"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".
IQ 2021 CREDIT UPDATE
AINV does not undertake an internal investment rating process. Here is the BDC Credit Reporter's evaluation. Total portfolio assets at 3/31/2021 were $2,716mn at cost and $2.449mn at FMV, a discount of (9.2%). AINV had 135 portfolio companies, of which 14 were rated as CCR 4 or CCR 5 on our 5 point credit performance scale. The cost of the underperformers was $665.25mn (including $310.8mn of Merxe Aviation) and the FMV $441.8mn (including $315.6mn of Merx Aviation). The discount was (34%).
Of the 14 underperformers, 8 were rated CCR 4 and 6 CCR 5. Overall, 5 are rated as non-material and are not reviewed by the BDC Credit Reporter. According to AINV "5.7% of total investments at amortized cost, or 1.4% of total investments at fair value, were on non-accrual status". This equates to $155mn and $34mn respectively.
Far and away the largest individual underperformer (by the BDC Credit Reporter's standards albeit not by AINV's) - is Merx Aviation, an aircraft leasing company which the BDC controls. Also of significant size either on a fair market value or income basis - or both - are Dynamic Product Tankers - an oil shipment business in which AINV has a substantial equity stake and SHD Oil & Gas, an E&P company. AINV owns 38% of SHD, also known as Spotted Hawk. There are more modest exposures to CarbonFree Chemicals (aka Maxus Capital Carbon), a chemical plant which AINV financed and has an equity stake in and to Ambrosia Buyer Corp, a manufacturer of kitchen equipment. AINV also has exposure to Paper Source, a stationery retailer that recently filed Chapter 11 and to Sequential Brands, a licensor of consumer brands, whose debt is currently in default and to Golden Bear 2016-R, a special securitized vehicle. Then there are 6 other companies whose fair market value is less than $10mn each. For the full list of AINV underperformers at IQ 2021, see the attached table.
Last time we wrote about Dynamic Product Tankers – in June 2021 – we were optimistic that valuations might improve going forward. In fact, we were wrong. As of the IQ 2021, Apollo Investment (AINV) valued its debt and equity position – with a cost of $71.8mn – at $47.5mn. Two quarters later and the value has dropped to $38.1mn. All the deterioration came in the equity stake AINV owns in its 85% of the business. The $22mn unsecured Term Loan remains valued at par and continues to charge a subsidized 5.16% rate to the shipper. The equity has dropped from $25.5mn to $16.1mn.
This is a closely held company with no useful public information found, so we’re reliant on disclosures from AINV. Unfortunately, the BDC has said nothing on its conference calls since 2018. We’re left to speculate – due to the valuation numbers – that the business is softening.
It’s impossible to determine if this “non core” asset will get sold any time soon. However, even at this lower valuation a considerable amount of pro-forma income is involved. Assuming a FMV of $38.1mn invested at 9%, AINV could generate $3.4mn of annual investment income, as opposed to $1.1mn currently. That’s nearly $0.04 a share of hypothetical incremental investment income.
On the other hand, should AINV be forced to write off just the remaining equity, the loss of NAV Per Share would be ($0.25). We have no view either way given the absence of information, but the ultimate resolution of Dynamic will be important to AINV.
For the moment, the company is rated CCR 4, and is possibly trending as the unrealized loss last quarter was substantial and could be repeated. We’ll probably report again when the IVQ 2021 AINV results are released in 2022.
The BDC Credit Reporter has written three times before about Bakken oil and gas operator Spotted Hawk Development. Since our last article in June, the company has been restructured yet again. This has required the only BDC with debt exposure (and a 38% equity interest) – Apollo Investment (AINV) – to convert one of its debt tranches to equity and another tranche was written off. This resulted in a ($44.4mn) realized loss, or roughly one third of the amount the BDC had invested in the company.
Currently, AINV has one debt tranche of $24.7mn valued slightly above par and current on its 12% interest. The debt matures at the end of June 2022. Two tranches of equity with a cost of $45.5mn is valued at $6.7mn. The total FMV of AINV’s position is $32.2mn. (At its peak in 2020 AINV had $116mn invested at cost in the business).
