OREANDA-NEWS. Fitch Ratings has affirmed the Long-term Issuer Default Rating (IDR), secured debt rating, and unsecured debt rating for Apollo Investment Corporation (Apollo) at 'BBB'. The Rating Outlook has been revised to Negative from Stable.

These actions are being taken in conjunction with a broader industry review, which includes 10 business development companies (BDCs). For more commentary on the broader sector review, please see the release, Fitch Takes Several Negative Rating Actions Following BDC Peer Review, available at www.fitchratings.com.

KEY RATING DRIVERS

The Outlook revision for Apollo is driven by the firm's outsized exposure to oil & gas, aircraft financing, and structured investments, in combination with, what Fitch believes to be, relatively high leverage levels, particularly given the risk profile of the portfolio. Negative market movements in any one of these sectors and/or asset quality issues which translate into realized or unrealized losses would reduce the firm's cushion on asset coverage requirements and, therefore, debt covenants. Additionally, if this were to occur, it could potentially coincide with a time when the firm's access to the equity markets is limited, given that it, and other BDCs, is trading at a meaningful discount to net asset value (NAV).

Oil & gas investments accounted for 13.6% of the portfolio at Dec. 31, 2014, which is at the high-end of the peer group, with investments in mining, energy, and diversified natural resources contributing another 2.7%. In fiscal 3Q15, Apollo recorded a \$7.8 million loss on a mining investment and \$38.1 million of unrealized depreciation on four energy-related investments. In aggregate, these marks contributed to a 3.0% decline in book value quarter-over-quarter. Further market movements or company-specific challenges could yield incremental valuation hits in coming quarters and eventual credit losses, particularly if oil prices remain at depressed levels.

Fitch recently conducted a stress test on BDC energy exposures and believes Apollo's leverage ratio is the most vulnerable in the peer group, given its outsized exposure to energy, overall and oil & gas, more specifically. A stress on the overall energy book, based on Sept. 30, 2014 balances, yielded a 6 basis point increase in the, already high, leverage ratio.

Exposure to aviation amounted to 14.2% of the portfolio at Dec. 31, 2014, consisting solely of the firm's investment in Merx Aviation Finance (Merx), which owns a diverse portfolio of used, current generation aircraft. Apollo holds a first lien investment in Merx, with a 12% coupon, in addition to 100% of its common equity, but, as the sole owner, Fitch views the entire investment as a levered equity position. Fitch believes this investment is outsized, particularly as the exposure is to a very cyclical industry, which exposes the balance sheet to more valuation volatility than a diverse portfolio of first lien positions.

Structured product investments, consisting of CLOs and credit-linked notes, accounted for 10.1% of the portfolio at Dec. 31, 2014, which is above the peer average. While Fitch recognizes that a large portion of these investments are driven by strategic partnerships where Apollo has full view of the collateral in the structures, the firm remains in the junior position of a relatively highly levered vehicle, which exposes the firm to more valuation volatility and potential loss.

Apollo's leverage target is 0.75x at the upper bound. At Dec. 31, 2014, leverage was above-target and the peer average, at 0.8x. Net of cash and unsettled transactions, leverage was 0.74x. While the adjusted leverage ratio is within the firm's targeted range, Fitch believes it is still high given the firm's outsized exposure to aviation, oil & gas, and structured products, combined with limited access to the equity markets.

Apollo's portfolio composition is riskier than the peer-average, in Fitch's opinion, with only 34.7% of investments in first lien positions at Dec. 31, 2014. Additionally, the average underlying portfolio company leverage was 5.4x at quarter-end, which is above the peer-average. While this ratio could be skewed by some large legacy, liquid deals, it is up from 5.2x a year ago, despite the continued portfolio shift into illiquid assets.

Fitch believes Apollo has been successful improving its funding flexibility in recent years, and 40.8% of its total debt was unsecured as of Dec. 31, 2014. The firm has \$454 million of debt maturing over the next two years, including \$225 million of secured notes in October 2015, \$200 million of unsecured convertible notes in January 2016, and another \$29 million of secured term notes in September 2016. Approximately \$350 million of the maturities have been effectively refinanced through Apollo's \$350 million unsecured public debt issuance in February 2015. These notes have a 5.25% coupon and mature in March 2025. Fitch views the firm's access to the public unsecured markets favorably and believes Apollo will continue to look for opportunities to access the market for debt funding.

Apollo's core operating performance remains relatively sound, despite the impact of competitive conditions on portfolio yields. Net investment income (NII) grew 16.0% for the first three quarters of 2015, year over year, due largely to 12.9% growth in the size of the portfolio, at cost, which drove an increase in interest income. That said; elevated prepayment activity also contributed, as prepayment fees and the acceleration of original issue discounts on repaid investments almost doubled in 2015, accounting for 11.3% of interest income.

Fitch believes earnings growth will be challenged in coming quarters, as access to growth equity is limited and repayment volumes are likely to slow. Apollo's earnings yields are also benefiting from the management and incentive fee waivers that have been in place since 2013. While NII per share continues to exceed dividends declared, the spread is getting tighter, which could pressure dividend coverage in the future, particularly if management cancels its fee waivers.

Today's affirmation of Apollo's ratings 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 global alternative investment manager, Apollo Global Management, LLC, and solid dividend coverage.

RATING SENSITIVITIES

Apollo's ratings could be downgraded should leverage ratios not decline to a level commensurate with the risk of the portfolio, particularly as the recognition of additional unrealized depreciation and/or credit losses would increase leverage, thus pressuring asset coverage ratios. An inability to refinance near-term debt maturities, a weakening liquidity profile, material further expansion of sector (eg aircraft leasing, structured product) or industry (eg oil &gas) concentrations, and/or an inability to cover dividends with core earnings could also result in a ratings downgrade.

A revision of the Outlook to Stable will be dependent upon the management of leverage at a more appropriate level, an absence of material losses (realized or unrealized) or credit deterioration, particularly in the oil & gas portfolio and 2013/2014 portfolio vintages, which have been originated in a more challenging market environment, operating consistency, an extension of the debt maturity profile, and the maintenance of strong dividend coverage.

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 has affirmed the following ratings:

Apollo Investment Corporation
--Long-term IDR at 'BBB';
--Senior Secured Debt at 'BBB'; and
--Senior Unsecured Debt at 'BBB'.

The Rating Outlook has been revised to Negative from Stable.