How Low Can Apollo Investment Go?

Shares of Apollo Investment Corp. (AINV) now trade at lows not seen since May 2009, mostly due to fears about losses in its commodity investments. But something interesting has happened: The market is now pricing in a total loss from the company's oil and gas and metals and mining investments.

Is Apollo Investment in too deep?
As of the latest filing, Apollo Investment Corp. had roughly 16% of its portfolio invested in oil & gas companies, and another 0.6% in metals and mining firms. Both industries are taking it to the chin, as lower output prices are crimping the profitability of its borrowers.

But just how much does Apollo Investment stand to lose?

A simple sensitivity analysis can show us how losses affect Apollo Investment Corp.'s net asset value, or book value, per share. The table below shows what would happen to the company's NAV per share based on varying loss rates.

Source: SEC filings, with calculations by the author. Includes only oil and gas and metals and mining investments.

The first column in the table assumes that Apollo Investment incurs zero additional losses on any of its commodity-related investments in the future. Thus, the $8.01 figure in the first column is the company's current net asset value per share.

On the opposite end, where I've assumed Apollo Investment Corp. takes a complete and total loss, NAV per share falls to $5.69, a 29% decline. That's not too far from the company's share price of $5.80 at the time of writing.

I should note that its investments aren't currently valued for perfection. In fact, as of June 30, its oil & gas investments were marked at an average of roughly 92% of cost, compared to 43% for investments classified as being metals and mining investments. 

Using the table as a guide
I'm not the biggest fan of Apollo Investment due to its fee structure and history of swinging big and, well, losing big. (In 2015, the big losing bet is energy. During the financial crisis, it was outsize bets on hotels.)

I happen to think it should trade at a discount to net asset value, perhaps as much as a 10% discount. So, with that in mind, I'd lop another 10% off the figures in the table to play it safe.

Thus, I might conclude Apollo shares are worth about $6.80 in a scenario in which Apollo loses another 20% on its commodity investments, for example. (Multiply the NAV of $7.55 by 0.9.)

Of course, this is only a very rough guide. Apollo's non-commodity investments could crush it, papering over losses in stressed industries. Conversely, its other investments could turn out to only pile on today's losers. It's tough to say.

But one thing is certain: Unless you think Apollo deserves to trade at a very wide discount to book value, the current share price already bakes in very big losses.