We get the impression from AINV’s latest conference call that some sort of liquidity event for Spotted Hawk is planned in the next 12 months. Here’s a quote from AINV’s IIQ 2021 conference call that is relatively explicit on the BDC’s motivations.
This latest restructuring may have been arranged to facilitate that purpose. How this plays out will be important for the BDC’s net asset value and income.
If AINV receives $32mn – as per the latest valuation – the income generated from re-investing the proceeds will not make any difference as AINV’s new investments yield about 9% (or lower), which would generate the same income as currently from the 12% Spotted Hawk Term Loan. NAV would not change either. However, if this turns out to be a write-off, AINV will lose ($2.9mn) of annual investment income and take a further ($0.5) per share hit to net asset value per share. Given that something is LIKELY to happen in the next few quarters, we have the company as Trending. However, whether the trend will be positive or negative is hard to handicap. Oil prices are high, but that did not help in prior periods, so the outcome is unclear.
For the moment, Spotted Hawk remains rated CCR 5. We’ll report back if we hear any news or when the IVQ 2021 AINV results are published.
Given the small amounts involved, the BDC Credit Reporter’s coverage of Solarplicity Group Limited (aka AMP Solar UK and Solarplicity UK Holdings) will be limited. As of the IIIQ 2021, the only BDC with exposure is Apollo Investment (AINV) which has $13.0mn in debt, preferred and equity invested in Solarplicity UK and a value of only $2.2mn.
The BDC has a long history with Solarplicity dating back to 2015. In FY 2018, AINV booked a realized loss of ($27.1mn) and the total investment at cost – which used to be one of the BDC’s biggest portfolio companies – was reduced from $155mn to $19mn, following a sale of the business. In FY 2020, AINV booked a further ($4.7mn) realized loss on some of the first lien debt left in the company.
As of now, there is $7.4mn in remaining debt at cost that has been non performing since IQ 2020 and has a value of just $2.2mn, down from $2.5mn in the prior quarter. The preferred and common have no value.
We rate the company CCR 5 because of the non performing debt and have no expectation – based on what we can glean – that any recovery is plausible. (Management of AINV has not provided an update on what’s happening at the solar company since 2018).
Given that we don’t cover any investment with a value below $2mn, we’ll probably be dropping Solarplicity to Not Material status shortly.
We have only a flimsy understanding of Apollo Investment’s (AINV) Renew Financial LLC position, which also includes an affiliate called AIC SPV Holdings II, LLC, and also goes by the name Renewable Funding, LLC. If that wasn’t enough, there’s also a Renew JV LLC stake. Taking these businesses together, AINV has invested $16.9mn – all in preferred or common. As of September 30, 2021, the FMV was given as $6.1mn – a (64%) discount, and no income was being generated. This finance company for alternative energy investments dates back to as 2014 when alternative energy was a core investment target for the BDC , and its parent the Apollo Group.
That’s all changed and Renew is now counted as “non-core”, but we get very little to nothing in terms of updates from AINV’s management as to any exit strategy that might be involved. All we know is that these related companies have been underperforming since IQ 2020, and just reached a valuation low point.
The Renew entities are rated CCR 4, as an eventual loss seems more likely than a recovery. In fact – given the trend and the junior nature of the capital – a full write-off might be in the cards one day. Given the absence of any income therefrom and the low cost (0.6% of total cost) and FMV this is a minor exposure for AINV. (If the investment gets written down below $2mn we will drop coverage). The investment is not Trending as recent write-downs were modest – under ($1mn). This is just another example amongst many of AINV investments gone wrong that just sit in the BDC’s portfolio ad infinitum, and with no clear raison d’etre or exit strategy as far as we have been told.
We’ve written about moribund Glacier Oil & Gas before on two occasions. Most recently, we noted that at the end of the IQ 2021 the FMV of the $67mn invested was worth only $8.1mn, according to Apollo Investment (AINV). $36.9mn of the exposure was in first lien debt that has been on non accrual since IQ 2020.
With the publication of AINV’s IIIQ 2021 results, we learn that the BDC booked a ($20.9mn) realized loss on Glacier, bringing the nominal cost to $45.1mn. The FMV is now just $4.9mn. Despite the increase in the price of oil, this seems like an almost certain complete loss for AINV.
