AIF: Continuing To Perform In A Tough Fixed Income Environment

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Binary Tree Analytics
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Summary

  • AIF is a closed-end fund with a 70/30 leveraged loans/high yield bonds allocation.
  • The CEF is down only -13% year to date, despite a doubling of all-in yields on the single "B" loans since the beginning of the year.
  • The vehicle has recently increased its dividend distribution, given higher net cash coming into the structure.
  • Leveraged loans CEFs have been a bright spot in the fixed income CEF space in 2022.
  • This article covers CEFs from our suite of products - we focus on macro portfolio allocation, CEFs, and yield-generating options strategies, targeting overall yearly portfolio returns of 9%+.

Financial stock market graph. Selective focus.

Diego Thomazini

Thesis

Apollo Tactical Income Fund, Inc. (NYSE:AIF) is a closed-end fund focused on leveraged loans and U.S. high yield bonds. As per the fund's literature:

Apollo seeks to generate current income and preservation of capital primarily by allocating

loans

New Issuance Yields (LCD)

what is the return

Total Return (Seeking Alpha)

total

Total Return (Seeking Alpha)

It's interesting to note that leverage can work favorably for an asset class if it layered correctly for low standard deviation fixed income instruments. Leveraged loans are usually senior in the capital structure, thus they represent a first lien on a company's estate. This high recovery feature makes leveraged loans fairly stable from a pricing perspective, which in turn generates positive long term results even when leverage is added on top throughout multiple credit cycles.

Premium / Discount to NAV

The fund is still trading at a discount to net asset value:

Chart
Data by YCharts

As it became clear in 2022 that rates are going up substantially and we might have a bear market on our hands, the fund moved to a wider discount to NAV. This CEF has a low premium beta to risk-on/risk-off environments, with virtually no movement in the discount as the markets sold off or rallied.

Distributions

As interest rates and all-in yields rose, the fund increased its dividend:

dividend

Dividend (Fund)

Most of the distribution is covered, with the fund exhibiting de-minimis return of capital usage, as observed in their filings for 2021:

distributions

Distributions (Seeking Alpha)

The advantage of having a collateral pool composed of floating rate loans, is the fact that as rates rise the holder gets a direct benefit via higher cash-flows. Even after the payment on the leverage portion is settled, the structure will benefit from an increase in the amount of cash received, and thus is able to increase its dividend. We expect higher rates to persist for longer, thus we believe the dividend hike is here to stay for the next year.

Conclusion

AIF is a closed end fund focused on leveraged loans. Given the asset class' low standard deviation, the managers have layered in a 37% leverage ratio. Although risk free rates and credit spreads have increased substantially this year, AIF is down only -13% on a total return basis, underlying the advantages of a floating rate asset class in a rising rates environment. The fund has also managed to increase its distribution rate, given higher amounts of net cash coming into the structure. The current dividend yield is 11%, and it is largely supported through interest income. Apollo is a robust platform and the CEF benefits from the asset manager's experience and track record in the space.

This article was written by

Binary Tree Analytics profile picture
3.1K Followers
With a financial services cash and derivatives trading background, Binary Tree Analytics aims to provide transparency and analytics in respect to capital markets instruments and trades._____________________________http://www.BinaryTreeAnalytics.com

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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