Dynamic Product Tankers: IQ 2021 Update

We’ve written twice before about Dynamic Product Tankers, a company owned 85% by Apollo Investment (AINV), which is also a junior lender. The last time was in November 28, 2020 when the $22mn in subordinated debt on the books was valued at par and the $49.8mn at cost in equity was valued at $27.1mn. Jump forward two quarters and the cost remains the same; the subordinated debt is still valued at par and the equity has a slightly lower value – $25.5mn. We rated the company CCR 4.

AINV has not said anything about what’s happening to this shipping investment in some time so there is no news to report. However, the fundamentals of the sector have been improving with the uptick in business activity and this might benefit the company. We’ll find out more when IIQ 2021 results are published. Dynamic is being added to the Trending list because odds are good we might see a material change in value.

In any case, with $1.2mn in annual investment income (a below market 5.31% yield) and a current FMV equal to nearly 5% of the BDC’s net assets, this is an important asset for AINV. This is the second largest underperforming company by value on the BDC’s books as of March 31, 2021. As we’ve seen with other troubled investments of long standing held by AINV, this seemed like an almost certain eventual loss till this year. That might yet be the case, but there’s also a possibility that the BDC – which has been invested in the business since 2015 – might get some or all its $50mn invested back.

Dynamic Product Tankers: Changes In Debt

For what it’s worth: there’s┬ásomething 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.

Dynamic Product Tankers: Downgraded To CCR 4

Based on the August 7, 2020 Apollo Investment (AINV) 10-Q filing, which saw the value of its equity stake in Dynamic Product Tankers get reduced by (45%), from (27%) in the prior quarter, we’ve chosen to downgrade the tanker company to CCR 4 from CCR 3. We know very little about what’s happening at this tanker company 85% owned by AINV for 5 years now. The more a BDC controls a company the less the outside world – including its shareholders are told. However, we’re aware that the shipping business is – by and large – in poor shape and in danger of getting worse if we get an ever deepening recession. We thought the most conservative approach would be to downgrade the company to one notch above non performing.

AINV is the only BDC lender to the company, as well as its principal owner, with $42mn invested at cost in first lien debt and another $50mn in the equity. That’s nearly three times as much AINV initially advanced. The investment income involved is high: $3.5mn. Any interruption or reduction in the interest income would have a material impact on the BDC. Furthermore, the remaining FMV of debt and equity is $69.3mn, also material: 7% of AINV’s net assets. We doubt that even in a worst case much more than half the total exposure at cost is at risk of being written off, but that’s still a notable number.

We’ll probably hear about Dynamic Product Tankers only next time AINV reports its results, and we’ll dutifully report back.

Internap Network Services: Files Chapter 11

On March 17, 2020 – according to news sourcesInternap Network Services Corp (“Internap”) – filed for Chapter 11. The publicly traded “colocation company” reported assets of $724m and debts of $785m. A restructuring agreement is already in place and – as usual – a debt for equity swap planned. Lenders holding at least 77% of the company’s debt have agreed to supply an additional $75mn in capital and greatly reduce debt outstanding in return for an unstated amount of equity.

We don’t know exactly where that leaves the only BDC with exposure, non-traded Business Development Corporation of America (BDCA). Total investment at cost is $11.8mn in the 2022 Term Loan. At 12/31/2019 that was already valued at (36%) discount. Now – according to Advantage Data – the market value is only 25% – a (75%) discount. This debt might be converting entirely into equity or partly. BDCA may be part of the new $75mn capital infusion, or not. What does seem certain, though, is that the BDC will be writing off about ($8mn) of its capital very shortly, given that the restructuring could be resolved shortly.