With no income coming in and – apparently – little chance of any material recovery this investment is becoming increasingly non material, by dints of realized and unrealized losses, to AINV and may be dropped from coverage shortly.
For the moment, Glacier remains rated CCR 5. We’re not sure if the investment will be “Trending” in the IVQ 2021 results.
We’ve now written about Sequential brands twelve times ! Most of the time we’ve focused on FS KKR Capital’s (FSK) substantial exposure to the now bankrupt business. However, we’ve mentioned Apollo Investment (AINV_ which has also been a long time lender, but only in the second lien debt and for a much smaller amount than FSK. With the IIIQ 2021 AINV results, though, we see that the second lien debt was placed on non accrual. That was expected given the Chapter 11 filing.
What we didn’t know till AINV reported is that the BDC and FSK had advanced another $6.5mn and $133mn respectively to Sequential recently but with a maturity at the end of 2022 and in a first lien position. This is DIP financing presumably. That debt is valued at par and the discount on the second lien has been reduced to only (8%). Furthermore – and also both reassuring and expected since we heard the sale of Sequential was turning out well – FSK values its own exposure at or above par – even its non performing loan.
All this suggests that both FSK and AINV will extract themselves from the slow moving train wreck that has been Sequential Brands with nary a scratch. We rate the company CCR 5 because of the bankruptcy but do not expect any material loss for anyone at the end of the day. (The only exception remains $2.8mn of equity invested back in the day by FSK, which continues to have a value of zero). Sequential is rated as Trending given that the final settlement of the transaction could result in substantial changes in holdings and proceeds received. That may occur in the IVQ 2021 or IQ 2022 results of FSK and AINV.
We last updated what was happening at Maxus Carbon (aka Carbonfree Chemicals SPE) after Apollo Investment’s (AINV) IQ 2021 results. At the time, the BDC – which controls the alternative energy company – was promising better times ahead for this long standing investment that has fared poorly over the years.
We were in a “show me” frame of mind after seeing the debt at the company converted to equity and the $78mn invested at cost written down to a FMV of $25.4mn. Thankfully, matters do seem to have improved. As of the IIIQ 2021, Maxus Carbon’s FMV has increased to $45.2mn, or $19.8mn. (The cost is $78.2mn). For two quarters in a row the investment has been valued higher, suggesting more improvement might be in sight.
We even received a brief update about the business – in the broadest terms – on the most recent AINV CC:
…”our investment in carbon-free consists of an investment in the company’s proprietary carbon capture technologies and an investment in the company’s chemical plant. Carbon free is benefiting from strong interest in carbon capture, utilization and storage as part of broader ESG trends. We believe carbon-free is a leader in this space as evidenced by partnerships announced during the quarter, which demonstrate market acceptance for its technology“
AINV Conference Call 11/4/2021
This is a closely-held investment and AINV does not offer much in the way of details and the public record is spotty. Nonetheless, there are reasons to be optimistic that AINV – one day – might find a way to dispose of this non-income producing investment. Even if sold at the latest FMV, the proceeds re-invested at 8.0% would generate a material $35mn plus in annual income.
We are retaining a CCR 4 rating on the company, but added the investment to the Trending list as AINV may increase the FMV in the IVQ 2021.
We’ve written about Ambrosia Buyer Corp (aka Trimark USA) three times before, with the most recent update after the IQ 2021. We wish we could tell what’s going on of late at the restaurant supply company from the public record, but we can’t. However, we can report that as of the IIIQ 2021 Apollo Investment (AINV), which holds second lien debt with a cost of $19.6mn continues to carry the debt as non performing. The amount invested at cost is reducing from quarter to quarter, suggesting that the BDC might still be receiving debt service but is paying down the principal with the proceeds.
At 9/30/2021 the AINV FMV in Ambrosia is $9.3mn, a (53%) discount from cost. The par value given is $21.4mn. The discount in the IIQ 2021 was substantially the same. This is an increased discount from the IQ 2021, which was (38%). We’re guessing that the disputes between the lenders to Ambrosia is still being fought out in court.
