"Apollo Investment Corporation, a Maryland corporation organized on February 2, 2004, is a closed-end, externally managed, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). In addition, for tax purposes we have elected to be treated as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, as amended (the “Code”). Our common stock is quoted on The Nasdaq Global Select Market under the symbol “AINV.Our investment objective is to generate current income and capital appreciation. We invest primarily in various forms of debt investments including secured and unsecured debt, loan investments and/or equity in private middle market companies. We may also invest in the securities of public companies and structured products such as collateralized loan obligations (“CLOs”) and credit-linked notes (“CLNs”). Apollo Investment Management, L.P., an affiliate of Apollo Global Management, Inc., a leading global alternative investment manager, serves as our investment adviser".

Posts for Apollo Investment

Sequential Brands: Lender Appoints Board Members

Sequential Brands is the BDC Credit Reporter’s Godot. We’ve written multiple articles over the past two years breathlessly warning that something bad – a bankruptcy or a forced sale – was close to happening. Then: nothing. The company and their lenders always seem to arrive at a temporary modus vivendi, but no permanent resolution. (We’re desperately trying not to use the kicking of cans down the road analogy again). At times – given the high valuations the BDC lenders have maintained – we’ve doubted ourselves and the urgency of the situation.

However, the latest developments suggest – once again – that SOMETHING is going to occur at Sequential in the near future and that there is a possibility the BDCs – with $290.5mn outstanding in debt and equity to the company – may be materially impacted. Here’s what we know: According to a March 31, 2021 regulatory filing the company and one of its lender groups – led by Wilmington Trust – extended “a waiver of existing defaults under the Credit Agreement through April 19, 2021“. Furthermore, the lender “shall have the right to appoint an independent majority of the Board of Directors of the Company“. So gone is Martha Stewart and three other less famous Board members, probably letting out a sign of relief. Also a red flag: the company has not yet filed its IVQ 2020 and full year results.

The short extension period by Wilmington suggests that whatever “strategic alternatives” the company has been exploring since December 2020 is reaching some sort of conclusion. That might involve a sale of the business – in whole or in parts – or some pre-agreed Chapter 11 filing. The public shareholders seem to be bullish about this likely outcome, with Sequential trading at $22.22 as of the close on Thursday April 1, 2021. We are less optimistic – as is our self appointed mandate.

At risk for the BDCs involved is the prospect of ($28mn) of annual investment income from their 2024 Term debt outstanding being interrupted. Then there’s a good chance – based on the most recent quarterly valuations which discounts the equity owned by (99%) – a realized loss of up to ($10mn) will be incurred. However, the most important question mark is how the second lien debt will fare in the half billion dollar of borrowings Sequential owes. FS KKR Capital (FSK) and FS KKR Capital II (FSKR) and Apollo Investment (AINV) have advanced $280.5mn– more than half the total debt outstanding.

Currently, FSK and FSKR discount their debt by only (12%) and AINV by just (4%). If we apply the more conservative discount, that would still result in ($34mn) of realized losses on the debt and ($44mn) in total. The loss could be higher, but even ($44mn) is material given the big bets placed by the FS- KKR organization and which will shortly all be held by FSK, as FSKR is about to merge into its sister BDC. (AINV’s exposure is – clearly – much more modest even adjusting for the respective BDC sizes).

We should say – to be fair and recognizing that the stock market seems to believe that there is considerable market value left in Sequential – that this could all pass as quickly and harmlessly as a summer storm. Some deep pocketed buyer could be finalizing a generous deal as we write this or some hard working lawyers could be arranging a favorable “debt for equity swap” which will leave creditors undiminished. Maybe there’s a SPAC out there who wants to own a group of consumer brands…We don’t know, but we are as confident as we’ve been in two years that a change of status is in the cards for the company in the near future.

We are maintaining our CCR 4 rating on the company – as an eventual loss seems more likely than repayment in full. We are also adding Sequential to our Trending list because of the expectation that whatever is in the company’s future in the weeks ahead will be reflected in the BDC valuations and income – most probably in the IIQ 2021. For FSK especially this could either be a body blow, or not. We’ll be tracking the situation daily and will report back when something material occurs.

Paper Source Inc. : Files Chapter 11

On March 2, 2021 stationery retailer Paper Source Inc. filed Chapter 11. According to Bloomberg: “The company intends to hand control of the business to an affiliate of MidCap Financial, a lending arm of Apollo Global Management, in exchange for debt forgiveness, court papers show. Paper Source owes about $103 million to lenders, including more than $55 million under a first-lien term loan“.

This is no great surprise to the BDC Credit Reporter, which has had the company on its underperformer list with a CCR 3 rating since IIQ 2017. A further downgrade occurred in April 2020 tro CCR 4 and will now be moved to a CCR 5 – non performing. The principal BDC lender is Apollo Investment (AINV) , which has invested $14.2mn in the company, principally in the form of first lien debt, which was valued at $11.4mn at year-end 2020, a (20%) discount. Presumably some ($1.2mn) of annual interest income will be forgone as Paper Source is sorted out.

