For what it’s worth: there’s something happening here, but what it is ain’t exactly clear. We’re cribbing from Buffalo Springfield to reference Dynamic Product Tankers. The shipping business is 85% owned by Apollo Investment (AINV) and has been since 2015. (The rest is held by management). Since 2018, the BDC owner has also been a first lien lender with a $42mn first lien loan due in 2023 and priced at LIBOR + 700 basis points. [There’s another $50mn invested in the equity, which is valued at just $27.1mn but that’s another part of the story].
In the IIIQ 2020 AINV’s 10-Q no longer shows that 2023 first lien loan but a now $22mn subordinated loan due in 2024. Furthermore, the pricing on this ostensibly more junior capital is only LIBOR + 500 basis points. Management has not explained the change on its latest conference call but the 10-Q does show that the value of AINV’s investment has been written down ($9.5mn) in the past 6 months. That represents a third of AINV’s unrealized losses on its control companies in this period: i.e. material.
This could be a glass half full or half empty story. If the former, AINV has received some repayment of its debt, either from Dynamic or from a third party lender refinancing a portion of that first lien debt. If the latter, AINV is being pushed down the capital structure of the company to generate some cash by pledging a first security interest to a new lender. The low pricing for the debt and the continuing drop in the enterprise value makes us plump for the darker theory.
This has already impacted the income generated from this investment, which has dropped from a $3.5mn level to $1.2mn annual pace. Of course, if things are getting worse at Dynamic Product Tankers even that remaining income may be at risk and all the $49.1mn in debt and equity value remaining.
The BDC Credit Reporter affirms our existing CCR 4 rating on the company. We are not adding this to the Weakest Links list because AINV’s dual role of owner and lender makes very difficult handicapping when a default on the debt might be triggered. This may prove to be an important credit story for AINV, or much ado about nothing. We will learn something more when AINV next reports its results.