MID-YEAR CREDIT OUTLOOK: DIVERGENCE TO PERSIST THROUGH 2024

Mid-Year Credit Outlook: Divergence to Persist

through 2024
June 2024
John Cortese, Robert Bittencourt, Shobhit Gupta, Akila Grewal,
Partner, Corporate Credit Partner, Corporate Credit Managing Director, Partner, Head of Credit
Corporate Credit Product

KEY TAKEAWAYS
The buoyant demand for corporate debt that has bolstered primary markets this year has come alongside pockets of distress in
the riskier parts of the market. We expect this divergence to persist through 2024 as demand for high-quality credit keeps index
spreads near record tights while a subset of lower-quality corporates struggle with generationally high interest rates.
We expect investment grade bonds and BB spreads will remain stable despite historically tight valuations given supportive
technicals and strong credit metrics. Meanwhile, the outlook for lower-quality credit is more uncertain: Credit spreads across the
B/CCC universe could be pressured if the economic backdrop deteriorates and the earnings tailwind from strong economic
growth subsides. Conversely, in a higher-for-longer rate environment, some of these companies may face funding cost
pressures given steep maturity walls in the US and European high yield and leveraged loan markets.
We believe the current higher interest rate environment coupled with a resurgence in capital markets activity will be a source of
catalysts for opportunistic credit. The continued evolution of AI and its increased grid and power demand, the disruption of
communications and media providers from new technologies and competitors as well as the US elections are all key themes we
are monitoring.
Looking at the investment grade market, there appears to be a rising fragmentation in liquidity. The most liquid segments of the
market have seen an improvement in trading volumes, while the liquidity profile of older vintage and smaller bond tranches has
deteriorated. At the same time, liquidity premia have compressed, suggesting investors are receiving less compensation in
return for holding bonds that are increasingly illiquid. With this in mind, we believe private credit is an attractive replacement for
this allocation.
The significant growth in middle market lending over the past year has driven an increase in issuance of two types of debt
instruments that share some resemblance: middle-market CLOs and BDC unsecured debt. While issued in distinct markets—
structured and corporate credit respectively—they have similar underlying risk exposures making their valuations readily
comparable. We present a novel analysis comparing the two types of structures in a later section.
The information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,
nor should any information in this document be relied on when making an investment decision. Opinions and views expressed reflect the
current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the end of this
document for important disclosure information.

© 2024 APOLLO GLOBAL MANAGEMENT, INC. ALL RIGHTS RESERVED.

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The phones rang off-the-hook in early May as a wave of companies—from the US to Asia—looked to raise money and traders
and analysts across the financial industry struggled to keep up with the flood of new bond deals hitting the market. In just 72
hours, 88 bond deals priced across more than 40 US investment grade firms that raised $53 billion alongside 12 high yield
issuers who netted $11 billion from new bond deals while 27 leveraged loan deals raised more than $27 billion. 1,2 In Europe,
issuers sold $23 billion of bonds into the investment grade and high yield markets during a holiday-shortened week and in Asia,
at least eight corporate borrowers priced offshore offerings that same week.1

The resurgence in primary markets was evident throughout

most of the first half of 2024. US investment grade issuance set
a first-quarter record for new deal activity and volumes through
May hit almost $750 billion, up 24% from the same period last
year. May was the most active month in the US high yield
primary market in nearly three years, pushing year-to-date
issuance over $150 billion, nearly as much as the total supply for
all of 2023. Leveraged loan issuance also hit a monthly record of
~$170 billion in May. We saw similar trends in Europe, with ~$50
billion of high yield issuance so far this year already surpassing
last year’s total. US and European CLO issuance also surged
during the first five months of the year creating strong demand
for broadly syndicated leveraged loans. 3

The drivers of supply have varied across markets. Investment

grade issuance has been driven in part by M&A-related funding,
while a significant portion of high yield and leveraged loan
supply was earmarked for refinancings and repricings as issuers
addressed maturities and monetized historically tight spreads.
As a result, while net supply has been elevated in investment
grade, it has been fairly muted among high yield issuers.

Still, while the primary credit market was thriving, the

riskier parts of the market were struggling. Economic
indicators published throughout most of the first half of the year have indicated that inflation remains elevated, reducing the
likelihood that the Federal Reserve will reduce rates in the foreseeable future. The resulting higher-for-longer interest rate
environment is likely a headwind for many levered issuers. Creditors of Altice France, the largest leveraged finance issuer in
Europe, were scrambling to organize in the aftermath of the announcement by the French telecommunications company that
lenders should expect to take a haircut on their principal as the company attempts to reduce leverage to more manageable
levels. 4 Creditors of the British holding company of Thames Water also face a restructuring after the company defaulted on an
interest payment in April. Pockets of distress also emerged in several large capital structures in the US. Hertz Global Holdings
reported a loss in April that was nearly three times larger than analysts expected, sending its shares and bonds lower and
prompting Moody’s to shift its outlook on the company’s credit rating to negative. Some US issuers attempting to access the
syndicated markets met pushback from prospective investors, forcing them to sweeten terms in order to place their deals. Such
was the case with Staples, Gray Television and Florida’s high-speed rail system, Brightline.