From what is being said in court papers, the Apollo Global owned lender Mid-Cap Financial – with whom AINV participated – envisages some sort of debt for equity swap. This will make the lenders owner/lenders going forward and reduce the company’s debt. Here is an outline of the plan, according to the Chicago-Tribune, quoting from court papers:

Paper Source said MidCap Financial agreed to serve as an initial bidder, or “stalking horse,” to purchase the company’s assets for up to $88.8 million, which includes $16.5 million in financing to help the company continue operating… A sale is expected to close in about 90 days”.

AINV only arrived on the scene as a lender in June 2019 when Paper Source was already underperforming, possibly as part of a “lend-to-own” strategy or just in a case of bad timing. Chances are now high that the BDC will be advancing additional monies; restructuring debt and the like and extending indefinitely its relationship with the retailer.

For AINV, whose credit troubles have been mostly concentrated in “legacy assets” booked some time ago under a different management team, this is a rare setback for loans booked by Mid-Cap Financial, the principal source of the BDC’s current new investment activity. We’re adding Paper Source to our Alert List because both income and investment values should be substantially different in the IQ 2021 results.

AMP Solar Group: Investment Sold

When we last wrote about AMP Solar Group on January 12, 2021, we were full of questions. We’d heard that the Carlyle Group had made an investment in the company, but we didn’t know what were the implications for Apollo Investment (AINV), which has a very long standing equity investment with a cost of $10.0mn and a value through September 30, 2020 of $8.570mn.

We don’t know if Carlyle’s involvement validates the multi-year investment in AMP Solar and we will see either a sale of the BDC’s position to them or an increase in the business valuation. ..We just don’t know but hope to learn more from AINV when IVQ 2020 results are published and discussed in February 2021“.

Now AINV has reported those results we know a lot more, even if not much color was offered. Apparently, the BDC received $14.0mn for its position, resulting in ” a net gain of approximately $5.6 million during the quarter“.

Six years after getting first involved with AMP Solar this is a positive outcome for AINV which has been long trying to sell-off its “non core” alternative energy investments. At one point this investment had been written down on an unrealized basis by (91%) so the gain realized must feel like vindication to the BDC.

The BDC Credit Reporter had rated the investment CCR 3, as its value had been appreciating in recent quarters, but the rating had been CCR 4 in the past. We are re-rating to CCR 6 as the BDC no longer has any exposure.

Ambrosia Buyer: Debt Placed On Non Accrual

As we noted at the top of our earlier article on November 26, 2020 about Ambrosia Buyer Corp., there are actually three different names used by different BDCs for the same borrower. Here’s what we wrote:

Occasionally BDCs use different corporate names for portfolio companies, which is very confusing for the BDC Credit Reporter and requires much checking and double checking. In this case we are going to discuss Ambrosia Buyer Corp; Trimark USA LLC and TMK Hawk Parent Corp. Three names but one company and set of debt. As CreditRisk Monitor explains: “Ambrosia Buyer, Corp. was formed by Centerbridge Partners, L.P. to facilitate its acquisition of TMK Hawk Parent Corp. d/b/a TriMark USA, LLC (“TriMark”) from Warburg Pincus LLC. TriMark is a leading distributor of foodservice equipment and supplies in North America serving over 80,000 customers”. Several BDC lenders are involved in a first lien Term Loan due August 2024 and a second lien maturing one year later. Total BDC exposure is a material $63.5mn at cost, split between four firms: Apollo Investment (AINV); New Mountain Finance (NMFC); Audax Credit BDC and Cion Investment, which is related to AINV.”

We also predicted in that same article that a default was a likely outcome: “As half of Ambrosia/Trimark’s customers – according to Moody’s – are restaurants and that the group already has a Caa rating on the company, we are not optimistic. We don’t know enough to add the company to the Weakest Links list, so we’re not “calling” an imminent payment default. Would we be surprised if one occurred ? No, given the dire economic conditions and the 10X debt to EBITDA remarked on by Moody’s as far back as April 2020″.

Now – thanks to AINV IVQ 2020 results disclosure – and a brief comment on its conference call, we know that company is non performing: “We placed 1 new investment on nonaccrual status during the quarter: our second lien investment in Ambrosia Buyer, or TriMark, was placed on nonaccrual status. The company is the distributor of food service equipment and supplies in North America and has been struggling during the pandemic as its restaurant customers were forced to close. We continue to receive scheduled cash interest payments from the company, but we’ll be applying those proceeds to the amortized cost of our position“.

From an income standpoint, that’s ($1.9mn) forgone on an annual basis, or about 1.7% of the BDC’s latest Net Investment Income Per Share annualized. (The second lien has a principal value of $21.4mn and an interest rate of 9.0%). As of the IIIQ 2020, there were still 4 BDCs involved with the multi-named company, with $63mn invested in first and second lien debt. Only Cion – besides AINV – holds a second lien position ($13.4mn). The remainder are in the first lien debt and may, or may not, also be in default.

