Item 1. Reports to Stockholders.
(a) |
The Report to Shareholders is attached herewith. |
Apollo Senior Floating Rate Fund Inc. (NYSE: AFT)
Apollo Tactical Income Fund Inc. (NYSE: AIF)
Semi-Annual Report
June 30, 2024
(unaudited)
Economic and market conditions change frequently.
There is no assurance that the trends described in this report will continue or commence.
This report, including the financial information herein, is transmitted to shareholders of the Funds for their information. It is not a prospectus. Past performance results shown in this report should not be considered a representation of future performance. Statements and other information herein are as dated and are subject to change.
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
June 30, 2024 (unaudited)
We would like to start by saying thank you for your interest in Apollo Senior Floating Rate Fund Inc. and Apollo Tactical Income Fund Inc. (the “Funds”). We appreciate the trust and confidence you have placed with us through your investment in the Funds.
The performance of risk assets during the second quarter can be characterized as
The Federal Reserve (the “Fed”) appeared to have regained its touch with signs that its restrictive monetary policy was finally bringing down inflation toward its long-term target. The core consumer price index—which excludes food and energy costs—rose 0.1% sequentially in June, the smallest monthly advance in three years and the headline inflation rate declined month-over-month for the first time since 2020. Additionally, US hiring and wage growth decelerated in June as the unemployment rate ticked up, leading Fed Chair Jerome Powell to describe the labor market as “no longer overheated”, at a mid-July conference.
1
Risk markets cheered the news but struggled to replicate the strength we saw in the last two months of 2023 and the first quarter of 2024. The S&P 500 Index touched its 30th record high of the year by the end of June, nearing the historic 5,500 level. Still, the benchmark’s 3.9% advance in the second quarter was less than half of the 10.2% and 11.2% gains notched in the previous two quarters.
1
The same was true for high yield spreads, which narrowed to a 17-year low of 335 basis points on May 6th but finished the quarter eight basis points wider at 351 basis points, the first spread widening in two years.
2
The ICE BofA CCC-rated High Yield Index, which rallied 4.3% on average during the past six quarters, added just 0.2% in the second quarter.
1
Similarly, capital markets activity downshifted in the second quarter. US investment grade issuance was a respectable $326 billion in the second quarter, but well below the $514 billion printed in the first three months of 2024. US high yield issuance also took a pause, falling $10 billion from the three-year high of $85 billion reached in the first quarter. Finally, the value of mergers and acquisitions (“M&A”) deals globally totaled $1.5 trillion in the first six months of 2024. While the activity slightly picked up from the same period last year, it still lags the 10-year average for the first six months of the year by more than $300 billion.
2
A slow start to the second quarter was mostly to blame for the moderating performance in risk markets. A hot March US jobs report and CPI reading temporarily moved interest rates higher while a largely unsuccessful missile and drone attack by Iran and its proxies on Israel elicited an Israeli retaliatory strike that threatened to escalate the conflict in the Middle East. Surprising election outcomes in Mexico and India in early June created some stirrings of volatility in local equity indices and currency markets, and President Emmanuel Macron’s failed election gambit pushed French government bonds to their widest spread to German Bunds in 10 years.
1
The US high yield corporate and S&P 500 indices mostly shrugged off these concerns posting 1% and 3.5% returns, respectively, in June.
1
,
3
Following indications that inflation is on a slow and steady path lower, traders are now pricing two rate cuts before the end of 2024. Additionally, economists have grown more optimistic that the global economy can avoid recession and are now projecting a 30% and 20% probability of a recession in the US and Europe, respectively, over the next 12 months, down meaningfully since February. Still, even if we assume the interest rate futures market is correct in pricing in cuts of 50 basis points this year and 100 basis points next year, short-term interest rates would end 2025 at around 4%, which would still be the highest level for overnight rates since 2007, if we exclude the recent Fed hiking cycle.