1
Source: Bloomberg, May 2024
2
Source: Credit Insights loans data; most issuance is from refinancing and repricing
3
Source: Pitchbook
4
Source: Bloomberg, May 2024

The information herein is provided for educational and discussion purposes only and should not be construed as financial or investment
advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed
reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the
end of this document for important disclosure information.

© 2024 APOLLO GLOBAL MANAGEMENT, INC. ALL RIGHTS RESERVED.

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This divergence across credit markets has resulted in significant dispersion in performance across the quality spectrum.
Investment grade and BB-rated debt are trading near their tights of the past decade, while CCC-rated spreads are near their 10-
year average. In fact, the CCC/BB spread ratio is hovering near its post-Covid peak. The dispersion is evident in the makeup of
the US high yield benchmark, where about 60% of the index trades inside 250 basis points and 7% trades above 750 basis
points—a more extreme distribution than in prior periods when HY spreads were at similar levels (Exhibit 1 compares current
distribution with January 2022 as an example). We expect this theme of divergence to persist through 2024 as demand for
high-quality credit keeps index spreads near record tights while a subset of lower-quality corporates remain under
pressure with generationally high interest rates.

Exhibit 1: US HY Spread Distribution

40%
35% Current
30% Jan-22
Mkt value (%)

25%
20%
15%
10%
5%
0%
<150 150-250 250-350 350-500 500-750 750-1000 >1000
OAS buckets (bp)

Data as of June 2024.

Sources: BofA Indices, Apollo analysts

In this mid-year credit outlook, we discuss four notable topics that we’ve identified in today’s credit
markets:

The divergence in the market and its impact on the relative value of credit
Investment themes in opportunistic credit
The vanishing liquidity premium in investment grade debt
Assessing relative value in BDCs’ unsecured debt

The information herein is provided for educational and discussion purposes only and should not be construed as financial or investment
advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed
reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the
end of this document for important disclosure information.

© 2024 APOLLO GLOBAL MANAGEMENT, INC. ALL RIGHTS RESERVED.

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I) The Divergence in Credit Markets

FUNDAMENTALS
As our Chief Economist Torsten Sløk discusses in his mid-year outlook, we expect the US economy’s expansion will remain on
track. While gross domestic product rose at a slower pace in the first quarter compared to the previous three-month period and
personal spending decelerated, strong equity markets and rising housing prices are supporting household wealth—a potential
tailwind for consumer spending over the coming quarters. Although the growth backdrop in Europe is weaker, economic
activity has rebounded recently with first-quarter gross domestic product increasing 0.3% quarter over quarter, ending the
streak of five consecutive quarters of stagnant or negative growth. However, the strength of the US economy has complicated
the Federal Reserve’s efforts to move inflation back within its 2% target range and consistently reset traders’ expectations for
rate cuts this year. Ultimately, we believe the Fed will forgo interest rate cuts this year versus the central bank’s most recent
guidance for one rate cut and the rate market’s anticipation of two cuts before year-end. In Europe, the central bank cut rates
for the first time in five years in early June but cautioned that additional reductions this year were unlikely given the persistent
inflationary pressures in the region.

The strong global economic growth backdrop can support revenues and profits across the credit universe, but the impact of
higher rates is more disparate. High grade companies are typically less impacted by the increase in funding costs given interest
expense is a smaller fraction of unlevered free cash flow (Exhibit 2 shows interest coverage, which is the ratio of EBITDA to
interest expense) and liabilities are generally composed of long-dated fixed coupon debt (Exhibit 3 shows average maturity of
debt by rating). In contrast, for lower quality companies, interest expense constitutes a much larger relative cashflow burden
while liabilities are typically shorter-dated, and a significantly higher portion is floating-rate, leaving these companies more
exposed to higher rates.

Exhibit 2: EBITDA/Interest Expense Exhibit 3: Average Maturity of Debt (Years)*

18x 12

16x
10
14x

12x 8

10x
6
8x

6x 4

4x
2
2x

0x 0
A BBB BB HY B HY BB Loans B Loans A BBB BB B

Data as of June 2024. Data as of June 2024.

Sources: Bloomberg, Pitchbook LCD, S&P Capital IQ, Morgan Stanley *Based on debt in Bloomberg Barclays Corporate Indices.
Research, Apollo Analysts Data as of June 2024.
Sources: Bloomberg, Apollo Analysts

The information herein is provided for educational and discussion purposes only and should not be construed as financial or investment
advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed
reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the
end of this document for important disclosure information.