AINV dropped its value in Ambrosia 30 percentage points from $16.6mn to $10mn, so it’s likely other BDCs will – at least – discount their debt further. Last quarter the senior loan was already haircut by (33%). For our part, we are downgrading the company from CCR 4 to CCR 5 and will provide an additional update when we hear from NMFC.

AMP Solar Group: Carlyle To Invest In Company

Here’s a mystery for you. What are the implications of the announcement that Carlyle Group is making a $374mn investment commitment to AMP Solar Group ? As Carlyle’s press release says, the company :

…”is a global renewable energy infrastructure manager, developer and owner. Since 2009, the Company has successfully developed over 1.8 gigawatts of distributed and utility-scale renewable generation projects, hybrid generation plus storage projects, and stand-alone battery storage projects around the world. Amp Energy’s proprietary digital energy platform, Amp X, also provides a diverse portfolio of disruptive and interoperable solutions, including a state-of-the-art smart transformer, that enable real-time autonomous management and optimized dispatch of all forms of distributed generation and loads across the grid. The Carlyle investment will help catalyze the continued rapid growth of both Amp’s asset base and Amp X within its core markets of North America, Japan, Australia, Iberia and the UK.

Apollo Investment (AINV) has $10mn invested in equity in AMP Solar (owns 6.6%) and $13.2mn in a UK subsidiary, which goes by the name AMP Solar Group UK or Solarplicity. The former investment is valued at a (14%) discount to cost while the latter is valued at only $0.17 on the dollar. The debt and the preferred on the UK company is on non accrual so the entire $23.2mn which AINV has invested at cost is non-income producing.

We don’t know if Carlyle’s involvement validates the multi-year investment in AMP Solar and we will see either a sale of the BDC’s position to them or an increase in the business valuation. Maybe the debt to the UK operation – never very profitable as the yield was fixed at 4% – will return ? We just don’t know but hope to learn more from AINV when IVQ 2020 results are published and discussed in February 2021.

Sequential Brands: Charged With Accounting Fraud

The BDC Credit Reporter has written multiple articles about publicly traded Sequential Brands (SQBG) over the last two years. There are five different updates in the archives. In the past, we were mostly concerned about the consumer brands conglomerate’s liquidity. Now the company, it’s shareholders and creditors face a new challenge: charges by the SEC that the company did not properly account for goodwill.

The complaint, filed in federal district court in Manhattan, charges Sequential with violating antifraud, reporting, books and records, and internal controls provisions of the federal securities laws and seeks injunctive relief and civil monetary penalties”.

As reported previously, there are three BDCs with exposure to the company, of which two have outsized amounts outstanding – mostly in first lien debt due in 2024: FS KKR Capital II (FSKR) and FS KKR Capital (FSK), with $218mn and $61mn respectively invested at cost. Far behind in terms of dollars – but invested in second lien debt is Apollo Investment (AINV) with $13mn.

For our part, we had recently upgraded Sequential from CCR 4 to CCR 3 in mid-year 2020 as our concerns about weak liquidity and a potential restructuring or bankruptcy seemed overblown at a time when the BDCs themselves (through IQ 2020) were valuing their debt almost at par. We had removed the company from our Weakest Links list as well.

Still, back on September 2, 2020 we wrote in our internal notes: “We wonder – after reviewing the IIQ 2020 results again – whether we were wise to upgrade from CCR 4 to CCR 3 following the IQ 2020 valuations. We may have allowed ourselves to be taken in by the almost knee jerk optimistic valuation of BDC lenders/investors when facing a major exposure. For example, AINV’s second lien debt is discounted but -5%. Regrets. We may have a few“.

Now we’re back to downgrading Sequential to CCR 4 again. It’s not just the SEC charges – which do not seem to have fazed shareholders. We also note that the Board has announced its intention to explore “strategic alternatives“. Furthermore, we’ve noticed that the FS KKR BDCs have been increasing their discount of the first lien debt in the last two quarters. At September 30, 2020 the discount was (15%). (AINV discounts its more junior debt only -4%).

Taken together, this is worrying and given the aggregate size of BDC exposure – $292mn at cost and $25mn of annual interest income – worth paying attention to. FSKR and FSK shareholders should have a special interest in any outcome – especially a poor one. Given the “strategic alternatives” exploration, we may hear sooner rather than later about the direction of Sequential Brands.

Dynamic Product Tankers: Changes In Debt

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.

Spotted Hawk Development: IIIQ 2020 Update

Spotted Hawk Development LLC is the BDC’s largest single remaining energy investment and the only one still generating current income for the BDC. As a result, the BDC Credit Reporter is undertaking an update as of September 30, 2020. The total cost remains $115mn, essentially unchanged from the prior period. However, the fair market value has dropped to $42.3mn from $47.5mn. The reduction occurred in the Tranche A senior loan (there are three tranches), which remains on non accrual.

Currently only Tranche A of the debt is still “performing”, with a cost of $24.7mn and a slightly higher FMV. The debt is priced at a 12.0% yield, generating $3.0mn of annual investment income, equal to 2.7% of the BDC’s annualized Net Investment Income Per Share.

