Apollo Tactical Income Fund, Inc. (NYSE:AIF) is a closed-end fund focused on leveraged loans and US high yield bonds. As per the fund’s literature:
Apollo seeks to generate current income and preservation of capital primarily by allocating the Fund’s assets among different types of credit instruments based on absolute and relative value considerations and its analysis of the credit markets. Under normal market conditions the Fund invests at least 80%of its managed assets (which includes leverage) in credit instruments and investments with similar economic characteristics.
Source: Fund Fact Sheet
The fund’s collateral is composed of leveraged loans mainly, which account for over 75% of the portfolio. The low standard deviation of its collateral has allowed the CEF to layer in a high amount of leverage, which currently clocks-in at 37%. The fund is down year to date, driven by higher risk free rates and much wider credit spreads:
We can see from the above chart, courtesy of LCD, how single “B” new-issue yields to maturity have moved up substantially, basically doubling from March 2022. To note that these are all-in yields (Libor/SOFR plus spread) and thus represent an encompassing reflection of the new cost of funds faced by companies. At the current levels for interest rates it is much more useful to talk about all-in yields, since they are a true reflection of the actual cost (ie dollars out the door) for a company.
Despite the violent rise in rates and all-in yields, AIF is down only -13% this year, and has not seen its drawdown exceed -20%. For a highly leveraged fund that is a fairly impressive result, especially when benchmarked against investment grade fixed income. As a comparison, the iShares iBoxx Investment Grade Corporate Bond ETF (LQD), which is an ETF composed of investment grade bonds with no leverage on top, is down about -18% in 2022.
Floating rate debt has been one of the safest places to be in fixed income this year, and even a high leverage ratio has not torpedoed results. The results speak to the resiliency of leveraged loans and the fact that CEFs that are based on this asset class should be preferred in a rising rates environment. We are talking here about “clean” leveraged loans CEFs, not structures that contain CLO bonds in them, CLO tranches being inherently leveraged within the structure, thus presenting higher risk levels.
The fund is down year to date, but has managed to keep a fairly shallow drawdown in light of the violent rise in rates:
Currently down only -13% in a year with a substantial widening in credit spreads and increase in rates, AIF never had a total return exceeding -20% this year. The fund outperforms versus EAD, but underperforms versus VVR.
The picture is similar on a 3-year basis, with VVR the clear outperformer, while AIF and EAD post positive similar total returns: