Merx Aviation: Added To Underperformers

Merx Aviation is an aircraft leasing company owned by Apollo Global. According to a recent press releaseas of December 31, 2019, [Merx’s fleet] consisted of 83 aircraft, 10 aircraft types, across 40 lessees in 26 countries.  80 of the aircraft are narrow-body which are the most in demand types of aircraft.  Apollo’s aviation platform has 45 investment professionals dedicated exclusively to aviation“. Total assets exceed $2 billion and equity is only $45mn. Despite reassurance from Apollo Investment (AINV), which is a lender to and investor in Merx, that all will be well the BDC Credit Reporter has its doubts. So does Fitch, which recently gave the entire sector a “negative outlook“, down from “stable” at year-end. More worrying to non-leasing specialists like the BDC Credit Reporter are quotes like the following, picked from a recent Reuters article:

“This is the biggest shock I’ve seen. This is much more severe than 9/11, this is much more severe than the financial crisis.”

That’s more than enough for us to add Merx to the Underperformers list. It’s not just the obvious downside from the standstill in aviation; the growing signs that we are entering a global recession, etc. It’s also the very large size of the exposure and where that stands in the company’s capital structure. At year-end 2019 AINV had $320mn invested at cost in Merx, $305mn in what is effectively debt structurally subordinated to lenders with first liens against the assets. Then were was $15mn of equity valued at the time at $57mn. The debt – priced at 12.00% (which by itself speaks volumes) – generates $37mn of investment income for the BDC. That’s equal to 14% of total investment income. Or, put another way, equal to one quarter’s Net Investment Income. The value of the investment at year end 2019 equalled 30% of the BDC’s book value.

We have no special insights to offer on the credit future of Merx or aircraft leasing. We’ll wait till AINV reports IQ 2020 results in May to look closer. However, we’re sure our readers can appreciate that a credit slip-up here would be monumental, both in BDC terms given that this is one of the largest exposures to a single name in the industry and for AINV. All the more reason for the BDC Credit Reporter to fix our sights on the company and the multiple other similar companies funded by other BDCs. We initiate at a Corporate Credit Rating of 3.