Management provided no update on the company this quarter and no analyst asked a question. We affirm the company’s CCR 5 rating, which has been in place since 2016 and continue to expect – given the parlous state of the energy sector – that this investment will end in a huge realized loss and – probably – a further decrease in fair market value from the IIIQ 2020 level. What’s impossible to tell – given that AINV controls this business and has – is whether Spotted Hawk will continue to pay its interest. Given the valuation trend, the outlook for payment and for valuation looks bleak.

KLO Holdings: IIIQ 2020 Update

With no guidance from BDC lender Apollo Investment (AINV), the BDC Credit Reporter recently wrote an update on October 17, 2020 about KLO Holdings – holding company for a kayak manufacturer with operations in the US and Canada. We posited that the BDC investment in the business – which failed earlier in the year – would result in a 100% write-off and everyone would move on.

Now that we’ve had a chance to dig into AINV’s IIIQ 2020 financials we’re changing our story. Once again we are getting no help from AINV – which like most BDC managers only episodically shares an anecdote or two about underperforming portfolio companies. We do know, though, from the 10-Q that AINV booked a ($3.7mn) realized loss in the IIIQ 2020 associated with KLO Holdings. However, a new borrower is now listed in the KLO Holdings Group : 1244311 B.C. Ltd. To this entity AINV has advanced $4.0mn in debt and $1.0mn in equity.

The $4.8mn invested in cost at the KLO Holdings subsidiary KLO Acquisition, in the form of a loan, remains valued at zero and on non accrual. The Canadian subsidiary of KLO holdings 9357-5991 Quebec Inc. had a cost of $8.657mn as of June, also in the form of a loan. That’s cost has now been reduced to zero. We’re guessing this is where the ($3.7mn) realized loss came from and the remaining $5.0mn transferred to the new entity: 1244311 B.C. Ltd. Of that $4mn in new debt, three quarters is cash paying, according to the 10-Q, and $1mn is in PIK form. AINV has valued its “new” $5.0mn investment at $4.844mn. The rest of the historic advances to KLO Acquisition and 9357-5991 Quebec Inc. are valued at zero.

That took us half an hour to parse out, so if you’re confused we sympathize. The bottom line, though, is that AINV has taken a small realized loss equal to one quarter of its June 2020 exposure to the KLO Holdings companies, but continues to have exposure to a new company by moving obligations around and changing their form. This means KLO Holdings is both a non performing and a performing loan, depending what subsidiary entity you’re talking about !

We have clearly under-estimated the unwillingness of AINV to give up and walk away. Only time will tell though if these are just realized losses delayed by these clever transactions or whether the BDC might participate in some turnaround and eventual partial or full recovery. Admittedly, the current FMV is low: just $2.157mn, and the amount of interest income being now received is very modest. For readers, this story of the changing nature of AINV’s kayak investment is a useful example of the flexibility BDCs have to re-characterize and restructure their assets. Investors have the challenge of trying to keep up in order to have a sense of what value is lost or created.

Ambrosia Buyer Corp : Lender Dispute

Occasionally BDCs use different corporate names for portfolio companies, which is very confusing for the BDC Credit Reporter and requires much checking and double checking. In this case we are going to discuss Ambrosia Buyer Corp; Trimark USA LLC and TMK Hawk Parent Corp. Three names but one company and set of debt. As CreditRisk Monitor explains: “Ambrosia Buyer, Corp. was formed by Centerbridge Partners, L.P. to facilitate its acquisition of TMK Hawk Parent Corp. d/b/a TriMark USA, LLC (“TriMark”) from Warburg Pincus LLC. TriMark is a leading distributor of foodservice equipment and supplies in North America serving over 80,000 customers”. Several BDC lenders are involved in a first lien Term Loan due August 2024 and a second lien maturing one year later. Total BDC exposure is a material $63.5mn at cost, split between four firms: Apollo Investment (AINV); New Mountain Finance (NMFC); Audax Credit BDC and Cion Investment, which is related to AINV.

The debt was performing normally till Covid came along but was downgraded from CCR 2 to CCR 3 in the IQ 2020 and then to CCR 4 in the IIQ 2020. We were influenced by the ever lower BDC valuations and a major downgrade of Trimark by Moody’s in the spring. As of September 2020, the BDCs involved are discounting their exposure by anywhere from (21%) to (33%). The AINV/Cion combo are in the second lien debt and the other BDCs in the 2024 first lien. However, AINV/Cion have applied the more modest discounts, which seems counter-intuitive.

In any case, Ambrosia/Trimark is caught up in a major struggle between lenders that has ended up in court. Here is the dispute in a nutshell as spelled out by Institutional Investor: “

“…a group of lenders to TriMark USA, which provides equipment to the foodservice industry, sued their fellow private credit providers, alleging that they improperly amended the credit agreement.

TriMark has been struggling during the pandemic, as its customers — restaurants — had to close. The lenders changed the credit agreement in a bid to give the company more liquidity.  