We continue to rate Ambrosia as CCR 5, with some ($1.3mn) of annual income forgone since the IVQ 2020. We can’t estimate what the final outcome might be as the company – and the debt – remains in flux.
Bankrupt Sequential Brands was going to hold an auction for its multi-brand assets, but ended up cancelling. Some of the company’s brands – like Jessica Simpson which was sold back to the celebrity herself for $65mn – were disposed of previously. The principal transaction, though, was a $330mn bid by Galaxy Capital Partners, a portfolio of Gainline Capital Partners – a PE group. Earlier this year, Galaxy bought Apex Global Brandsincluding, Hi-Tec, Magnum and Tony Hawk and has licensing deals with top brands such as Justice, London Fog and many others.
This transaction is being financed with $55mn in cash and the assumption of debt. That debt is held – amongst others – by the two BDC lenders involved – FS KKR Capital (FSK) and Apollo Investment (AINV) to the tune of at least $231mn. As far as we can understand, Galaxy will be the new borrower and FSK – and to a much lesser degree – AINV, will also hold an equity stake in the business.
How all this gets reflected in the two BDCs schedule of investments is impossible to tell in advance. We’d guess that the $3.0mn in equity FSK invested in Sequential might be written off. AINV’s debt was valued at a discount of (12%) as of June 30, 2021 and might result in a haircut but total exposure at cost was only $12.6mn, so any impact will be minimal.
The most intriguing question is how FSK – with $216mn invested at cost in debt treats that investment. We expect no loss will be recognized but some portion of the debt may be converted into equity in Galaxy. Also unknown is whether the new facility will be priced as attractively as the advance to Sequential: LIBOR + 875%. When we get those sort of details we’ll be able to tell what the impact on FSK’s investment income – seemingly running at $24mn per annum before the bankruptcy – will look like. There’s some financial sleight of hand going on here, but the bottom line is that FSK – and seemingly AINV – are undertaking a mixture of a debt refinancing and debt for equity swap.
Sequential remains rated CCR 5 until the bankruptcy judge approves the many moving parts of this transaction and Galaxy gains control. We’ll report back when we hear more from the BDC lenders involved.
At long last, highly leveraged, publicly traded Sequential Brands Inc. (ticker: SQBG) has filed for voluntary Chapter 11. Reportedly, the company – in co-operation with certain of its lenders – is seeking to sell off its multiple brands (presumably in combination or individually) in order to repay nearly half a billion dollars in debt outstanding. A debtor-in-possession (DIP) loan of $150mn has already been arranged with its so-called “Term B Lenders”:
The BDC Credit Reporter has been warning of trouble at the company as early as the spring of 2019, and with even more urgency with the impact of the pandemic on retail. We’ve written nine prior articles on the subject, including the most recent post in July when a bankruptcy filing had all the inevitability of an ancient Greek drama.
Here’s what we wrote last time:
What we’ve found intriguing is how the two BDC lenders to Sequential – FS KKR Capital (FSK) and Apollo Investment (AINV) have marked their respective investments in anticipation in the debt due 2/7/2024 as of June 2021. Admittedly, AINV’s exposure is much more modest than FSK’s : $12.6mn versus $218.7mn. However, AINV rates the loan as second lien and FSK as first lien. AINV has applied an (18%) discount to its investment. FSK values the $215.9mn invested at a slight premium. Note, though, that the face amount of the debt is $266.8mn. We’re guessing that the gap between cost and par value has something to do with FSK acquiring the assets of its sister BDC FS KKR Capital II (previously FSKR) at a discount. The $2.8mn FSK has invested in Sequential’s stock, though, is valued at zero.
We’re pretty much certain FSK and AINV are both involved with the “Term B lenders”. FSK – at least – seems to believe that when all is said and done no loss will be incurred. This is supported by the fact that even after filing for bankruptcy Sequential’s stock still trades at over $6 as we write this. Investors and lenders seem to believe that the value of the assets will exceed all debt and leave something for the common shareholders. We are skeptical, but are keeping an open mind. In the next few weeks we’ll find out if FSK’s optimism will bear out, and any material loss will be averted.
