NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to assign a rating of 'BBB' to Apollo Investment Corporation's (Apollo) unsecured institutional debt issuance. Fitch does not expect there to be a material impact on the company's leverage levels as a result of the issuance, as proceeds will be used largely to repay borrowings on secured credit facilities; effectively refinancing near-term debt maturities.
Fitch views the firm's ability to access the institutional bond market favorably, as it provides Apollo with enhanced funding flexibility, in Fitch's opinion.
KEY RATING DRIVERS
The expected rating is equalized with Apollo's Issuer Default Rating (IDR) and the ratings assigned to Apollo's existing senior unsecured debt, as the new notes will rank equally in the capital structure. The equalization of the unsecured ratings with the secured debt rating reflects Apollo's relatively low leverage, as compared to other financial institutions, and Fitch's expectation that proceeds from the issuance will be used to repay a portion of secured debt outstanding, thus increasing the amount of unsecured funding in the capital structure.
Apollo's IDR reflects its demonstrated access to the debt and equity markets historically, relatively consistent operating performance in a difficult market environment, experienced management team, access to deal flow and investment resources from asset manager, Apollo Global Management, LLC, and solid dividend coverage.
Rating constraints for Apollo include outsized exposure to oil & gas, aviation, and structured product investments. Rating constraints for the broader industry include the capital markets impact on leverage, given the need to fair value the portfolio each quarter, dependence on the capital markets to fund portfolio growth, and a limited ability to retain capital due to dividend distribution requirements.
At Dec. 31, 2014, approximately 40.8% of the company's debt was unsecured and borrowing capacity on the corporate revolver was approximately $575 million.
The ratings expected to be assigned to the unsecured notes are equalized with Apollo's IDR, and therefore would be expected to be sensitive to any changes in Apollo's IDR.
Apollo's IDR currently has a Stable Rating Outlook , but Fitch has a negative outlook on the BDC sector as the challenging market backdrop is likely to pressure the sector's, earnings, asset quality, portfolio valuation, dividend funding, and equity market access over the near-to-intermediate term. Origination volume in the industry has remained strong, which means Apollo, and others, have meaningful exposure to 2013 and 2014 vintages, which Fitch believes could lead to asset quality deterioration down the road. Apollo also has outsized exposure to oil & gas investments, which are likely to be challenged from a valuation and credit perspective until energy prices rebound. To the extent that Fitch deems these challenges to be of a sufficient magnitude, this could result in negative rating action for Apollo.
Positive rating momentum is not expected over the near term, but would be driven by measured portfolio growth, in the face of what Fitch believes is an overheating credit environment. This will be evaluated in the context of the stability and consistency of Apollo's operating performance, asset quality, valuation, and underlying portfolio metrics, including leverage and interest coverage. Proven performance with respect to new business verticals and the maintenance of a strong funding profile, ample liquidity, steady core operating performance, and leverage consistent with the risk profile of the portfolio would also be necessary to yield positive rating actions.
Headquartered in New York, NY, Apollo is an externally managed BDC, organized on Feb. 2, 2004. As of Dec. 31, 2014, the company had investments in 109 portfolio companies amounting to approximately $3.5 billion.
Fitch expects to assign the following rating:
Apollo Investment Corporation:
-- Unsecured debt at 'BBB(EXP)'.
Fitch currently rates Apollo as follows:
Apollo Investment Corporation
--Long-term IDR 'BBB';
--Senior secured debt 'BBB';
--Senior unsecured debt 'BBB'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (January 2014);
--'Investment Manager and Alternative Funds Criteria' (December 2013).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Investment Manager and Alternative Funds Criteria