zelter said. “But I don’t think you are going to see a lot of material impacts in the June quarter,” he added.