Also interesting will be whether AINV and FSK place their debt on non accrual, which will materially affect the latter’s interest income in the IIIQ 2021 and beyond. We calculate that FSK has been booking over $23mn of annual investment income from Sequential, equal to just under 3% of the BDC’s total revenues.
How accurate the valuations of FSK and AINV prove to be in this slow moving train wreck, where both lenders have had full access to what is going on, will be an interesting test of management’s credibility in this critical area. To date, both sets of managers have avoided discussing Sequential on their conference calls. Maybe the IIIQ 2021 call will be different and Sequential Brands – and its ultimate disposition – will be addressed. We imagine we’ll be reporting back even before the third quarter results come out as the bankruptcy process unwinds.
Given that this is one of the biggest bankruptcies of a BDC-financed company ever, this is a story worth watching both for investors in FSK and AINV, and anyone interested in the BDC sector more generally.
We’ve written extensively about publicly traded Sequential Brands (ticker: SQBG) , beginning in the spring of 2019. In a nutshell, the company has a huge amount of debt but only modest revenues and EBITDA – both of which are in decline – to service their obligations. The debt has required multiple waivers from lenders, which continue at present. On July 26, 2021 Sequential filed an 8-K discussing the non-filing of its financial statements as required by NASDAQ. Making matters more complicated, the Board of the company has now recognized that the 10-K and its IIIQ 2020 10-Q require restatement and can no longer be relied on. The company has a plan to deal with these inadequacies but admits that nothing is yet resolved with its lenders despite months of negotiations:
“The Company cannot assure you that its lenders would be willing to negotiate further changes to its financial covenants when necessary and the Company cannot obtain further waivers of the defaults under the Credit Agreements without the consent of the respective lenders thereunder. If the Company is unable to obtain additional waivers of ongoing defaults, or otherwise is unable to comply with its debt arrangements, the obligations under the indebtedness may be accelerated. If an acceleration were to occur, the Company does not have sufficient liquidity to satisfy the loan, and the Company would potentially need to seek protection under the federal bankruptcy code“.
For a time common stock investors – apparently believing in the fundamental value of the many brands Sequential licenses – were looking beyond these difficulties, pushing the stock price to nearly $40 a share in March. However, the mood is darker now, with the stock price under $10 a share. Likewise, back in 2019 and 2020 we were surprised by the full valuations the BDC lenders to Sequential were continuing to book, despite the very obvious challenges.
However, that has changed of late and may change again once a resolution is reached. As of March 31, 2021 BDC exposure to Sequential remained huge: $290mn. All but $10mn (which is in equity) consists of debt due in 2024, split between FS KKR Capital (FSK) and Apollo Investment (AINV). (95% of the debt and all the equity is held by FSK). Currently, the equity has been written to zero – the stock price notwithstanding. The debt is discounted as much as (18%), but seems to be current. (We have to wonder if Sequential is actually paying its interest bill in cash or the lenders are just adding the amount due to the principal, and what might happen when a settlement occurs. FSK and AINV might have to unwind income previously booked).
Anyway, trying to handicap how this transaction might end up for the BDCs is well nigh impossible. Sequential has been shedding assets but the proceeds are too modest to ameliorate the overall picture by much and will only add to the income decline. Everything seems to point to the lenders taking over in some sort of bankruptcy filing before long. However, whether this will be just a modest setback – especially for FSK – or a major realized loss, remains unclear. We will continue to watch this unfolding story and will be interested to see how FSK and AINV value their investments at June 30, 2021 and whether they speak to the subject on their upcoming conference calls. (AINV reports 8/5/2021 and FSK 4 days later).
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.
We’ve written about Apollo Investment’s (AINV) long standing and ill fated investment in Spotted Hawk Development (aka SHD Oil & Gas) twice before. The last time – back on November 27, 2020 – we noted that two of the three debt tranches AINV has advanced were on non accrual and the FMV of the $115mn invested was only $42.3mn, based on IIIQ 2020 results.