4
THE OPPORTUNITY FOR PRIVATE CREDIT
We continued to witness a solid opportunity set for private credit throughout the first half of 2024. Despite the strong return of the syndicated credit markets this year, Leveraged Commentary & Data indicates that the volume of private credit loans taken out by the broadly syndicated loan (“BSL”) market slowed during the second quarter. Additionally, while the rebound in syndicated credit markets was driven by refinancings and repricings, most M&A and leveraged buy out (“LBO”) deals—or de novo issuance—have been financed by the private credit market.
5
Executives at major
2 |
J.P. Morgan–North America Credit Research, July 2024 |
3 |
“High Yield Corporate” represented by the ICE BofA US High Yield Index |
5 |
PitchBook LCD, Data through June 30, 2024 |
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Manager Commentary (continued)
June 30, 2024 (unaudited)
US banks said during recent earning calls that they’re seeing more dialogue on M&A and predicted that dealmaking will continue to progress. Ultimately, as discussed in previous letters, we believe that for credit markets to function effectively, both types of lending—public and private—need to co-exist and provide tailored solutions that depend on the borrower’s profile, investment lifecycle and specific needs.
We believe this continued growth is the result of two key features of private credit: risk adjusted returns and excess spread per unit of risk. Creditor protection is a fundamental principle of direct lending, given the nature of the business in which lenders own the debt until maturity. This differs from the syndicated market where banks can decide to sell the instrument to a third party and exit a transaction at any time. One of the main reasons we will often say no to deals is when we identify potential weak creditor protections. Looking at corporate credit, spreads in the public market have tightened considerably in the last six months to the lowest levels since the Global Financial Crisis.
2
We’ve seen spreads in the private market trace tighter alongside those in the public market but importantly, the incremental spread available in private credit remains stable during this period of tightening—just as it did when rates began to rise in the first quarter of 2022. It’s this relationship and consistent availability of incremental spread we look to take advantage of in the private credit markets.
Turning to the higher-for-longer interest rate environment, elevated borrowing costs have several implications for direct lenders. With short-term dated base rates above 5% and five-year SOFR swaps slightly below 4% as of mid-July, we believe direct lending continues to represent a compelling total return opportunity.
6
At the same time, higher borrowing costs continue to pressure issuers, especially highly leveraged companies. A recent report from Morningstar indicated that as of June 2024, about 10% of private credit issuers were seeking covenant relief, and that more than half of this cohort carried ratings of CCC or lower.
7
This is unsurprising as rates have now been elevated for two years, which has increased interest expense burdens for floating-rate borrowers. This highlights the importance of the vintage of a fund’s portfolio as well as credit selection as many companies that tapped the market in 2021—when the low-rate environment in the aftermath of the pandemic fed a dealmaking frenzy—now face a steep maturity wall and higher interest rates.
We continue to believe that the opportunity set to lend to bigger businesses on a first lien, senior secured basis at elevated yields remains attractive. We expect sponsors and large corporations to continue to seek private solutions, especially amid the ongoing debate about the timing and extent of interest rate cuts. Apollo expects a higher rate environment for a longer period.
Still, we remain cognizant of several risks and potential sources of volatility, including upside risks to inflation, further geopolitical tensions, and uncertainty leading into the November US elections. We continue to monitor several pro-inflationary trends including deglobalization, energy transition, higher defense spending and the elevated US fiscal deficit. We are keeping a close watch on geopolitical risks including the current stalemate in Ukraine and the ongoing war in the Middle East, where any escalation could impact energy markets and the broader global economy. Finally, we are tracking the heightened uncertainty less than four months before the US elections, which we expect to introduce further market volatility.
We continue to maintain a cautious approach, but we believe this environment may provide an attractive opportunity for large, scaled investors, and we expect our “credit first” philosophy to be on full display as we seek to deliver more stable returns through a tumultuous and uncertain 2024.
Sincerely,
Apollo Credit Management, LLC
6 |
Federal Reserve Bank of New York, retrieved from FRED, Federal Reserve Bank of St. Louis, July 2024 |
2 | Semi-Annual Report
Apollo Senior Floating Rate Fund Inc.
