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Wells Fargo downgrades Apollo Investment to 'market perform'

Wells Fargo Securities analyst Finian O'Shea downgraded Apollo Investment Corp. to "market perform," citing issues in its legacy book.

O'Shea wrote that the market must recognize the business development company's struggle in attempting to rotate into higher-credit-quality assets from troubled assets, and that investors should also assume Apollo Investment will still struggle in its exposure to oil and gas companies. The analyst also wrote that further losses would pose challenges in sustaining the company's 45-cent dividend, considering it has lost about 9% of its net asset value since cutting its dividend three years ago. Despite this, O'Shea wrote that Wells Fargo analysts still believe Apollo Investment and its management "have made meaningful strides" and the BDC is still in a position to be one of the better-performing companies compared to peers.

The analyst said the "market perform" rating is primarily to give more time for Apollo Investment to transition into higher-credit-quality assets. The current rating is based on the assumption that the BDC would successfully make the transition but troubled legacy exposures would still provide headwinds on the company's returns. O'Shea wrote that Wells Fargo analysts "would become very positive" if the company exits its troubled legacy exposures.

O'Shea upgraded his 2020 EPS forecast to $1.82 from $1.80, taking into account the company's earnings beat in the quarter but also assuming a debt extinguishment fee in the next quarter. Apollo Investment reported net investment income per share of 50 cents in the fiscal first quarter of 2020, which beat the S&P Global Market Intelligence consensus normalized EPS estimate of 46 cents.