Six months later – and going off the IQ 2021 AINV results – not much has changed. Total exposure at cost remains the same and two of the debt facilities remain on non accrual. The FMV is $35.4mn. (However, that valuation is slightly better than in the IVQ 2020 when the FMV was $32.4mn, the lowest ever. Maybe the increase in the price of oil has begun to revive Spotted Hawk’s value, if only on paper.
Back on May 20, 2021 AINV’s management had the following, vaguely encouraging, update to offer on the company:
“Sort of now that oil prices have picked up, and there’s some sense of — there’s some — visibility is too strong a word. There’s some possibility of sort of constructive transactions. We’re going to be as aggressive as we can there to sort of exit that, but we don’t have anything”.
We continue to rate the oil and gas explorer as CCR 5 – given the two non accruals. However, we have the investment on our Trending List because there’s a strong possibility – with $70+ oil and much enthusiasm about everything in the markets these days – that the value of the business might be improving and its cash flows – potentially – increasing. Furthermore, we’re sure that if anyone shows any interest in AINV’s 38% interest in the company, they’ll find a receptive seller. This may yet be an almost complete write-off when AINV finally creates some resolution, but there’s a chance the BDC might do better than one might have expected just a few months ago. Of course, these things change very quickly in any commodity industry.
We last wrote about Glacier Oil & Gas back on August 18, 2020 shortly after Apollo Investment (AINV) placed its debt on non accrual. At the time the BDC had invested $67mn at cost in the Alaskan oil & gas company and valued its investment at $14.7mn. Not much has changed in the interim. The debt remains on non accrual and the value of the BDC’s investment has been reduced somewhat to $8.1mn. That’s unchanged from the IVQ 2020 value.
With no income being generated, and little in the way of remaining value, we were tempted to categorize Glacier as non material and not bother with providing a written update. (This is a long standing “legacy investment” of Apollo that was previously known as Miller Energy, and which was restructured back in 2016 with no success). However, with the price of oil above $70 hope springs eternal that the company may escape its CCR 5 (non performing) status.
Unfortunately AINV has not discussed the company since April 2020, so we don’t have any updates to offer. The BDC does own 47% of Glacier’s equity, as well as holding that non accruing debt and could well benefit if the economics of the industry finally turn in its favor. We’re not taking anything for granted, but are adding the company to our Trending List because the value of Glacier may increase when the IIQ 2021 results are published. In the past, we’ve assumed the final value of Apollo’s misguided foray into oil and gas investing might be zero once AINV finally settles its account. At least now there is a glimmer of hope for AINV – and its long suffering shareholders – that some recovery might be possible. We’ll provide an update after the IIQ 2021 AINV results are published.
Apollo Investment (AINV) has been invested in Golden Bear 2016-R since IVQ 2016, and the investment has been underperforming – by our standards – since IQ 2018. However, we’ve refrained from writing about Golden Bear before because we were – and remain – somewhat unclear what the investment consists of. We know Golden Bear is some sort of securitization – presumably the equity portion – and that AINV is a 100% owner. We also know that the BDC booked $1.2mn of dividend income from that source in the IQ 2021, which is consistent with the payout in the last three years. What we don’t know is what assets Golden Bear is securitizing, and why AINV has reduced by a third the value of the $16.8mn invested at cost in the vehicle.
We have rated Golden Bear CCR 4 because it seems unlikely the BDC will recoup its capital invested. The latest valuation is slightly better than the prior quarter, and improved on the worst discount of 45% reached in the IIIQ 2020.
We’ll continue to provide occasional updates, but neither the amount of FMV nor the income involved is of great importance to AINV.
Last time we wrote about Paper Source Inc., the stationery retailer was bankrupt and Mid Cap Financial – an affiliate of Apollo Global Group – was preparing to acquire the company in a “stalking horse bid”. This would have made Apollo Investment (AINV) – a lender and investor to the company – a part owner (and also likely a lender) to the post-bankruptcy business. AINV as of March 31, 2021 had $16.4mn in debt at cost to Paper Source (its equity stake had no dollars attached) and a value of $13.4mn. For some reason, AINV carried the debt as performing, notwithstanding the bankruptcy.
