Innkeepers USA: Major Apollo Investment to File for Bankruptcy?

Includes: AINV, INKPP
by: Nicholas Marshi

Reuters reports Innkeepers USA, the hotel chain owned by Apollo Investment Corporation (NASDAQ:AINV), may be about to file for bankruptcy. Here’s the full article, which is brief, but sounds plausible:

NEW YORK (Reuters) – Innkeepers USA Trust (Other OTC:INKPP.PKNews), a U.S. real estate investment trust with interests in about 73 hotels, is getting ready for a possible bankruptcy filing after missing debt payments earlier this month, according to four people familiar with the matter.

The firm, which was bought out by Apollo Investment Corp (NasdaqGS:AINVNews) in 2007 in a $1.5 billion deal, has hired law firm Kirkland & Ellis and investment bankers Moelis & Co to advise it on restructuring, these people said.

The Palm Beach, Florida-based trust is preparing for all restructuring contingencies, including a possible bankruptcy, these people said, asking not to be named because the information is not public.

Innkeepers did not return several calls seeking comment on Tuesday.

At the last conference call, AINV’s management admitted Innkeepers was in the fight of its life and “too early to tell you what the outcome’s going to be”. Now we (may) know.

However, Apollo Investment has been very aggressive in writing down its $173mn investment at cost to just $8mn, so the impact on the BDC’s balance sheet will be minimal.

Nonetheless, there is no doubt that Innkeepers is a major reverse for Apollo which bet way too heavily on one non-yield producing equity investment. The Innkeepers investment represented 5% of total assets at cost, and nearly 50% of its total equity and preferred investments.

If AINV writes off the entire investment, Total Realized Losses for the BDC will reach nearly $550mn, or nearly 20% of capital at cost. That places Apollo in the unenviable position of being one of the three worst companies in terms of Realized Losses as a percentage of initial capital. It speaks to the resiliency of the BDC structure that a company can absorb such losses without facing its own bankruptcy, and can still attract fresh capital.

Disclosure: Author holds a long position in AINV