Friday’s lawsuit claims that these changes devalued certain lenders’ debt and makes it less likely that they’ll get repaid if TriMark defaults. “This breach-of-contract case arises from a cannibalistic assault by one group of lenders in a syndicate against another,” the lawsuit said.” 

The plaintiffs include Audax, BlueMountain Capital Management, Golub Capital Partners, Intermediate Capital Group, New Mountain Finance Corp., Shenkman Capital Management, York CLO Managed Holdings, and Z Capital Credit Partners. 

..The list of asset managers and owners they are suing is long. Two of the defendants are TriMark’s private equity owners Centerbridge Partners and Blackstone, which holds a minority stake in the company. “Blackstone is a minority investor in the company and these claims are wholly without merit,” a spokesperson for the firm said via email. A spokesperson for Centerbridge declined to comment

The plaintiffs are also suing BlackRock, Ares Management, Oaktree, Sculptor Capital Management, Australia’s Future Fund, and the Canadian construction industry pension plan, among several others“.

We can’t hope to disentangle here which BDC is on which side and who might be doing what to whom. The attached FT article is a useful primer, but may get overtaken by events. Our purpose is simply to highlight that this is a contentious credit and may yet result in significant defaults occurring. Most at risk on paper is NMFC with $33mn invested at cost, but in first lien debt. Next is AINV with $21.1mn, followed by Cion with $13.2mn, both in the 2025 Term loan. Audax has a very modest, noin material exposure.

We are maintaining the CCR 4 rating assigned earlier in the year and will revert back when this dispute plays out in a way that allows us to determine what lasting damage might occur to the BDCs involved – if any. As half of Ambrosia/Trimark’s customers – according to Moody’s – are restaurants and that the group already has a Caa rating on the company, we are not optimistic. We don’t know enough to add the company to the Weakest Links list, so we’re not “calling” an imminent payment default. Would we be surprised if one occurred ? No, given the dire economic conditions and the 10X debt to EBITDA remarked on by Moody’s as far back as April 2020.

A-L Parent: IIIQ 2020 Update

After reviewing the IIIQ 2020 BDC results, there are two developments worth noting at Learfield Communications, owned by A-L Parent, which we last wrote about last quarter. First, our decision to downgrade the company to CCR 4 from CCR 3 on August 7, 2020 was validated by Apollo Investment’s (AINV) latest valuation. The BDC is discounting the second lien Term loan by (34%) from (22%). That’s a ($0.650mn) reduction in FMV to $3.654mn. The income involved – still being received – amounts to just under $0.5mn a year.

Secondly, Bain Capital Specialty Finance (BCSF) – which was also a second lien lender as of June, seems to have decamped, leaving AINV as the only remaining lender.

We affirm the CCR 4 rating and the inclusion of the company on the Weakest Links list, which means chances are high of a default in the next quarter.

Maxus Carbon: Debt For Equity Swap

This is the fourth article we’ve written about Maxus Carbon’s, Apollo Investment’s (AINV) poorly performing project finance for a chemical plant that has been around for 7 years. Click here for the prior articles and to get caught up. After placing remaining debt on non accrual in the IIQ 2020, the BDC in the IIQ 2020 has quietly restructured its position in the company. Again. We say “quietly” because management made no mention of the conversion of the $30.4mn in first lien debt – albeit non performing – into equity on its IIIQ 2020 conference call transcript. This removed Maxus from AINV’s long list of companies on non accrual but – arguably – further weakened the BDC’s position on the company’s balance sheet, which is now all equity for $77.9mn at cost. Of course, no income is being received.

AINV valued some of its earlier equity at $24.9mn at FMV and the just converted debt at zero. Counter-intutively, the latest valuation is slightly higher than last quarter, which was for $22.6mn. At this point AINV has written down 69% of invested capital and has no income coming in. When this investment started out AINV made a $60mn loan and charged 13%. That’s ($7.8mn) of annual income lost along the way.

We are “upgrading” Maxus from CCR 5 to CCR 4 because technically no longer non performing. Still, at best this is a lateral move.

Based on the ever lower valuation and the debt to equity conversion, the BDC Credit Reporter does not hold up much hope and would not be surprised if AINV – one day – would write off the entire project. The current FMV of the investment would amount to about 2.5% of net assets as of September 2020.

As always we are at the mercy of AINV in terms of updates on the chemical plant’s progress. We’ll provide the latest disclosure next quarter of what remains – even with two thirds of the value written down – a material “Legacy” investment for the BDC and an almost certain dud once the final bill comes due.

Merx Aviation: IIIQ 2020 Update

On November 5, 2020 Apollo investment (AINV) provided a substantive qualitative update on aircraft leasing and servicing investment Merx Financial during its IIIQ 2020 conference call. We’ll quote in full from the lengthy – but still lacking in detail – prepared remarks:

” …the pandemic has had a significant adverse effect — impact on the global economy with direct implications for the aviation sector, although we are starting to see some recovery in global air traffic. Merx continues to closely monitor the current market environment and proactively maintain dialogue with its airline clients globally.