© 2024 APOLLO GLOBAL MANAGEMENT, INC. ALL RIGHTS RESERVED.

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As our chief economist details in his mid-year outlook, this theme of bifurcation in the credit markets is also present among US
consumers. According to Sløk, there are two broad cohorts of consumers in the US, each affected differently by the higher
inflation and rate environment. The first group is comprised of lower income consumers who carry elevated debt balances and
are currently falling behind on paying their bills—mostly car loans and credit cards. The second cohort consists of more wealthy
consumers who typically own assets and have enjoyed a positive wealth effect from the increase in housing prices and the rally
in capital markets, supporting consumption trends.

TECHNICALS
We expect demand technicals will further exacerbate the divergence in fixed income markets. Higher bond yields have boosted
demand for fixed income from duration-focused investors such as insurance companies and pension funds. During the fourth
quarter of 2023, fixed income annuities—proceeds of which are mostly invested in fixed income—were sold at three times the
pace versus the same period in 2021 (Exhibit 4). As long as all-in yields are high and somewhat stable, we would expect annuity
sales to remain strong. Similarly, the funding ratio for defined benefit pension plans remains above 100%, which continues to
drive an allocation shift out of equities and into fixed income for these investors (Exhibit 5). Strong mutual fund flows into
investment grade, high yield and leveraged loan funds have further strengthened the technical backdrop for fixed income.
Importantly, the insurance and pension flows tend to focus on higher quality parts of credit which will likely widen the valuation
gap across the ratings spectrum.

Exhibit 4: Total Fixed Annuity Sales Exhibit 5: Milliman 100 Pension Funding Index

$100 5.0% 120%

110%
$80 4.0%

100%
$60 3.0%

90%
$40 2.0%
80%

$20 1.0%
70%

$0 0.0% 60%
Sep-20

Sep-21

Sep-22

Sep-23
Sep-19

Mar-20
Jun-20

Mar-21
Dec-20

Jun-21

Mar-22
Mar-19

Dec-21

Jun-22

Mar-23
Jun-19

Dec-22

Jun-23

Mar-24
Dec-23
Dec-19

Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
Jan-22
Jan-23

Jan-24
Quartely fixed annuity sales ($bn, lhs) 10y Tsy yield (rhs)
Funding ratio

Data as of June 2024. Data as of June 2024.

Sources: Bloomberg, LIMRA, Apollo Analysts Source: Milliman

The information herein is provided for educational and discussion purposes only and should not be construed as financial or investment
advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed
reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the
end of this document for important disclosure information.

© 2024 APOLLO GLOBAL MANAGEMENT, INC. ALL RIGHTS RESERVED.

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OUTLOOK
While valuations are historically tight, we expect that investment grade and BB spreads will remain stable. Economic data
suggests that a Goldilocks scenario, characterized by moderating inflation and solid economic growth, is certainly possible but
the continued strength of investment grade and BB credit is not predicated on that outcome. As mentioned earlier, elevated
funding costs generally do not pose a meaningful risk for the credit metrics of these issuers. Additionally, corporate
fundamentals can remain intact even amid moderating economic growth. This view holds for European credit as well even
though the macro backdrop in that region is somewhat weaker than in the US. A scenario of weakening growth and declining
risk-free rates might even benefit technicals, if investors respond by rushing to lock-in elevated yields.

Meanwhile, the outlook for lower-quality credit is more uncertain. While a select group of lower-rated credits have come under
pressure recently, the benefits of strong economic growth have blunted the impact of higher funding costs for a much larger
universe of companies. However, if the economic backdrop deteriorates, credit spreads across the B/CCC universe could be
pressured as the earnings tailwind from strong economic growth subsides. On the other extreme, if growth remains strong,
higher-for-longer rates and steep maturity walls in the US and European high yield and leveraged loan markets will likely
pressure the ability of some issuers to address near-term maturities. The risk could be especially acute for US companies with
elevated leverage metrics and a high fraction of floating-rate liabilities.

Consequently, even though investment grade/BB spreads are trading near multi-year tights, we expect them to remain range-
bound for the balance of the year. Meanwhile, at current valuations, we do not find spreads compelling in the lower-quality
spectrum (Bs and CCCs specifically). Given that the room for further spread tightening appears limited and the
compensation to extend spread duration is low relative to historical levels, we have an underweight stance on spread
duration. Within BB credit, this drives our preference for loans over high yield. While more than 75% of the loan market
trades over $99 and has limited room for further price appreciation, we find the current yield offered attractive. 5 We also have a
similar view in the securitized market, specifically CLO liabilities which have been among the best-performing fixed income
asset classes this year.

