AIF Apollo Tactical Income Fund Inc

 

 

 

 

 

There is no assurance that the trends described in this report will continue or commence.

 

 

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.

 

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. 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. 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. 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

 

 

2 | Semi-Annual Report

 

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
Number of Issuers (f)				95
Floating Rate Exposure				93.55%
Weighted Average S&P Rating (g)				B
Weighted Average Rating Factor (Moody’s) (g)				3,190
Credit Quality (b)
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%
Total				64.3%
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%
Total				22.2%

 

 

Semi-Annual Report | 3

 

 

 

 

 

 

 

 

4 | Semi-Annual Report

 

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
Number of Issuers (f)				97
Floating Rate Exposure				85.32%
Weighted Average S&P Rating (g)				B
Weighted Average Rating Factor (Moody’s) (g)				3,129
Credit Quality (b)
A				0.5%
BB				11.1%
B				38.8%
CCC+ or Lower				7.2%
Not Rated				42.4%

(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, 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, an internationally recognized statistical rating organization. The Top 5 Industries table above excludes Structured Products which represents 7.5% of the portfolio as of June 30, 2024.

(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 in default as of June 30, 2024.

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Performance Comparison
		YTD					5 Yr					10 Yr					Since Inception (d)
AIF - Market Price				11.03	% (a)				9.21	% (a)(b)				7.16	% (a)(b)				6.36	% (a)(b)
AIF - NAV				5.88	% (a)				6.63	% (a)(b)				6.39	% (a)(b)				6.87	% (a)(b)
S&P/LSTA Leveraged Loan Index (c)				4.40	%				5.53	% (b)				4.60	% (b)				4.64	% (b)

Distributions (e)
Current Monthly Distribution (per share)														$0.144
Current Distribution Rate at Market Price (f)														11.80	%
Current Distribution Rate at NAV (f)														11.70	%

(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.

(b)	Annualized.

(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 25, 2013.

(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.

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(a)

“Senior Loans” are senior, secured loans made to companies whose debt is below investment grade as well as investments with similar economic characteristics. Senior Loans typically hold a first lien priority and, unless otherwise indicated, are required to pay interest at floating rates that are periodically reset by reference to a base lending rate plus a spread. In some instances, the rates shown represent the weighted average rate as of June 30, 2024. Senior Loans are generally not registered under the Securities Act of 1933 (the “1933 Act”) and often incorporate certain restrictions on resale and cannot be sold publicly. Senior Loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual maturity may be substantially less than the stated maturity.

(b)	All or a portion of this Senior Loan position has not settled. Full contract rates do not take effect until settlement date and therefore are subject to change.

(c)

The interest rate on this Senior Loan is subject to a base lending rate plus a spread. These base lending rates are the Secured Overnight Financing Rate (“SOFR”), the Euro Interbank Offered Rate (“EURIBOR”), or the prime rate offered by one or more major U.S. banks (“Prime”). The interest rate is subject to a minimum floor, which may be less than or greater than the prevailing period end EURIBOR/SOFR/Prime rate. As of June 30, 2024, the 1, 3 and 6 month EURIBOR rates were 3.63%, 3.71%, and 3.68%, respectively, the Daily SOFR (“D SOFR”), 1, 3 and 6 month SOFR rates were 5.33%, 5.34%, 5.32%, and 5.25%, respectively, and the Prime lending rate was 8.50%. Senior Loans may contain multiple contracts of the same issuer which may be subject to base lending rates of EURIBOR, SOFR and Prime (“Variable”) in addition to the stated spread.

(d)	Fair Value Level 3 security.

(e)	Foreign issuer traded in U.S. dollars.

(f)	Represents a payment-in-kind (“PIK”) security, which may pay interest in additional principal amount/share quantity.

(g)	Issuer filed for bankruptcy and/or is in default of principal and/or interest payments.

(h)	Fixed rate asset.

(i)	Securities exempt from registration pursuant to Rule 144A under the 1933 Act. These securities may only be resold in transactions exempt from registration to qualified institutional buyers. At June 30, 2024, these securities amounted to $25,952,159, or 11.19% of net assets.

(j)	Non-income producing asset.

(k)	The Fund has granted a security interest in substantially all of its assets in the event of default under the credit facility.

(l)	Principal of $130,000,000 less unamortized deferred financing costs of $22,617.

(m)	Securities may be deemed to be “restricted securities” under the Securities Act of 1933. As of June 30, 2024, the restricted securities were as follows:

Issuer		Investment Type		Acquisition Date				Cost				Value				Value as Percentage of Net Assets Applicable to Common Shares
Acosta, Inc.		Common Stock			12/31/2019			$	27,644			$	38,540				0.02	%
Acosta, Inc.		Preferred Stock			12/31/2019				170,424				236,717				0.10	%
Anuvu Corp.		Common Stock			3/23/2021				2,303,882				—				0.00	%
Carestream Health, Inc.		Common Stock			9/30/2022				2,121,110				972,225				0.42	%
KCF Puerto Rico, LLC		Corporate Note			12/28/2021				—				319,809				0.14	%
RDV Resources, Inc.		Common Stock			3/30/2020				—				18,794				0.01	%
Vector Capitano Holdings, LP		Partnership Interest- Class B-1			7/3/2023				—				—				0.00	%
Vector Capitano Holdings, LP		Partnership Interest- Class B-2			7/3/2023				—				—				0.00	%
								$	4,623,060			$	1,586,085				0.69	%