Up The Quality Curve

I previously investigated the publicly traded BDC, Apollo Investment Corporation (AINV), Apollo’s middle market publicly traded direct lending vehicle here and here.

The general conclusion was that AINV was heading towards being a 100% first lien, 100% co-invested with MidCap vehicle – versus one that trafficked in MidCap levered loans / ABLs along with aircraft and a pile of legacy non-core loans. Today the company made a number of strategic announcements:

• Rebranding under the MidCap banner, detaching from confusing Apollo Investment Corporation name
• Reducing fee structure, enabling investments in lower yield / higher quality loans
• ~3% post-close equity investment in AINV at NAV, which is ~35-40% higher than yesterday’s trading price, and validating existing NAV

AINV will head towards being one of, if not the only, 100% first lien middle market publicly traded loan vehicle. In my opinion, an attractive cut of loans given MidCap’s track record.

The big question in my mind is would Apollo wind down the vehicle given growth is dependent on being able to issue equity at or above NAV, a long way from where it was yesterday.

I was able, for the first time, to get airtime with management on AINV’s earnings call this morning. And the answers to my questions made future ambitions clear. Apollo plans to support the vehicle and aims to grow it based on issuing equity when / if that window opens.

As such, what does this mean today? As of right now, AINV is trading up 1-2%, so the market reaction is muted / non-existent. I believe that purchasing MidCap loans at a 25% discount, or at a look through LTV of 45%, is attractive. Not to mention the dividend was increased as a part of the above strategic announcement and continues to remain depressed as it rolls off its aircraft and non-core investments.

All told, following AINV has been a fun experience in thinking through strategy and pulled on other research I had done on credit markets and Apollo’s equity. We’ll see how the story continues to play out.

Disclosure: We own shares of AINV. This is not investment advice, do your own work.