During the quarter, the fair value of AINV’s investment in Merx declined by $5.7 million or 1.8%. The quarter-over-quarter change reflects the decline in the fair value of Merx’s fleet given the challenging environment, partially offset by an increase in the value of Merx’s servicing business.

As discussed in the past, in addition to aircraft leasing, Merx has built a best-in-class servicing platform and acts as a servicer or technical adviser for aviation assets across the broader Apollo platform. Merx is now benefiting from a growing servicing business, which has helped partially offset the decline in fair value of its fleet during the quarter. We believe Merx’ portfolio compares favorably with other major lessors in terms of asset, geography, age, maturity and lessee diversification. Merx’s portfolio is skewed towards the most widely used types of aircraft, which means demand for Merx’s fleet should be somewhat more resilient. Merx’s fleet primarily consists of narrow-body aircraft serving both the U.S. and foreign markets. At the end of September, Merx’s own portfolio consisted of 81 aircraft, 10 aircraft types, 40 lessees in 26 countries with an average aircraft age of 9.6 years. Merx’s fleet includes 78 narrow-body aircraft, 2 wide-body aircraft and 1 freighter.

Similar to other industry participants, many of Merx’s lessees requested rent deferrals and/or rent reductions. Merx has been working with its lessees to provide the necessary flexibility during these unprecedented times. Each request was reviewed on a case-by-case basis. Some of the deferral periods have expired, and we’re now seeing a recovery in lease payments. Despite the current industry challenges, we do not expect Merx to require funding from AINV in the near term.

The aviation team has the experience to skillfully navigate this period of market stress and the requisite capabilities to mitigate potential adverse outcomes. Additionally, the Apollo aviation platform will continue to seek to opportunistically deploy capital in the face of widespread uncertainty and market disruption. To be clear, Merx is focused on the existing portfolio and not seeking new investments. However, growth in the overall Apollo aviation platform will inure to the benefit of Merx as the exclusive servicer of aircraft owned by other Apollo firms“.

In the Q&A, AINV also revealed that many lessees received 6-9 month payment deferrals earlier in the year which have not expired. Should those payments not resume – which must be a strong possibility in many cases – that would materially impact results.

The net write-down of Merx was only ($5.9mn) because AINV also wrote up the company’s servicing business in the quarter by $4.4mn due to a deal done with Delta and because “the pipeline remains very, very robust in terms of other opportunities“.  

The BDC Credit Reporter is unconvinced – given the drastic market conditions – that the overall value of Merx at $324mn – a slight premium to $320mn in cost – is appropriate. In the IIQ 2020, the BDC was forced by the impact of the pandemic to restructure its investment, resulting in a substantial loss of interest income due to a lower loan balance and yield. Yet in all of 2020, AINV has written down its value in Merx by only ($39mn), or only (10%).

Of course we don’t have access to the financial records of this huge operation, except for some summary and not very useful numbers AINV is required to reveal. Common sense – and the knowledge that AINV’s capital sits underneath a mountain of secured debt – suggests, though, that the BDC should be sharpening their pencil more. This leaves open the possibility of a further write-down or restructuring of this very large AINV investment in the future as reality catches up with valuation. In fact what happens in the next few quarters to the valuation of Merx will speak very loudly to the BDC’s credibility when marking “control investments”, of which AINV has many.

KLO Holdings, LLC: Update

Did you ever wonder what happened to KLO Holdings LLC (aka Hemisphere Design Works), a kayak manufacturer which was a fruit of the combination of a combination of Michigan-based KL Outdoor and Montreal, Canada-based GSC Technologies ? We did. We last wrote about the business on January 31, 2020 when the business was already in deep trouble and on non accrual since mid-2019. Overall, we’d written three articles about the company, based on BDC valuations and what we were able to learn from the public record.

Now, thanks to a regional publication in Muskegon, Michigan we’ve been (almost) fully updated about what has happened to the company in recent months:

After an abrupt closure last year, kayak-maker KL Outdoors is back under new ownership, and business is “booming,” according to a company representative...KL Outdoors has since been resurrected by the founder of the Canadian company, GSC Technologies, state records show. The company has produced 64,000 kayaks since purchasing the liquidated assets of KLO Industries in June, David Baun of the new KL Outdoors told the Muskegon City Commission earlier this week.“We have 84 employees and we’re looking at continuing to grow,” Baun said.

As of June 2020 there were two BDCs with $11.8mn invested in the 2022 Term Loan of KLO Acquisition and KLO Intermediate – the predecessor company and its subsidiary, as well as in its Canadian company the inelegantly named 9357-5991 Quebec Inc. These were Apollo Investment (AINV) and Cion Investment. The former- public – BDC had written down its $4.8mn stake in KLO Acquisition to zero. (For some reason, Cion, although invested in the same facility still valued its position at $1.6mn).

AINV values its position in the Canadian entity at $2.2mn. Given what we know, we expect that both BDCs will take a 100% realized loss on the liquidation of the company in the IIIQ 2020 results. For AINV, this means a modest loss given the amount involved and the BDC’s size and a more material hit for Cion. We estimate the loss of annual investment income will be ($1.6mn), but that’s already impacted both lenders for over a year.