Anyway, scrub all the above. In the interim, Elliott Management – owner of Barnes and Noble – has swooped in and acquired Paper Source out of bankruptcy for $91.5mn. Here is a link to a trade publication article on the subject, and an extract which explains the appeal of Paper Source to the buyer:
“In a presentation, Elliott described the businesses of Barnes & Noble and Paper Source as “highly complementary, with shared product ranges and a common commitment to excellent customer service.” The investment firm noted that Paper Source will continue to operate independently and keep to its core product offering of greeting cards, stationery,office supplies, gifts and other products. At the same time, Elliott noted that “considerable opportunities exist for mutually beneficial retail partnerships.”
Although Mid Cap/AINV lost the opportunity to acquire Paper Source – something of a mixed blessing given brick and mortar’s endemic challenges regardless of the pandemic – this is probably good news for the BDC. We get the impression the first lien debt – as well as DIP financing recently provided – will be repaid in full. That should allow AINV to post a several million dollar increase in value from the ultimate proceeds, which should show up in the IIQ 2021 results, or by the third quarter at the latest, as the transaction closes.
We may be jumping the gun, but expect to take Paper Source off our underperformers list. Given the potential increase in value, we are adding the company to our Trending List for the IIQ 2021 given the likely upside to be booked. This was never going to be a major setback for AINV and now looks likely to be a minor success. As has been the case on multiple occasions of late, thanks are due to a frothy financial environment and the fast recovery from the pandemic conditions that initially brought the company low.
With Apollo Investment’s (AINV) IQ 2021 filings, we can provide our fifth update on Maxus Carbon (aka Carbonfree Chemicals). The BDC valued the now all equity investment with a cost of $77.8mn at $25.4mn. That’s essentially unchanged from the prior two quarters and since AINV’s debt to the business was converted into equity.
The valuation might suggest that nothing much – good or bad – is happening at Maxus Carbon but what was said on the May 20, 2021 AINV conference call suggests otherwise. Here is what was said by AINV’s CEO Howard Widra:
“[Maxus Carbon] has some really good developments there. And that’s an all equity debt investment that had been converted to our equity. But that’s all equity and is a carbon-efficient business that has a lot of demand, obviously, where the world is going right now. And so, we hope that over the next year can have some real significant positive things happen to it”.
We can’t tell if the above is something specific getting underway or just hopeful comments from the BDC. It’s about time something happened at Maxus Carbon – on the books since 2013, and non-income producing since IIIQ 2020.
We are retaining our CCR 4 rating and not adding Maxus to our Trending List given the unchanged nature of the recent valuations and the vague nature of management’s status update. In the current environment, though, where capital is loose, it’s not impossible that SOMETHING might happen of a positive nature where this long standing “zombie” investment is concerned. That’s at variance with our earlier thoughts that the most likely resolution would be a write-off of the project and a complete loss. At this stage, both good news or bad news are equally likely.
Apollo Investment (AINV) has reported its full year and fiscal IVQ 2021 results through March 31, 2021. To management’s credit, much was said about the BDC’s largest investment – aircraft lessor and maintenance company Merx Aviation Finance LLC. We’ve written about Merx before on three occasions. The BDC Credit Reporter has been skeptical of the – let’s say – “generous” valuations AINV has placed on its debt and equity investments in Merx, despite the severe impact of the pandemic on flying and the value of aircraft and their leases. Both in the IVQ 2020 and in the IQ 2021 results, AINV has increased the value of its investment in Merx after a modest unrealized write-down earlier in 2020. As of now, the $190.5mn of first lien debt is carried at par, as was the case before the pandemic. The value of the now $120.3mn in equity is given as $125.1mn, up $0.5mn in the period.
On the latest conference call AINV sought to explain how Merx could be re-leasing planes at lower rates than before the pandemic or having to sell them off and still see an increase in the value of the equity stake. (Previously the BDC pointed to increases in their aircraft maintenance activities for its higher valuation, but this was not mentioned in the most recent conference call). Much as we’d like to, we don’t follow how AINV maintains such a high equity valuation despite the undeniably tough conditions. We rate the company CCR 4 despite the fact that AINV values its overall investment modestly over cost. However, we encourage readers to review the conference call transcript and decide for themselves.