Although we are constructive on credit in the medium term, we remain cognizant of several risks and potential sources of
volatility for the credit markets, including upside risks to inflation, further geopolitical tensions, and uncertainty leading into the
November US elections. We continue to monitor several pro-inflationary trends including deglobalization, energy transition,
higher defense spending and the elevated US fiscal deficit. We are monitoring geopolitical risks including the current stalemate
in Ukraine and the ongoing war in the Middle East, where any escalation could impact energy markets and the broader global
economy. Finally, with less than five months before the US elections, we are approaching a rematch of President Joe Biden and
former President Donald Trump. The election, according to prediction markets like PredictIt, is currently a veritable coin flip.
The uncertainty could introduce market volatility especially in the aftermath of surprise results earlier this year in India, Mexico,
and the European parliamentary elections, a topic which we will expand on in the next section.

5
Source: JPMorgan Leveraged Loans Data, June 2024

The information herein is provided for educational and discussion purposes only and should not be construed as financial or investment
advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed
reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the
end of this document for important disclosure information.

© 2024 APOLLO GLOBAL MANAGEMENT, INC. ALL RIGHTS RESERVED.

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II) Investment Themes in Opportunistic Credit

STRATEGY:
The strong high yield and leveraged loan new issue market was a source of positive catalysts for opportunistic credit during the
first half of the year. Several overleveraged companies took advantage of tighter spreads to refinance their debt and extend
maturities. Still, high yield and leveraged loan issuers are facing elevated near-term maturities with over $500 billion of debt
coming due through 2026 in the US, the largest two-year maturity wall in history. 6 Given the elevated interest rate environment,
we also expect to continue to see a higher prevalence of distressed exchange and out-of-court restructuring activity. The
month of May saw the third-largest monthly volume of distressed exchange activity on record, and at $21.7 billion of volume so
far in 2024, this year already ranks as the third-highest total annual volume ever. 7 We believe each of these trends creates
opportunities to supply a variety of capital solutions for companies, ranging from rescue capital to acquisition financing.

KEY THEMES FOR 2024:

Artificial Intelligence: We continue to think through the disruptive impact of generative AI, a trend that we have
tracked since OpenAI released ChatGPT to the public in late 2022. We saw signs of the disruptive impact the technology
may have on call centers earlier this year when Swedish fintech Klarna disclosed that it was using an AI assistant powered
by OpenAI to handle two-thirds of its customer service chats, pressuring the equities of several call center operators. For
now, the consensus seems to be that AI-driven chatbots will mostly replace non-voice and simple voice customer
interactions, while more complex workflows, which are most prevalent in the financial services and healthcare domains, will
remain more insulated from AI competition. Additionally, the rise of AI and the associated power demand has focused the
market on the implications of technology on energy demand. According to some estimates, the data-center share of US
electricity consumption may triple over the next six years, to the equivalent usage of 40 million US homes. 8 If so, we think
the US will need to invest in more energy production and transportation, which could benefit power producers, the
domestic natural gas industry and electricity infrastructure providers. Longer-term, we think the increased demand for AI-
related infrastructure, including data centers, semiconductors and power generation, will create large capital deployment
opportunities for asset managers like Apollo.

Media & Communications: The telecommunications, satellite and broadcasting/media sectors are facing a variety of
secular pressures and are, unsurprisingly, among the highest yielding segments of the high yield market. Cable and
broadband operators are facing increased competition from traditional telephone companies who are replacing their
legacy copper networks with fiber, and wireless network operators who are offering mobile-based broadband alternatives.
At the same time, traditional satellite network operators are facing a new competitor in Starlink, a subsidiary of Elon Musk’s
SpaceX, which has launched a global constellation of low Earth orbit satellites that boasts faster throughput and lower
latency than traditional satellite networks. In media, television broadcasters and content providers are contending with
accelerating cord-cutting trends as consumers increasingly opt to consume video content through streaming services such
as Netflix. We believe these trends will lead to more dispersion within the telecom and media sector, increase the need for
creative financing solutions and, in certain cases, lead to industry consolidation.

US Elections: Politics has been a major investable theme in 2024, given 40 countries—representing half of the global
GDP—are holding elections this year (Exhibit 6). The election risk has already manifested itself in several markets. The peso
initially fell more than 10% versus the dollar after investors underestimated the extent of President-elect Claudia

6
Source: ICE BofA Corporate Indices, Bloomberg, Pitchbook LCD. January 2024
7
Source: JPMorgan, Default Monitor. June 2024
8
Source: CPower. March 2024

The information herein is provided for educational and discussion purposes only and should not be construed as financial or investment
advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed
reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the
end of this document for important disclosure information.