Neither BDC has revealed much about the fate of KLO since an update was made by AINV on a November 5, 2019 conference call, which amounted to the following:

Regarding KLO, our investment was placed on nonaccrual status last quarter due to the underperformance from lower customer demand, consolidation challenges and higher costs. The company’s liquidity position has continued to weaken. The company expects to complete a comprehensive restructuring in the coming months“.

BDC credit stories like these with their only episodic updates and large omissions are part of the impetus for publishing the BDC Credit Reporter. Otherwise, investors are left with more answers than questions by the BDCs involved and have to read the tea leaves of those gradually reducing quarterly valuations. Back in June 2019 when the company’s debt was first placed on non accrual (by one of the BDCs involved but not the other), the discount taken was just (14%), but then increased to (70%) by year end 2019 and now to (100%) and a likely complete write-off. We wonder if AINV will even mention KLO when reporting third quarter 2020 results ?

Merx Aviation: Restructured

Apollo Investment (AINV) reported that its largest investment – Merx Aviation – was restructured in a couple of ways in the second quarter 2020. The aircraft leasing and servicing company, which AINV owns 100% of the stock of, saw $105mn of its $305mn in Revolver debt outstanding from AINV converted to debt. Second, the remaining debt saw its interest rate drop to 10.0% from 12.0%. Management of the BDC were circumspect in discussing the company’s performance, even though Merx’s FMV represents one-third of net book value at June 30, 2020. On the conference call AINV executive spoke in general terms, like this: “The pandemic has caused an unprecedented decline in global air traffic, which has led to a widespread lease deferrals throughout the industry. Although aircraft — air traffic trends have improved slightly more recently, it remains significantly below pre-pandemic levels“.

Despite the huge strains on aircraft lessors and the loss of substantial income because of the above, AINV wrote down its equity stake in Merx – which just increased by 800% at cost – by only ($4.2mn).

BDC portfolio company valuations are always a riddle wrapped in an enigma, initially prepared by internal staff, often reviewed by an outside appraisal firm and the final responsibility of the directors. To our minds – given what we do know about market conditions; the high leverage involved and the restructuring, this write-down is wholly inadequate and inexplicable. At this stage, AINV’s Merx investment taken overall is still valued above cost and would not show up on the BDC’s own underperforming company list.

For our part, we reaffirm the BDC Credit Reporters Corporate Credit Rating of 4, which we instituted last quarter. We do not have Merx on our Weakest Links list only because AINV has such latitude to continue paying interest even if the business is insolvent, which may be the case from what little we know. The fact that one third of debt is no longer accruing income is a negative sign, as is the need to lower the rate. These are the actions of an owner rather than a lender and make the entire valuation questionable.

This is a very serious challenge for AINV. In a short time, the BDC has lost ($16.6mn) in annual investment income. That’s just over 10% of IQ 2020 Net Investment Income. If the entire debt goes on non accrual another ($20.0mn) in annual Investment Income would be lost and AINV would have lost (25%) of its earlier Net Investment Income. We’ve already mentioned the size of the Merx investment on the balance sheet and in relation to net book value.

We will continue to update readers about Merx, but may not have anything to report till AINV does so given the closely held nature of the investment and management’s closed lips. There is a danger of an “October surprise” when AINV reports IIIQ 2020 results, especially as the global aviation business continues to face dire circumstances. Unfortunately, AINV shareholders may not find out till it’s too late that the current valuation was unrealistic. For everybody concerned, we hope otherwise.

Glacier Oil & Gas: Debt Placed On Non-Accrual – Updated

Glacier Oil & Gas is an Alaskan oil & gas exploration company. We learn from Apollo Investment’s (AINV) IQ 2020 conference call that – not surprisingly – the company is performing poorly. As a result, the BDC’s $37.2mn of second lien debt has been placed on non accrual. That will result in $3.7mn of investment income not being received. (We believe the income was being paid in PIK form before so the cash impact on AINV will be nil).

We are downgrading Glacier from CCR 4 to CCR 5, or non performing. We did not have the company on our Weakest Links list given that AINV – with a 98% ownership position – has great flexibility about when to choose to be paid interest or not. That makes prognostication difficult. With the benefit of hindsight considering the current market conditions moving to non accrual makes sense.

The overall investment in Glacier, which has a cost of $67.0mn is now valued at just $14.7mn. For our purposes, we are assuming AINV will eventually have to write the entire investment off, ending a journey that began in 2012 when Glacier was called Miller Energy with $40mn committed. Since then, the BDC restructured and renamed the business (in 2016) which now faces an existential challenge. We expect a further write-down will occur in AINV’s IIQ 2020 results. [Written My 23, 2020]

IIQ 2020 Update: AINV continued to write down its position in Glacier Oil & Gas by ($3.2mn). The hit was taken on the already non performing second lien loan. That leaves a FMV – all in the debt as the equity has been written down to zero already – of $11.5mn. We continue to believe that the entire investment will be written off but have little confidence of getting a full and frank update from management which said nothing about the company this last quarter. We do know that “production is hedged through 2020”. 2021 may be the year of reckoning if there’s no huge uptick in oil prices. We maintain a CCR 5 rating.