With all that said, industry trends seem to be on the mend for Merx and total capital at risk – thanks to a large principal repayment – has dropped from $321mn as of March 2020 to $311mn a year later. The debt is performing at a 10% yield (down from 12% previously). The equity is non-income producing. The overall annual return on assets invested – both debt and equity – is 6.4% versus something closer to 15% pre-Covid when the loan yield was higher and dividends were being paid. AINV’s management does not envisage a return to those halcyon days but hopes for a ROA somewhere in-between.
This is very much a work in progress, but if industry conditions improve as expected, AINV should be able to avoid any further reduction in its debt yield from Merx. Once securitizations of aircraft are sufficiently paid down – which are senior to where AINV sits – we may even see a resumption of some dividend payouts. However, we cannot estimate when that might occur. We are maintaining our CCR 4 rating till we get more substantive good news and the credit remains Trending because we would not be surprised to see values and income change materially again – probably for the better – in IIQ 2021.
Even if AINV extricates itself from Merx without a realized loss (even though the loss of investment income has been substantial in recent quarters), the question remains why a BDC supposedly committed to portfolio diversification would invest 30% of its capital (using the IQ 2021 numbers) in a single company ?
We’ve discussed Ambrosia Buyer Corp, which also goes by the name Trimark USA LLC and TMK Hawk Parent Corp on BDC books twice in the past. The first article was on November 26, 2020 when we discussed a major dispute between different lender groups. On February 5, 2021, we confirmed that second lien debt outstanding had been placed on non accrual by Apollo Investment (AINV). However, several other BDC lenders – involved in both the first and second lien debt – had discounted the value of their positions but had not placed the obligations on non performing status. AINV admitted to continuing to receive contractual interest, but applying the proceeds to reducing the cost basis of their investment.
Neither AINV nor the other public BDC with exposure (first lien) New Mountain Finance (NMFC) addressed what is happening at the company on their IQ 2021 conference calls. Last we heard, the dispute between different lender groups was before a judge but we’ve not been able to determine an outcome, if any has occurred. Still, in the IQ 2021 both AINV and NMFC reduced the discount applied to their debt positions. The former’ discount is now (38%) versus (52%) in the prior quarter but remains on non accrual and the cost is still being reduced from interest proceeds. NMFC has reduced its own discount by 10%.
From what we can gather the disputed rescue package has provided the company with much needed liquidity and – presumably – market conditions are improving as lockdowns end and people are eating out again. Moody’s still rates the companyCaa2 – or did in January 2021. We’d like to offer more clarity but with the BDC lenders mum, we can only suggest that the company is on the mend and a major financial crisis does not seem likely.
We continue to rate Ambrosia CCR 5, even if NMFC and two other BDCs still have the debt as performing. The company is still Trending, because it’s likely that the valuation will change again – probably for the better – in the IIQ 2021 results when they come out. Moreover, the lawsuit between lenders may get resolved.
Common stock shareholders were excited to hear that lenders to Sequential Brands had extended a waiver of loan defaults from May 10 to June 7, 2021. At the time – according to Seeking Alpha – the stock price jumped 30%. However, for the lenders to the troubled company this means no resolution has yet been found to troubles that date many months back. We’ve written about Sequential Brands seven times before, so we won’t rehash the whole backstory.
However, we’ll note that BDC exposure – in both debt and equity – to the company remains huge: $277.1mn at cost. The debt at March 31, 2021 has been discounted by (16%) and the equity by (100%). The BDC lenders are FS KKR Capital (FSK) and FS KKR Capital II (FSKR), as well as Apollo Investment (AINV). However, given that FSKR is to be merged into the outstandings can rightfully be allocated all to FSK. Over a quarter of a billion dollars is a Major exposure for the KKR-managed BDC. (AINV has invested $12.8mn at cost).
We have no idea how this is going to play out, although some sort of resolution must be the horizon. We retain a Trending rating for Sequential as chances are good valuations or income derived therefrom could change shortly. We’re also affirming our CCR 4 credit rating which suggests we believe some sort of realized loss will eventually occur. However, whether that will be a few tens of millions or hundreds of millions – an important distinction – remains unclear.