June 30, 2024 (unaudited)
|
|
|
|
|
|
Portfolio Composition (as % of Current Market Value of Investment Securities) |
|
|
|
Loans |
|
|
|
91.5% |
|
High Yield Bonds |
|
|
|
8.1% |
|
Equity/Other |
|
|
|
0.4% |
|
|
|
|
Portfolio Characteristics (a) |
|
|
|
Weighted Average Floating-Rate Spread |
|
|
|
4.77% |
|
Weighted Average Fixed-Rate Coupon |
|
|
|
6.83% |
|
Weighted Average Maturity (in years) (floating assets) |
|
|
|
4.20 |
|
Weighted Average Maturity (in years) (fixed assets) |
|
|
|
4.46 |
|
Weighted Average Modified Duration (in years) (e) |
|
|
|
0.18 |
|
Average Position Size by Issuer (f) |
|
|
$ |
3,596,029 |
|
|
|
|
|
95 |
|
Floating Rate Exposure |
|
|
|
93.55% |
|
Weighted Average S&P Rating (g) |
|
|
|
B |
|
Weighted Average Rating Factor (Moody’s) (g) |
|
|
|
3,190 |
|
|
|
|
|
|
|
|
A |
|
|
|
0.7% |
|
BB |
|
|
|
3.9% |
|
B |
|
|
|
52.5% |
|
CCC+ or Lower |
|
|
|
6.7% |
|
Not Rated |
|
|
|
36.2% |
|
|
|
|
|
|
|
Top 5 Industries (as % of Current Market Value of Investment Securities) (c) |
|
|
|
Services: Business |
|
|
|
17.8% |
|
High Tech Industries |
|
|
|
15.8% |
|
Healthcare & Pharmaceuticals |
|
|
|
13.7% |
|
Banking, Finance, Insurance & Real Estate |
|
|
|
12.3% |
|
Media: Advertising, Printing & Publishing |
|
|
|
4.7% |
|
|
|
|
|
|
|
|
|
|
Top 10 Issuers (as % of Current Market Value of Investment Securities) (d) |
|
|
|
Garda World Security Corporation |
|
|
|
2.6% |
|
Gainwell Acquisition Corporation |
|
|
|
2.5% |
|
DCert Buyer, Inc. |
|
|
|
2.5% |
|
BDO USA, P.A. |
|
|
|
2.4% |
|
LSF11 A5 Holdco LLC |
|
|
|
2.3% |
|
Solera, LLC |
|
|
|
2.1% |
|
Advarra Holdings, Inc. |
|
|
|
2.0% |
|
eResearch Technology, Inc. |
|
|
|
2.0% |
|
Deerfield Dakota Holding, LLC |
|
|
|
1.9% |
|
EG Group Limited |
|
|
|
1.9% |
|
|
|
|
|
|
|
(a) |
Averages based on par value of investment securities, except for the percentage of floating rate exposure and the weighted average modified duration, which are based on market value. |
(b) |
Credit quality is calculated as a percentage of fair value of investment securities at June 30, 2024. The quality ratings reflected were issued by S&P Global Ratings (“S&P”), an internationally recognized statistical rating organization. Credit quality ratings reflect the rating agency’s opinion of the credit quality of the underlying positions in the Fund’s portfolio and not that of the Fund itself. Credit quality ratings are subject to change. |
(c) |
The industry classifications reported are from widely recognized market indexes or rating group indexes, and/or as defined by Fund management, with the primary source being Moody’s Investors Service (“Moody’s”), an internationally recognized statistical rating organization. |
(d) |
Holdings are subject to change and are provided for informational purposes only. |
(e) |
Excludes equity investments and includes fixed and floating rate assets. |
(f) |
Excludes equity investments. |
(g) |
Excludes securities with no rating or non-performing defaulted securities as of June 30, 2024. |
Semi-Annual Report | 3
Apollo Senior Floating Rate Fund Inc.
