AINV Quick Update: Higher Yield For A Reason

The following information was previously provided to subscribers of Premium BDC Reports along with:

  • AINV target prices/buying points
  • AINV risk profile, potential credit issues, and overall rankings
  • AINV dividend coverage projections (base, best, worst-case scenarios)

AINV Distribution Update

On August 5, 2021, the Board declared a distribution of $0.31 per share payable on October 8, 2021, to shareholders of record as of September 21, 2021. On August 5, 2021, the Company’s Board also declared a supplemental distribution of $0.05 per share payable on October 8, 2021, to shareholders of record as of September 21, 2021.

Since 2018, the distributions to shareholders have been covered only through fee waivers and not paying the full incentive fees. However, the company will likely start paying incentive fees during the September 30, 2021, quarter which will have a meaningful impact on dividend coverage and was discussed on the recent (August 5, 2021) call:

“Given the total return hurdle feature in our fee structure and the recovery in our portfolio over the last several quarters, we expect to begin to pay a partial incentive fee in the quarter ending September 2021. The exact timing and amount will vary based upon — based on future gains and losses if any, as well as the level of net investment income for the quarter. As we said on last quarters call, we believe AINV net investment income, may fluctuate over the next few quarters as we begin to pay incentive fees. That said we expect to generate higher revenue from certain investments, including Merx, which will help offset the impact from incentive fees.”

As discussed later, AINV’s recurring interest income has recently declined to its lowest level over the last 15 years and the company would have only covered around 86% of the quarterly dividends if the full incentive fees had been paid.

“The quarter-over-quarter decline in interest income was attributable to the pace of the investment activity and a relatively higher yield on repayments versus fundings. The weighted average yield at cost on our corporate lending portfolio was 7.7% at the end of June, down from 7.8% last quarter. Prepayment income was $4 million, up from $3.3 million last quarter.”

Investors should expect dividend coverage to “fluctuate” over the coming quarters but management seems committed to paying the regular quarterly distribution of $0.31 plus the supplemental distribution of $0.05 through March 31, 2022, as discussed on the recent call:

“We remain confident in the trajectory of our earnings, and our long-term plan. As mentioned last quarter, we intend to declare a quarterly based dividend distribution of $0.31 per share, and a quarterly supplemental distribution of $0.05 per share for at least the next two quarters. To be clear, this would be an addition to the distribution declared today.”

There is a chance that AINV could be downgraded to ‘Level 3’ dividend coverage (implying the potential for a reduction in the amount of total dividends paid) depending on the progress of rotating out of “non-earning and lower yielding assets” and improved results/income from its investment in Merx Aviation:

“We believe Merx has successfully navigated this challenging period, and we expect AINV will be able to generate higher revenue from Merx in the coming quarters.”

Management has guided for portfolio growth using increased leverage which is already among the highest in the sector at 1.39 debt-to-equity (net of cash) compared to the average BDC currently around 0.95 as shown in the following table.

“Net leverage increased to 1.39 times at the end of June, up from of 1.36 times last quarter and slightly below our target leverage range of 1.40 times to 1.60 times. As we look ahead, we are confident in our ability to grow our portfolio and operate within our target leverage range, given the tremendous need for creative and flexible private capital and the unique and robust nature of the Apollo mid cap platform.”

The following table shows each BDC ranked by its simple (not effective) debt-to-equity ratio net of cash (non-restricted) along with its portfolio mix. The “Other” column includes everything that is not first or second-lien secured debt.

I have updated the projections for AINV to take into account the recently reported results as well as guidance from management on the recent and previous calls.

From previous call: “We said that we believe a $0.31 base distribution reflects a conservative estimate of the long-term earnings power of our core portfolio, and that the supplemental distribution would be a function of the redeployment of non-earning and lower yielding assets from noncore and legacy assets, as well as an increase in yield we received from our Merx investment. We remain constructive on each of these drivers, although we expect some of the benefits of these drivers will occur after we start accruing incentive fees. As a result, net investment income may fluctuate over the next few quarters as we continue to reposition out of noncore and legacy assets and grow the portfolio to within our target leverage range.”

“Looking ahead to fiscal year 2022, we will continue to seek to optimize and de-risk our portfolio and rotate out of our remaining noncore and second lien assets into core assets. The noncore assets are generating about a 4% or 5% return. So, as we generate cash off those assets and redeploy them into our current yield and we get Merx back to a level of producing income, not to where it was before, but to sort of a new moderated level, we can generate enough income after the incentive fee to cover that dividend.”

