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Apollo Management offers good value to peers and broader Financials

| July 24, 2020

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Apollo Management Holdings (APO) bonds appear attractive in the intermediate part of the curve, offering a moderate pick to peers, and a steeper overall curve versus comparable issuers. APO offers good value trading on top of some lower-rated (BBB) investment management and private wealth credits. The Broker/Asset Manager/Exchange segment of the IG Corp Aggregate Index has beaten most Financial sectors on a spread basis year-to-date, with Excess Return of -1.49%, offering greater stability than segments such as Insurance (-2.74%) and Finance Cos (-8.00).

As highlighted in our recent study of risk-adjusted performance for 2020 (APS Strategy: Risk-Adj Performance), the Broker/Asset Mgr segment had one of the top 5 Sharpe Ratios in the entire Index year-to-date.

 APO 4.4% 05/27/26 @ +150/5YR; G+144; 1.76%; $113.98

Apollo Management Holdings LP
Gtd by Apollo Global Management Inc. (APO: A/A)

CUSIP: 03765HAB7
Amount outstanding: $500 million
Rating: A-/A

144A Private Placement

Closest Operating Peers: KKR, CG, BX, BAMACN;

Additional index comps: LAZ, IVZ, LM, AMG

Exhibit 1: APO bonds versus comparable issuers

Source: Bloomberg/TRACE indications, Amherst Pierpont Securities

  • With its roots from Drexel, Credit (roughly $210 billion of AUM) remains the most prominent segment versus either Private Equity (roughly $68 billion of AUM) or Real Assets (roughly $38 billion of AUM). A larger percentage of Credit now lies within its permanent capital vehicles – or more specifically, the Athene Holding Ltd and Athora Holding Ltd intermediate holding companies in the insurance segment (approximately $140 billion of AUM or roughly 44%). Increased exposure to these entities creates a more stable base of fee-generated income, but does align APO’s risk profile closer in line with the insurance sector.  
  • APO is tremendously well-capitalized, with leverage that we believe remains commensurate with single-A ratings (with or without a draw-down on the Company’s contingent liquidity – see below). S&P estimates adjusted leverage will remain in the 1.5-2.0x range through 2021.  
  • APO’s liquidity position remains solid with $1.3 billion in cash and equivalents on the balance sheet as of 1Q20. The Company has no debt maturities until 2024 ($500 million), with an undrawn credit facility of $750 million thru 2023.  
  • APO’s total Assets Under Management (AUM) increased to over $300 billion in 2019, and ended the year with over $330 million, with roughly $230 billion held in fee-generating assets under management (FGAUM). AUM backed up in 1Q20 to $315 billion in the difficult operating environment, but is poised for recovery in the current quarter (reports 2Q20 results on 7/30/20). The double-digit increase in AUM last year capped an impressive >80% trend of break-neck growth since YE2015. 
  • APO has proven to be opportunistic in managing its debt maturity profile, bringing a balanced mix of debt instruments in the debt capital markets. The Company most recently launched a senior 10-yr note in June of this year. Previously, APO had brought a 30-year subordinated note near the peak in credit back in December of last year. Earlier in 2019, management originated a contingent 10-yr note. The deal was unique in that the Company had no immediate use for proceeds and instead placed the capital in a custody account as a source of future contingent liquidity. This strategy is akin to the 10-yr notes in the insurance industry by issuers such as Prudential (“Five Corners Funding Trust” 2023s) and Voya (“Peachtree Corners Funding Trust” 2025s), in which the management teams saw an opportune time to tap the debt markets without an immediate need for capital. The key difference in those instances was the creation of a formal trust versus a custody account, but both serve the same purpose and neither is technically debt on the balance sheet at the time of issuance. S&P moved APO’s outlook to Negative at the time and eventually downgraded to A- when the recent 10-yr deal was launched.
  • Purchase of GECAS from GE no longer remains a credit overhang to APO. The Company was in the news last year with reports that they were reportedly among those investors seeking to put together a bid (likely with partners) for the entirety/bulk of General Electric’s (GE) aircraft-lease business (GECAS). GECAS as a whole had been estimated to draw a potential valuation in the $40 billion neighborhood. GE repeatedly shot down the prospect of an outright sale/exit of the entire aircraft leasing business since that time, stating that GECAS is core to not only the remaining pieces of GE capital, but also the industrial aviation business as well (even though it is technically not captive). GE ultimately opted to sell off smaller pieces of the business, of which APO was a buyer.
  • Worth noting is that APO Founder/Chairman/CEO/”key man” Leon Black is among the high profile people who have been reported to have professional/personal ties to Jeffrey Epstein. Epstein provided tax and estate-planning services for Black (personal, not APO). In addition, he served as director for Black’s charitable organization – and as has been reported, maintained that position for several years after Epstein struck his original plea deal in Florida in 2008. While an ugly association, it seems to mostly put Black on an extremely long list of high profile business executives, presidents, politicians, celebrities, royals, etc. who appear to be caught up in this story, but it does present a potential source of headline volatility related to the Company.

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