© 2024 APOLLO GLOBAL MANAGEMENT, INC. ALL RIGHTS RESERVED.

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Sheinbaum’s margin of victory in the Mexican elections. India’s benchmark NSE Nifty 50 Index dropped nearly 6%, posting
the worst performance in more than four years, after Prime Minister Narendra Modi’s party, the BJP, failed to secure a
majority in the parliament. France’s OAT spread over Germany’s Bund widened 25 basis points and was at the widest gap in
10 years after President Emmanuel Macron‘s surprise decision to call snap elections in the aftermath of the National Rally
party’s strong performance in the European Parliament election. With a little over four months to go before the US
elections, we expect rising volatility as we approach a rematch between President Joe Biden and former President Donald
Trump. Looking specifically at the implications for credit, we believe that under a Republican presidency we’re more likely
to see more lenient regulations for the banking and energy sectors, supportive policies for US auto companies that will slow
EV adoption, upside convexity for the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and rising
M&A activity. Meanwhile under a Democratic presidency, we expect stronger support for consumer-friendly policies such
as student loan forgiveness and broadband subsidies as well as clean energy initiatives. Further, in a Democratic sweep
scenario, we expect higher corporate tax rates which, in addition to lowering post-tax income, could impact leverage
policy. A higher tax rate increases the value of debt’s tax shield (from the issuer’s perspective) and could, on the margin,
drive increased debt and hybrid issuance.

Exhibit 6: Election Map

Data as of June 2024.

Source: International IDE

The information herein is provided for educational and discussion purposes only and should not be construed as financial or investment
advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed
reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the
end of this document for important disclosure information.

© 2024 APOLLO GLOBAL MANAGEMENT, INC. ALL RIGHTS RESERVED.

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III) The Vanishing Liquidity Premium

Liquidity in credit markets is a key focus for investors especially given the growth of private credit. One metric often used to
quantify liquidity in public markets is turnover, typically defined as trading volume as a fraction of total outstanding debt
(Exhibit 7). That metric for the US investment grade market has increased over time—from mid-60% in the 2015-2018 period
to more than 80% in 2023. In our view, the increase in turnover has been driven in part by the advent of portfolio trading, which
allows investors to transact large volumes in one trade, as well as the growth of mutual funds, which have daily liquidity needs.

Exhibit 7: US IG Turnover Exhibit 8: Turnover by Vintage and Size

7x
0.85x
Issued <0.5yr, >$2bn Outstanding
6x <0.5yr, $0.5-2bn
0.80x
>2yr, <=$0.5bn
5x >2yr, $0.5-2bn
Turnover

0.75x
4x
0.70x
3x
0.65x
2x
0.60x
1x

0.55x
0x

H2 2020

H2 2021

H2 2022

H2 2023
H1 2015

H1 2016

H1 2017

H1 2018

H1 2019
H2 2014

H2 2015

H2 2016

H2 2017

H2 2018

H2 2019
H1 2020

H1 2021

H1 2022

H1 2023
0.50x
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Data as of June 2024. Data as of June 2024.

Sources: TRACE, BofA Indices, Apollo Analysts Sources: TRACE, BofA Indices, Apollo Analysts

However, we believe the aggregate data only tells part of the story given that the increase in turnover has come almost entirely
from the pickup in trading volumes of on-the-run bonds (defined as debt issued in the prior six months). The turnover of on-the-
run debt has nearly doubled in the last five years (Exhibit 8). Meanwhile, turnover for bonds issued more than two years ago—a
universe that includes more than $6 trillion of debt, or about 70% of the total investment grade debt outstanding—has largely
remained unchanged at around 40%-60%. 9

This fragmentation in IG trading volumes likely stems from an evolving market structure where the need to trade individual
corporate bonds for daily liquidity has declined. Investors are increasingly using ETFs and portfolio trades to manage daily
flows, which is more efficient than trading individual bonds. These innovations in financial markets, which were mostly absent
10 years ago, has reduced the need to individually trade smaller or older vintage bonds. Consequentially, the use of ETFs and
portfolio trades has bolstered trading volumes for constituent bonds in these baskets, which are typically the more recently
issued, on-the-run securities, and has reduced trading in older vintage bonds.

9
Sources: TRACE, BofA Indices, Apollo Analysts

The information herein is provided for educational and discussion purposes only and should not be construed as financial or investment
advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed
reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the
end of this document for important disclosure information.

© 2024 APOLLO GLOBAL MANAGEMENT, INC. ALL RIGHTS RESERVED.