During the three months ended June 30, 2021, the Company repurchased 145,572 shares at a weighted average price per share of $13.92, inclusive of commissions, for a total cost of $2.0 million. This represents a discount of approximately 12.72% of the average net asset value per share for the three months ended June 30, 2021. During the period from July 1, 2021, through August 4, 2021, the Company repurchased 44,418 shares at a weighted average price per share of $13.46 inclusive of commissions, for a total cost of $0.6 million. Since the inception of the share repurchase program, the company has repurchased 13,800,150 shares at a weighted average price per share of $16.31 for a total cost of $225.1 million, leaving a maximum of $24 million available for future purchases. On July 9, 2021, the company priced an offering of $125 million of 4.500% Notes due July 16, 2026.

“Regarding liquidity, given the continued improvement in the quality of our investment portfolio, our liquidity position continues to strengthen both quarter end in July, we issued $125 million up 4.5% unsecured notes due on July 26. Despite the dilutive impact of these notes, we believe it was prudent to diversify and extend the maturity of our funding sources.”

“Regarding stock buybacks during the quarter AINV purchased 145,500 shares at an average price of $13.92 for a total cost of $2 million. From July 1 — this is first quarter to August 4, 2021, we purchased an additional 44,000 shares at an average price of $13.46 for a total cost of $600,000, leaving approximately $24 million authorization for future purchases under the Board’s current authorization.”

For calendar Q2 2021, AINV reported between its worst and base case projections due to the continued decline in its portfolio yield driving recurring interest income to its lowest level over the last 15 years. As shown in the following table, the company would have covered around 86% of the quarterly dividends if the full incentive fees had been paid which is a slight decline from the previous quarter.

Previously, AINV was considered a ‘Level 4’ dividend coverage BDC implying that a dividend reduction was imminent and on August 6, 2020, the company announced a decrease in the regular quarterly dividend per share from $0.45 to $0.31. Subsequently, AINV was upgraded to ‘Level 2’ due to the dividend reduction and the strong likelihood that the company would not be paying incentive feesover the coming quarters.

From previous call: “Turning to our distribution, in light of the challenges and uncertainty created by the COVID-19 pandemic and our plans to further reduce the funds leverage, we have reassessed the long-term earning power of the portfolio and included that as a prudent to adjust the distribution at this time. We believe that distribution level should reflect the prevailing market environment and be aligned with the long-term earnings power of the portfolio. Going forward in addition to a quarterly based distribution, the company’s Board expects to also declare supplemental distribution and an amount to be determined each quarter.”

It is important to note that AINV has experienced around $700 million of realized losses over the last ~8 years which is around $10.75 per share using the current number of shares. This compares to other BDCs with a history of realized gains such as ARCC with $725 million of realized gains during the same period. A good portion of AINV’s previous and recent losses were due to higher amounts of exposure to cyclical sectors including extended stay hotels and oil/energy. However, PNNT also had larger amounts of oil/energy exposure with much strong NAV performance during the same period. This is likely due to AINV’s management previously taking on too much risk including concentration risk in the wrong sectors.

AINV Quick Risk Profile Update

During calendar Q2 2021, non-accruals declined from 1.4% to 1.1% of the portfolio fair value (5.6% of the portfolio at cost) due to marking down its investments Glacier Oil & Gas and Ambrosia Buyer Corp partially offset by marking up Spotted Hawk. It should be noted that there will likely be continued realized losses over the coming quarters including previously discussed investments some of which are included in the table below. These investments alone account for $268 million or $4.11 per share of previous unrealized losses but still account for 7.0% of the total portfolio and 16.6% of NAV per share.

Management is working to exit its investment in Spotted Hawk and was discussed on the previous earnings call:

“The oil and gas investments, it’s really Spotted Hawk is the one of size. And we are — 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.”

The largest markdown during the quarter was its equity position in Dynamic Product Tankers which is a shipping business 85% owned by AINV (since 2015) as discussed in previous reports. As shown below, AINV currently has $22 million subordinated loan due July 2024 at a very low rate of LIBOR +500 basis points and continues to mark down its equity position currently 40% of cost accounting for almost $30 million or $0.46 per share of unrealized losses.

Net asset value (“NAV”) per share increased by $0.14 or 0.9% (from $15.88 to $16.02) mostly due to Carbonfree Chemicals partially offset by Dynamic Product and Merx Aviation as well as overearning the dividend by almost $0.03 per share.

“During the quarter our corporate lending portfolio had a gain of $6 million or $0.09 per share. Merx had a slight loss of $1.2 million or $0.02 per share, and our non core and legacy assets had a net gain of $2 million or $0.03 per share. The net gain on non-core and legacy included a $9.8 million gain on Carbonfree, a legacy investment partially offset by losses on oil and gas and shipping.”

