Energy issues cause loss for Apollo BDC

A rocky energy sector during Q4 2016 hit the firm’s BDC, causing a drop in earnings of nine cents per share.  

Apollo Investment Corporation, the business development company of Apollo Global Management, posted a decline in net asset value of nine cents per share for Q3 of the firm’s fiscal year. The company’s management attributed the decline to an underperforming energy portion of its portfolio together with a continued process to restructure and de-risk the BDC.

Net investment income also fell during the period compared with Q2. The firm reported $36.4 million, or 17 cents per share, in Q3. In Q2, the BDC had net investment income of $39.5 million—18 cents per share.

During its earnings call on Monday, the firm announced its NAV had fallen from $6.95 per share to $6.86 per share. The firm noted that a choppy energy sector, which accounts for 9.4 percent of the BDC’s portfolio, hampered the BDC’s performance. An executive added, however, that the firm is looking to reduce its energy exposure along with exposure to renewables and structured debt.

Apollo reported it had paired down the exposure to all three of these aforementioned areas during the quarter. Structured credit exposure fell from 7.8 percent of the portfolio to 6.7 percent. Renewables account for 8.1 percent, down from 11.3 percent.

“It is our intention to further reduce our exposure to these areas,” Howard Widra, president, said. He added the BDC’s yield should be expected to fall as Apollo de-risked the portfolio. The firm anticipates the yield going from “high 10s” to an amount in the “lower 10s”.

According to John Cole Scott, chief investment officer at Closed-End Fund Advisors, the firm has a higher allocation to energy than most of the industry. The industry average, is around 4.2 percent, he told PDI, citing his firm’s research.

Cole Scott also noted Apollo cut its dividend in August by 25 percent. The firm said in its earnings it would pay out a dividend to shareholders of record of 15 cents per share in April.

Cutting a dividend, however, is in keeping with the broader BDC universe. Firms like Medley and Fifth Street have cut dividends over the last eight quarters or so, Cole Scott noted. “The trends haven’t been favourable to distributions,” he said.

The de-risking of the portfolio is also in keeping with the industry as a whole, Cole Scott noted. “The comments across the board have been as we’re getting later in the credit cycle the talk has been about using higher-quality loans,” he told PDI.

Apollo also noted it’s finding it difficult to identify attractive opportunities to deploy capital. “We’re finding capital deployment is less attractive as many of these opportunities do not make it past our credit qualities,” Tanner Powell, chief investment officer at Apollo, said during the call.

Cole Scott said this is the right move for a BDC like Apollo. It’s difficult to find loans at the moment which would enhance or improve a portfolio, he said.