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In fact, not only has turnover in older vintage securities stagnated, but liquidity appears to have worsened along
several dimensions. Historically, higher spread volatility has led to higher trading volumes—the rationale being that a significant
move in a bond’s price is more likely to change an investor’s perception of value in the security, leading to elevated trading
volumes. This was the case pre-Covid as evidenced in Exhibit 9, which shows turnover as a function of spread volatility.
However, this relationship has weakened recently as turnover picked up only slightly even for bonds that suffered meaningful
spread widening.

Exhibit 9: Turnover by Spread Vol Exhibit 10: Transaction Cost vs Spread Vol

Turnover* 2018-2019 2023 Bid-ask (bp) 2023 2018 2019

0.8x 30

0.7x
25

0.6x
20
0.5x
15
0.4x

10
0.3x

0.2x 5
<-50 [-50,-25] [-25,10] [-10,10] [10,25] [25,50] >50 <-20 [-20,-5] [-5,5] [5,20] [20,50] >50

Spread Change (bp)* Spread Change (bp)*

Data as of June 2024. Data as of June 2024.

*Annualized turnover calculated based on quarterly volumes. Spread *Based on one month Spread Change. For bonds with <= $500mn
change over the same quarter. Average of turnover for each quarter outstanding, issued >two years ago. **Bid-ask estimated using Barclays
during the period. Based on $500mn or smaller deal size, issued more LCS score divided by OAD.
than two years ago. Sources: Barclays, BofA Indices, Apollo Analysts
Sources: TRACE, BofA Indices

Like trading volumes, the bid-ask spread generally increases with spread volatility. However, this relationship has been more
extreme as of late. The quoted bid-ask for securities that suffered a widening of more than 50 basis points was more than twice
the rest of the universe, a substantial worsening in this relationship versus the pre-Covid period (Exhibit 10). The worsening
liquidity has also affected the price discovery mechanism in the less liquid cohort of the market and we observe that these
securities are much more likely to suffer a steeper price move than the rest of the universe.

The information herein is provided for educational and discussion purposes only and should not be construed as financial or investment
advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed
reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the
end of this document for important disclosure information.

© 2024 APOLLO GLOBAL MANAGEMENT, INC. ALL RIGHTS RESERVED.

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With diminishing liquidity for smaller tranches and off-the-run securities, the liquidity premia offered by this cohort have also
compressed. The spread basis between small and large bond issues, after adjusting for differences in rating and duration, which
serves as a proxy for liquidity premia, is almost back to pre-Covid levels (Exhibit 11). This suggests, investors are receiving
less compensation in return for holding bonds that are increasingly illiquid.

The trading patterns suggest increasing fragmentation in the investment grade market. The most liquid segments have seen an
improvement in trading volumes as investors turn to these instruments to articulate changing market views or meet liquidity
needs. This has resulted in a deterioration in liquidity for a large segment of the investment grade universe: older vintage and
smaller deals. These bonds, which make up more than 70% of the $6 trillion investment grade market, have effectively become
buy-and-hold investments for many investors. However, these securities appear to offer investors limited excess spread
compensation for their lack of liquidity. We believe that private IG credit could be an attractive alternative for this
allocation.

Exhibit 11: IG Liquidity Premium

Spread basis
30
adjusted for
25 rating/duration
difference (bp)
20

15

10

-5

-10

-15

-20
Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24

Data as of June 2024.

Spread difference based on excess spread, i.e. OAS not explained by
spread and duration. IG: For industrial issuers only. Deal size for IG:
Small (<=$750mn), Large (>$750mn).
Sources: BofA indices, Apollo

The information herein is provided for educational and discussion purposes only and should not be construed as financial or investment
advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed
reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the
end of this document for important disclosure information.

© 2024 APOLLO GLOBAL MANAGEMENT, INC. ALL RIGHTS RESERVED.

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IV) Relative Value of BDCs’ Unsecured Debt

Business Development Companies, or BDCs, are investment firms that invest predominantly in small-and medium-sized private
companies. As middle market lending has grown over the past few years, so has the funding needs of BDCs. These companies
usually raise debt through a few channels: secured bi-lateral loans, CLOs backed by their assets (i.e., middle market loans) and
senior unsecured debt in the investment grade market. 10
Issuance of both middle-market CLOs (MM CLOs) and BDC unsecured debt has picked up of late. MM CLO supply, which had
averaged $30 billion per year since 2021 has already hit $26 billion this year (Exhibit 12). BDC unsecured debt has mimicked this
growth with the amount outstanding increasing to more than $40 billion (Exhibit 13). In this section, we will present a novel
analysis comparing the two types of structures.

Exhibit 12: Middle Market CLO Issuance Exhibit: 13: BDC Debt Outstanding

$bn $bn

$30 $45

$40
$25
$35

$20 $30

$25
$15
$20

$10 $15

$10
$5
$5

$ $
H1 2021 H2 2021 H1 2022 H2 2022 H1 2023 H2 2023 YTD Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-23 Jan-24
2024

Data as of June 2024. Data as of June 2024.