Maxus Carbon: Debt Placed On Non Accrual

Apollo Investment (AINV) has reported IIQ 2020 results, which included the news that two debt facilities associated with chemical plant Maxus Carbon were placed on non accrual in the quarter. These are two 2024 senior loans of $13.3mn and $17.1mn respectively. AINV – which owns the troubled business – had already been requiring only a reduced interest rate (5.0% and 3.0% respectively). Still, the income lost is substantial: ($1.2mn) annually.

We’ve written about the company before on two occasions. Every time we have a new look at the company business seems to have gotten worse and valuations are lower. Besides the non accruals AINV took two unrealized write-downs this quarter on debt and equity in Maxus Carbon and its affiliated company totaling of ($10.0mn). The current FMV is $22.6mn on investments with a cost of $76.5mn. That means (70%) has been discounted already.

The BDC Credit Reporter has downgraded Maxus Carbon to CCR 5, or non performing. We’d be surprised if AINV achieved any recovery on the entire amount invested, but with very limited disclosures as to what is going right or wrong at the plant it’s hard to point to more than hunches. Unfortunately, this is an example of a “zombie” portfolio company kept alive – seemingly – by the goodwill of its lender-owner but generating no return for the BDC’s shareholders. Apollo Global – which manages AINV – should be either closing down this operation; bringing in partners to validate the value, or – at the very least – provide a level of performance disclosure to allow its shareholders to determine what the eventual outcome might be. Instead, we are getting a slow death by multiple cuts in an information void.

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.

A-L Parent: Downgraded To CCR 4

After a review of the IIQ 2020 BDC results, the BDC Credit Reporter decided to downgrade Learfield Communications, LLC (owned by A-L Parent, LLC) to CCR 4 from CCR 3. We noted that the two BDCs holding the company’s second lien debt sharply discounted their positions as of June 30, 2020. Furthermore, on May 20, 2020, Moody’s downgraded the company to Caa1 and the second lien debt – the only BDC exposure – to Caa3. We are mostly concerned that the media company which depends on college sports broadcasting is said to have very weak liquidity. Furthermore, leverage was said to be very high at year-end 2019 (10x !) and is likely only to have gotten worse. As a result, we are also adding the company to the Weakest Links list.

Apollo Investment (AINV) has $5.5mn invested at cost and Bain Capital Specialty Finance (BCSF) $4.0mn and total investment income at risk is nearly $0.8mn. For neither BDC is the amount at risk highly material to future results. However, given the second lien status and the long dry spell ahead for college sports an eventual complete write-off is a distinct possibility.

We’ll be keeping track of developments at the company in the public record and next time the BDCs involved report, but there’s a chance a bankruptcy or restructuring may have happened before then. Learfield is a clear Second Wave credit casualty. Admittedly, Moody’s had downgraded the company previously in 2019 and at the end of the year the BDCs involved had discounted their debt by (10%), causing us to add the name to the underperformers list. However, the interruption in business brought on by Covid-19 has accelerated the company’s troubles. Of course, all that leverage piled up before the crisis happened didn’t help…

Spotted Hawk Development: Debt Placed On Non-Accrual

Oil & gas production company Spotted Hawk Development – which has faced difficult conditions for years and has already endured one major restructuring – is faring even worse under the current oil price drop. According to its lender-owner Apollo Investment (AINV) “the company has reduced expenses and capital expenditures to necessary maintenance items and temporarily curtailed production“.

AINV also disclosed on its IQ 2020 conference call that of the three debt facilities outstanding to Spotted Hawk, two are now on non-accrual, up from one previously. This time a $45.5mn Term Loan with an interest rate of 4.0% has been moved to non-performing. That’s $1.8mn of annual investment income that AINV will not be receiving. That leaves just one 2021 loan trache with a face value of $24mn and an interest rate of 12.00% still generating income for AINV. Understandably enough one has to wonder if that last tranche can remain income generating ($2.9mn annually) for much longer. The company has been benefiting from price hedges on its production but those expire – according to AINV – shortly…

Overall, AINV has invested $114.8mn in Spotted Hawk in an attempt to rescue an investment that began in 2012 with just $24mn. If the business fails, AINV stands to lose up to ($47.2mn) and that remaining loan income. With the BDC manager clearly not interested in adding new rescue capital under virtually any scenario, the chances of failure seem high.

The investment – one of those “legacies” left over from an earlier strategy by a different management team – illustrates both the risks involved in lending/investing in oil & gas and of serving as both owner and lender to a cash strapped company. That has turned AINV into the investor of last resort on multiple occasions and caused a small credit mistake to grow into a very big one and the second largest in the BDC’s portfolio. Many BDCs have learned to avoid energy investments but the more complex matter of serving as lender-owner remains unsettled. Yet, in the quarters ahead we will see many more of the latter than of the former and will have an opportunity to revisit whether the BDCs involved have demonstrated whether they know “when to hold them and when the fold them“.