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Apollo Investment Corporation Message Board

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  • serendipitymoonlight serendipitymoonlight Mar 27, 2012 6:09 PM Flag

    Stifel Nicolaus on AINV

    "Investment Thesis: We have to weigh current valuation with historical/expected
    credit performance. On a valuation basis the stock looks inexpensive trading at an
    11.7% earnings yield on our calendar 2012 estimate of $0.83 which is significant
    discount to the peer average of 10.1%. However, the historical performance of
    AINV has not been good, and while we believe management has outlined a
    strategic shift, there is still higher risk given the difficulty to change culture and it
    would realistically take 12-24 months to make any meaningful shifts in a $2.9
    billion portfolio. So while the stock does trade at a discount to peers we believe
    that discount is warranted given the historical performance and higher risk profile.
    In addition if AINV were to raise additional capital we could see the stock lower.
    We continue to have a Hold rating on the shares.
    Message to AINV management…….Don't Issue Additional Equity– based on
    the earnings conference call questions and the performance of the stock today,
    we believe AINV analysts and investors were in agreement that AINV should not
    raise additional equity (either secondary or rights offering). To put it bluntly, AINV
    has had its share of issues over the past 3-4 years but we believe that none of
    those issues can be corrected by being bigger. AINV has not lacked capital, what
    they have lacked, in our opinion, is a strategic focus that can drive acceptable
    returns for shareholders, quality underwriting and an appropriate expense
    structure. We think AINV needs to do more true middle market underwriting and
    less buying pieces of large syndicated transactions. We believe that they need to
    leverage the intellectual capital of the larger Apollo platform and find strong risk
    adjusted returns for shareholders and they need to do that with an expense
    structure that aligns shareholder and management interests."

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    • "We applaud management for suggesting a management fee concession. In
      the press release AINV said it intended to “waive the management and incentive
      fees associated with the new shares”. While we disagree with the issuance of new
      shares, we are huge fans of any line of thinking that would lower the current
      management expense and are very encouraged that management is willing to
      think about ways to lower that expense for shareholders. Our only suggestion is
      don’t couple the change in management fee to new equity. Instead we would
      suggest that AINV simply lower their fee agreement. We aren’t suggesting making
      huge changes, but instead of 2% on assets how about 1.75%, and instead of 20%
      NOI incentive fee how about 18%. The economic impact of these changes would
      be very similar to waiving the fees on 10% of additional equity. We appreciate
      what we think is an attempt to show that Apollo Global Management is trying to
      support AINV, but we think asking shareholders to step up and provide more
      capital is not the best way to show that support, even if the fee is waived on the
      new capital. One last comment for the Board of Directors, while you are making
      these changes please also consider adding a couple shareholder protections like
      no incentive fee on PIK income until its collected in cash and have the incentive
      fee hurdle include permanently impaired assets; neither of these changes will cost
      the new management team a dime if the credit in the portfolio performs as
      expected.
      The Board takes decisive action and outlines a new strategy. In our report
      following last quarter’s conference call we questioned whether the AINV business
      model was broken. Investing in liquid bonds could not generate a high enough
      ROE to shareholders after the 2&20 management fee structure. The Board of
      directors took decisive action with the release of Patrick Dalton who led the
      investing team and outlined a strategy of focusing on higher ROE businesses like
      the proprietary middle market originations. In our view, the focus on new
      businesses lines was necessary and we are glad to see AINV shift its focus.
      Execution will be key. After years of focusing on more liquid loans we question
      whether AINV has the team for sourcing and originating new proprietary deals.
      When asked on the call, we interpreted management’s comments as agreeing..."

 
AINV
8.150.00(0.00%)Apr 17 4:00 PMEDT

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