Source: Apollo Analysts Sources: BofA Indices, Apollo Analysts

MM CLOs and BDC debt are issued in distinct markets—structured and corporate credit accordingly—each with distinct buyer
bases, and their valuations are benchmarked against comparables within their respective markets. However, the underlying risk
exposure for both MM CLOs and BDC debt is similar and—in the case of CLOs issued by BDCs—even intertwined. As a result,
their valuations can be readily comparable.
Still, the comparison between the two instruments is not straightforward. Differences in underlying asset quality and leverage
across different BDC issuers, and the presence of structural features in CLOs impact the performance of debt/CLO instruments
under a stressed scenario.
To adjust for collateral and structural differences, we model losses for each BDC assuming a prolonged period of elevated
default rates and estimate the resulting deterioration in credit enhancement (or conversely an increase in the effective loan-to-
value) of their unsecured debt and CLO tranches (if any). 11 Specifically, we assume an ~8% default rate with 20%-40% recovery
over a five-year period. Although such a severe scenario of losses is unlikely in our view, in a severe downturn, we believe that

10
A CLO, or collateralized loan obligation, is a single security backed by a pool of non-investment grade corporate loans. These loans usually sit
in the first-lien level of the capital structure and are secured by the company’s assets.
11
Here and in the rest of the report, we use credit enhancement, or attachment point, as our measure of subordination beneath the senior
unsecured tranche. This is effectively the converse of the loan-to-value ratio. For instance, a $40 debt tranche on $100 of assets has $60 of
equity beneath in resulting in effective credit enhancement/attachment point of 60%. The LTV in this case is 40%.
The information herein is provided for educational and discussion purposes only and should not be construed as financial or investment
advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed
reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the
end of this document for important disclosure information.

© 2024 APOLLO GLOBAL MANAGEMENT, INC. ALL RIGHTS RESERVED.

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investors may price in a worst-case outcome akin to our model assumptions. Importantly, the relative value conclusions hold
even in a less severe default scenario.

When modeling asset losses, we account for the following:

1. Sector exposure: Default rates for middle market loans are assumed to vary by sector depending on our analysts’
fundamental views.

2. Borrower size: Default rate is assumed to vary based on the borrower’s EBITDA, with larger issuers enjoying
a lower default rate.

3. Seniority: Any subordinated exposure, such as a second lien or unsecured risk, is assumed to have a lower recovery.

The analysis assumes that assets for any CLO, or bi-lateral loans, are carved out such that the BDC only retains the residual or
equity interest in these assets. Additionally, we assume that only first lien assets are encumbered in CLOs. Based on
conversations with managers and anecdotal evidence, we also assume managers will support CLOs by exchanging bad loans
for good collateral. This can help lower the default rate for CLO assets compared with the rest of the BDC collateral.

Exhibit 14 shows the initial attachment point, or credit enhancement, for select BDC unsecured debt tranches. On average, the
credit enhancement is ~50% across the cohort. However, in a distressed scenario, it declines significantly to ~20%. There are
meaningful differences in outcome among BDCs driven primarily by asset quality: Some debt tranches experience a near
complete erosion of subordination (BDC 1) while others are less severely impacted (BDC 2 and 5).

Exhibit 14: Credit Enhancement of BDC Senior Exhibit 15: Median Credit Enhancement of
Unsecured Debt MM CLO Tranches
80% 60%

70%

60%
40%
50%

40%

30%
20%
20%

10%

0% 0%
BDC 1 BDC 2 BDC 3 BDC 4 BDC 5 BDC 6 BDC 7 AAA AA A
Distress Initial Distress Inception

Data as of June 2024. Data as of June 2024.

Source: Apollo Analysts Source: Apollo Analysts

We repeat the same analysis for AAA/AA/A tranches of CLOs issued by these BDCs (Exhibit 15). The decline in credit
enhancement is more benign in this scenario owing to better asset quality, given our assumption of holding first lien assets only,

The information herein is provided for educational and discussion purposes only and should not be construed as financial or investment
advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed
reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the
end of this document for important disclosure information.

© 2024 APOLLO GLOBAL MANAGEMENT, INC. ALL RIGHTS RESERVED.

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manager support and OC/IC triggers which trap excess interest in the structures for the benefit of senior tranches. 12 As a result,
even though the initial credit enhancement for a CLO AAA tranche is inferior to BDC unsecured debt, the relationship flips under
a distressed scenario.

To assess relative value across a selection of BDC and CLO debt, we compare their current spreads against their pro forma
credit enhancement under a distressed scenario. Exhibit 16 shows the current relationship—each data point refers to BDC
unsecured debt or CLO liability tranches. Although the two factors are correlated across the BDC/MM CLO universe, the model
cannot fully explain the divergence we see in pricing. We suspect that investors are assigning significant value (perhaps too
much) to manager track records and, more importantly, the age of a specific fund (not the direct lending platform/ adviser) with
older vintage funds trading tighter.