As discussed in previous reports, AINV restructured its first-lien loans to Carbonfree Chemicals and now owns 31% of the company. The equity portion was marked up during the recent quarter and now value at 46% of cost but needs to be watched as it could result in higher (or lower) NAV over the coming quarters. Carbonfree produces proprietary technologies that capture and reduce carbon emissions by producing chemicals such as limestone and baking soda for sale or for long term storage and could benefit from the current administration. Management discussed on the recent call:

“As a reminder, our investment in Carbonfree Chemicalsconsists of investment in the company’s proprietary carbon capture technologies and an investment in the company’s chemical plant. Carbonfree is benefiting from the strong interest in carbon capture utilization and storage. The increase in valuation is a result of a recent third party capital raise at Carbonfree.”

Previous call: “Carbonfree Chemicalswhich 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 one over the next year can have some real significant positive things happen to it.”

Over the last few years, the company has been repositioning the portfolio into safer assets including reducing its exposure to oil & gas, unsecured debt, and CLOs. The “core strategies” portion of the portfolio remains around 92% of all investments:

“We continue to make good progress increasing our exposure to first lien floating rate corporate loans, while reducing our exposure to junior capital and non-core positions. Repayments during the quarter included the exit to second lien investments, as well as a small partial pay down from one of our shipping investments. We remain focused on reducing our exposure to the remaining non-core assets, while ensuring an optimal outcome for our shareholders.”

Its aircraft leasing through Merx Aviation remains the largest investment and remains around 13% of the portfolio and was marked down during the recent quarter as discussed on the call:

“Moving to Merx and beginning with the overall market. We are optimistic that the demand for air travel will continue to improve with the ongoing rollout of the vaccine and the lifting of travel restrictions. Additionally, we expect the aircraft leasing market will continue to be an important and growing percentage of the world fleet, as airlines will need to increasingly look to third party balance sheet to finance their operating assets. As the aircraft sector continues to recover, we have seen a notable pickup in sale leaseback transactions and in the ABS market, an important source to financing for aircraft lessors. Specific to our investment, we believe Merx has successfully navigated this challenging period. The level of lease revenue generated from our fleet has stabilized. We have worked through our exposure to airlines that have undergone restructurings. We’ve been able to remarket aircraft during this period with long term leases or sales. Our current lease maturity schedule is well staggered. Additionally, Merx continues to benefit from a growing servicing business, which has increased in value over time. We believe Merx’s portfolio compares favorably to other lessors in terms of asset, geography, age, maturity, and lessee diversification. Merx’s portfolio skewed towards the most widely used air — types of aircraft, which means demand for Merx’s fleet is anticipated to be resilient. Merx’s fleet primarily consists of narrowbody aircraft serving, both U.S. and foreign markets. At the end of June, Merx’s own portfolio consisted of 78 aircraft, 10 aircraft types, 39 lessees in 25 countries with an average aircraft age of 11.5 years, and an average lease maturity of 4.3 years. Merx’s fleet includes 75 narrowbody aircraft, two widebody aircraft and one stryder. The Apollo aviation platform will continue to seek to opportunistically deploy capital. To be clear, Merx is focused on its existing portfolio and is not seeking to materially grow its own balance sheet portfolio. However, growth in the overall Apollo aviation platform will nurture the benefit of Merx as the exclusive servicer for aircraft owned by other polyflon.”

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Each week we provide a balance between easy to digest general information to make timely trading decisions supported by the detail in the Deep Dive Projection reports (for each BDC) for subscribers that are building larger BDC portfolios.

  • Monday Morning Update – Before the markets open each Monday morning we provide quick updates for the sector including significant events for each BDC along with upcoming earnings, reporting, and ex-dividend dates. Also, we provide a list of the best-priced opportunities along with oversold/overbought conditions, and what to look for in the coming week.
  • Deep Dive Projection Reports – Detailed reports on at least two BDCs each week prioritized by focusing on ‘buying opportunities’ as well as potential issues such as changes in portfolio credit quality and/or dividend coverage (usually related). This should help subscribers put together a shopping list ready for the next general market pullback.
  • Friday Comparison or Baby Bond Reports – A series of updates comparing expense/return ratios, leverage, Baby Bonds, portfolio mix, with discussions of impacts to dividend coverage and risk.

This information was previously made available to subscribers of Premium BDC Reports. BDCs trade within a wide range of multiples driving higher and lower yields mostly related to portfolio credit quality and dividend coverage potential (not necessarily historical coverage). This means investors need to do their due diligence before buying.