June 30, 2024 (unaudited)
Apollo Senior Floating Rate Fund Inc. (“AFT”) returned 4.95% on a net asset value (“NAV”) per share basis and 16.26% on a market price per share basis for the period ending June 30, 2024, outperforming the S&P/LSTA Leveraged Loan Index, which returned 4.40% for the period. As of June 30, 2024, AFT held 91.5% of its fair value of investment securities in first and second lien leveraged loans, 8.1% in high-yield bonds and 0.4% in equities and other securities. Outperformance in AFT relative to the index was driven mostly through credit selection, with an emphasis on downside protection and capital preservation. Additionally, AFT benefitted from performance of the private assets held in the Fund.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFT - Market Price |
|
|
|
16.26% |
(a) |
|
|
|
8.39% |
(a)(b) |
|
|
|
6.07% |
(a)(b) |
|
|
|
5.49% |
(a)(b) |
AFT - NAV |
|
|
|
4.95% |
(a) |
|
|
|
6.30% |
(a)(b) |
|
|
|
5.67% |
(a)(b) |
|
|
|
6.05% |
(a)(b) |
S&P/LSTA Leveraged Loan Index (c) |
|
|
|
4.40% |
|
|
|
|
5.53% |
(b) |
|
|
|
4.60% |
(b) |
|
|
|
4.66% |
(b) |
|
|
|
|
|
|
|
|
|
|
Current Monthly Distribution (per share) |
|
|
|
$0.140 |
|
Current Distribution Rate at Market Price (f) |
|
|
|
11.55 |
% |
Current Distribution Rate at NAV (f) |
|
|
|
11.28 |
% |
(a) |
Performance reflects total return assuming all distributions were reinvested at the dividend reinvestment rate. Past performance does not necessarily indicate how the Fund will perform in the future. The performance information provided does not reflect the deduction of taxes that a shareholder would pay on distributions received from the Fund. |
(c) |
The S&P/LSTA Leveraged Loan Index is a broad index designed to reflect the performance of the U.S. dollar facilities in the leveraged loan market. |
(d) |
Inception date February 23, 2011. |
(e) |
All or a portion of the Fund’s distributions may be comprised of ordinary income, capital gains and/or return of capital. Refer to Note 7 in the Notes to the Consolidated Financial Statements. |
(f) |
Distribution rates represent the latest declared regular distribution, annualized, relative to the most recent month-end market price and NAV. Special distributions are not included in the calculation. |
4 | Semi-Annual Report
Apollo Tactical Income Fund Inc.
June 30, 2024 (unaudited)
|
|
|
|
|
|
Portfolio Composition (as % of Current Market Value of Investment Securities) |
|
|
|
Loans |
|
|
|
75.7% |
|
High Yield Bonds |
|
|
|
16.6% |
|
Structured Products |
|
|
|
7.5% |
|
Equity/Other |
|
|
|
0.2% |
|
|
|
|
Portfolio Characteristics (a) |
|
|
|
Weighted Average Floating-Rate Spread |
|
|
|
5.29% |
|
Weighted Average Fixed-Rate Coupon |
|
|
|
6.49% |
|
Weighted Average Maturity (in years) (floating assets) |
|
|
|
4.52 |
|
Weighted Average Maturity (in years) (fixed assets) |
|
|
|
4.57 |
|
Weighted Average Modified Duration (in years) (e) |
|
|
|
0.45 |
|
Average Position Size by Issuer (f) |
|
|
$ |
3,335,564 |
|
|
|
|
|
97 |
|
Floating Rate Exposure |
|
|
|
85.32% |
|
Weighted Average S&P Rating (g) |
|
|
|
B |
|
Weighted Average Rating Factor (Moody’s) (g) |
|
|
|
3,129 |
|
|
|
|
|
|
|
|
A |
|
|
|
0.5% |
|
BB |
|
|
|
11.1% |
|
B |
|
|
|
38.8% |
|
CCC+ or Lower |
|
|
|
7.2% |
|
Not Rated |
|
|
|
42.4% |
|