The Long and Short
Dan Bruzzo, CFA | September 29, 2023
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.
Using 5-year spread history to rank current spreads is a good screen for relative value. And through that lens, brokers, asset managers and exchanges score highest among sectors in the investment grade corporate bond index alongside banking. Those sectors show current spreads trading wider than 74% of sessions in the last five years. Apollo Asset Management (APO: A2/A-A) stands out as an attractive relative value, with its intermediate notes offering compelling spread compensation relative to the other ‘A’ bonds in the peer group and a good overall balance of risk and reward relative to the broader investment grade universe. APO generates highly consistent fee revenue and has a solid track record to support its higher ratings profile.
Exhibit 1.Broker/Asset Manager/Exchanges – Single ‘A’ rated or better
APO 4.872% 02/15/29 @ +136/5yr, G+136, 6.05%, $94.66
Issuer: Apollo Management Holdings LP (APO)
Amount Outstanding: $675 million (index eligible)
144a Private Placement
Apollo Asset Management is now one of the two core subsidiaries of the ultimate holding company of Apollo Global Management (AGM), alongside the insurance operations of Athene (ATH). The all-stock Athene acquisition closed in January 2022, and AGM now generates roughly half of its earnings from each of the two separate entities – asset management and insurance. For ratings purposes, Athene is considered to be heavily insulated from the rest of the operations given the regulated nature of the life insurance industry. The insurance side of the business makes $750 million in contributions to AGM annually, which could be available to the asset management side of the business.
AGM has $617 billion in assets under management (AUM) as of the second quarter of 2023. Fee-generating AUM make up $462 billion of the current total. With its roots from Drexel, the credit side of APO’s business has remained the most prominent segment versus either private equity or real assets. A larger percentage of credit also now lies within its permanent capital vehicles. Increased exposure to these entities creates a more stable base of fee-generated income. The fee-generating AUM are comprised primarily of yield (i.e. credit) at 83%, with only 11% identified as equity and the remainder as hybrid. Within yield, the largest concentrations are in corporate fixed income (31%), structured credit (24%) and corporate credit (23%) with the remainder split between real estate debt and direct originations.
APO’s liquidity profile versus maturity needs remains very solid with adequate cash ($1.254 billion) and revolvers available on the balance sheet. It is appropriate to look at APO’s sources and needs for liquidity independent of ATH, which has its own liquidity profile commensurate with a standalone life insurance operations. In particular, given the large number of funding-agreement backed notes in the front-end that are issued directly out of ATH and have very little bearing on APO’s liquidity needs. The only APO public maturities prior to the 2029 notes include $500 million in 2024 and $500 million in 2026, both of which could be fully covered by the $1 billion undrawn credit facility available through 2027. APO has proven to be opportunistic in managing its debt maturity profile, bringing a balanced mix of debt instruments in the debt capital markets. However, the Company has not tapped the public debt market since 2022, most recently opting to price 30NC5 junior subordinated hybrids and convertible preferred stock.
AGM reported second quarter adjusted EPS of $1.70, exceeding the $1.65 consensus estimate. Overall earnings results were very well received by capital markets. The company posted a record amount of fee-related earnings at $442 million or about 35% of segment income. The current AUM of $617 billion had fallen short of expectations but rose from $515 billion in the previous year period. Total inflows were $35 billion for the second quarter and $154 billion over trailing twelve months. AGM also reported $56 billion in dry powder as of quarter end.
APO maintains leverage that we believe remains commensurate with strong single ‘A’ ratings. S&P estimates adjusted leverage is currently around 1.5x and will remain in the 1.0-1.5x range for the next several years.