Exhibit 16: Spreads Compared to Stressed Credit

Enhancement

Treasury
Spread

CLO A
BDC 6
BDC 7 BDC 10
BDC 5
BDC 12
BDC 11
CLO AA BDC 9
BDC 3
BDC 13
BDC 8
BDC 4 CLO AAA
BDC 1 BDC 2

Credit enhancement in distress scenario

Data as of June 2024.

Source: Apollo

A couple of other observations:

CLO A tranches stand out as attractive relative to some tighter spread BDC debt, having similar subordination under a
distressed scenario but trading much wider.
Select perpetual BDC debt also appears attractive—we find that their spread levels don’t fully reflect the strong quality of
their assets.

12
The Overcollateralization (OC) test compares the principal amount of CLO assets to amount outstanding of debt tranches. If the OC level falls
below a threshold, cash is diverted away from junior and equity CLO tranches to pay down senior debt tranches instead. Interest coverage (IC)
test: if the total interest generated from collateral falls below a trigger value, cash is diverted away from equity and junior CLO tranches to pay
down senior debt tranches instead.

The information herein is provided for educational and discussion purposes only and should not be construed as financial or investment
advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed
reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the
end of this document for important disclosure information.

© 2024 APOLLO GLOBAL MANAGEMENT, INC. ALL RIGHTS RESERVED.

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About the Authors

John Cortese, Partner

Corporate Credit
Mr. Cortese is a Partner in Credit at Apollo, where he is responsible for its Global Trading business and is the
Deputy Chair of its Multi-Credit Committee. Prior to joining in 2021, John was Co-Head of US Credit Trading at
Barclays. Previously, he was a High Yield and Distressed credit trader at Lehman Brothers. John is a board
member of the Make-A-Wish Foundation’s Metro & Western NY branch as well as Dartmouth College's Hopkins
Center for the Arts. John graduated from Dartmouth with a BA in Economics and holds a CFA.

Robert Bittencourt, Partner

Corporate Credit
Since joining Apollo in 2006, Rob has focused on Apollo’s credit businesses in a variety of capacities including
as Co-Head of Liquid Opportunistic Credit, Head of Research for Global Corporate Credit and currently as Co-
Head of Opportunistic Credit. He has also led research coverage of a variety of sectors including
consumer/retail, technology, telecom/media and chemicals. Rob currently serves as the Co-Chair of the
Opportunistic Investment Committee and as a member of several investment committees across the Apollo
platform. He co-founded Apollo’s digital asset strategy and is a member of Apollo’s Credit Management
Committee. Rob graduated cum laude from Harvard College with a BA in economics.

Shobhit Gupta, Managing Director

Corporate Credit
Shobhit Gupta joined Apollo in January 2024 as the Head of Multi-Credit Strategy and is responsible for
identifying key themes and opportunities across global credit. Prior to joining Apollo in 2024, Mr. Gupta spent
15 years at Barclays as the head of US credit strategy, covering investment grade, high yield, loans, credit
derivatives and securitized products. He also worked at Citadel for two years focusing on opportunities in
subordinated capital securities. Mr. Gupta has a PhD in Operations Research from MIT, and a Bachelor’s
degree in Mechanical Engineering from IIT Bombay.

Akila Grewal, Partner

Head of Credit Product
Akila Grewal is a Partner in Client and Product Solutions, where she serves as the Lead of the Institutional
Product Specialist team and Co-Lead of Product Management focused on strategies in Credit across Apollo’s
platform. As part of her role, Akila leads a global team of professionals who work closely with internal
stakeholders and external partners on capital formation across Credit, Private Equity, Real Assets and
Infrastructure. Akila sits on several committees, including the Firm’s Credit Management Team, Credit
Allocations Sub-Committee and the Apollo Opportunity Foundation’s Council. Akila also serves on the not-for-
profit Braven’s NYC Board as well as the PK AirFinance Board. Prior to joining in 2016, Akila was on the
Proprietary Trading and Risk Management team at Mariner Investment Group. Previously, she was in the
Business Development group at MKP Capital and she started her career at Credit Suisse on the Hedge Fund of
Fund’s Portfolio Management team. Akila graduated from New York University’s Stern School of Business with
a BS in Finance and is a CFA charterholder.

The information herein is provided for educational and discussion purposes only and should not be construed as financial or investment
advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed
reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the
end of this document for important disclosure information.

© 2024 APOLLO GLOBAL MANAGEMENT, INC. ALL RIGHTS RESERVED.

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