Morningstar DBRS Upgrades Apollo Debt Solutions BDC's Long-Term Credit Ratings to BBB from BBB (low) and Revises the Trend to Stable from Positive

DBRS, Inc. (Morningstar DBRS) upgraded the Long-Term Issuer Rating and the Long-Term Senior Debt credit rating of Apollo Debt Solutions BDC. (ADS or the Company) to BBB from BBB (low). The trend on all credit ratings has been revised to Stable from Positive. The Company's Intrinsic Assessment (IA) is BBB, while its Support Assessment is SA3 which assumes no timely systemic support, resulting in the Company's final credit rating being equalized with its IA.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings upgrade reflects ADS' strong operating performance including its scaled investment portfolio which totaled $17.4 billion at Q1 2025 supported by strong equity net inflows and limited share repurchase requests. Profitability remained solid even with a decrease in the weighted average yield of the investment portfolio as asset-level credit performance was strong with only 0.8% of the investment portfolio at cost on non-accrual at Q1 2025, while there has been limited fair market value depreciation of the portfolio. While credit performance to date has been strong, we note that notable growth in the investment portfolio over the last 12 months introduces vintage concentration that is considered in the rating. The Company diversified its funding profile further with additional unsecured debt issuance and an inaugural direct lending CLO while it maintained its conservative leverage profile at 0.56x gross debt-to-equity at Q1 2025, well inside of its long-term target of 1.0x through the cycle.

The revision of the trend to Stable considers our expectation that ADS will benefit from its' focus on upper middle market borrowers given the disruption in syndicated lending as borrowers seek certainty of execution from private credit lenders. Also, large sponsor-backed corporations may be better able to weather economic uncertainty from direct and second-order impacts of tariff and federal spending policy shifts. Morningstar DBRS expects dividend coverage to improve as leverage increases and note that over the full year 2024, distributions were covered by net investment income.

CREDIT RATING DRIVERS
Strong operating performance including improved profitability and dividend coverage alongside consistent strong credit performance over time with a conservative leverage profile would result in a credit ratings upgrade. Conversely, a meaningfully increase in non-accrual investments or a sizeable loss that materially reduces the Company's cushion to regulatory leverage requirements would lead to a credit ratings downgrade.

CREDIT RATING RATIONALE

Franchise Building Block Assessment: Strong / Good
ADS is Apollo's flagship wealth management direct lending investment vehicle whose franchise strength benefits from its relationship with its external advisor, Apollo Credit Management LLC (the Advisor), an affiliate of Apollo, a global alternative asset manager with $616 billion of AUM dedicated to credit investments. ADS is primarily focused on lending to larger corporate borrowers - as of Q1 2025, the weighted average EBITDA of its directly originated assets was $263 million. The total $17.4 billion investment portfolio consisted of 99.9% first lien investments across 353 portfolio companies in a well-diversified portfolio by single name as well as industry.

Earnings Building Block Assessment: Moderate
The Company's earnings power continues to be solid despite the weighted average yield decrease of approximately 170 basis points from the prior year to 9.3% at Q1 2025. ADS reported a net increase in net assets (net income) of $711.2 million for full year 2024 and $162.6 million for Q1 2025 as credit quality and fair value marks remained strong. Net investment income (NII) was $675.0 million for 2024 and $224.0 million for Q1 2025 supported by the scaled investment portfolio. PIK income was substantially lower than peers at 1.4% of total investment income for 2024 and 1.3% for Q1 2025, as ADS has actively avoided transactions underwritten with PIK. Morningstar DBRS expects earnings may continue to moderate with further yield compression though the Company has been able to lower its funding costs across facilities and debt issuances which may mitigate some of this risk.

Risk Building Block Assessment: Good / Moderate
ADS' risk profile is acceptable as credit performance has been strong despite vintage concentration which has been considered in the credit rating. Non-accruals were at just 0.8% of the investment portfolio at cost while the Company's cumulative net realized loss on investments inception to date (January 2022) was $6.1 million. With 97% of the investment portfolio based on floating rates, a decrease of 50 basis points would decrease annual NII by an estimated $47.7 million at Q1 2025. The majority of ADS' investment portfolio is sponsor-backed, with a weighted average EBITDA of $263 million for its directly originated investments at Q1 2025. ADS' management believes there is limited direct impact from tariffs and federal spending cuts on the investment portfolio, which is generally more services-orientated, and where relevant, the negative effects appear to be moderate and manageable. However, like other BDCs, second-order effects remain uncertain. Software and financial services represent the largest industry concentrations at 12.3% and 7.5% of the investment portfolio.

Funding and Liquidity Building Block Assessment: Good / Moderate
ADS has further diversified its funding profile which consists of a revolving credit facility, asset-backed facilities, a CLO issuance and private and public unsecured notes with well-laddered maturities. The Company continues to have good access to the capital markets issuing a 7-year unsecured note in January 2025 at 6.55% (a spread of 185 basis points to treasuries). The Company also opened a warehouse in 2024 for their inaugural direct lending CLO. Near term refinancing requirements are manageable with ADS having $423 million of unsecured notes maturing through 2026 of $3.3 billion outstanding. Unsecured funding comprised approximately 52% of total drawn funding at Q1 2025, providing a high level of unencumbered assets should the need arise for additional pledged assets. Liquidity of $2.3 billion of available capacity and $1.0 billion of cash is sufficient compared to unfunded commitments of $2.3 billion at Q1 2025.

Capitalization Building Block Assessment: Moderate
Capitalization is conservative and supportive of the credit ratings level as ADS targets approximately 1.0x debt-to-equity through the cycle well below regulatory limits of 2.0x. The Company operates well below that target at 0.56x gross debt-to-equity at Q1 2025 while strong equity inflows averaged $450 million per month in 2024 and over $600 million per month in 2025 supporting lower leverage levels. Importantly, Morningstar DBRS believes the Company's current leverage and target range has sufficient cushion to the asset coverage ratio (ACR) regulatory limit to absorb potential valuation volatility from the investment portfolio. At Q1 2025, the cushion was approximately $8.2 billion, implying that the Company would need to take a full loss on 47% of the $17.4 billion investment portfolio at fair value to breach the ACR limit. Redemptions have been manageable with ADS receiving approximately $130 million of share repurchase requests during Q1 2025. Dividend coverage for the full year 2024 was 101%, but has dropped to 87% for Q1 2025. Morningstar DBRS considers dividend coverage from recurring sources of income important for BDCs, given the reliance on equity inflows for capital to fund originations and balance sheet growth.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings at (May 16, 2025) https://dbrs.morningstar.com/research/454196.

Notes:
All figures are in US dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (November 19, 2024) https://dbrs.morningstar.com/research/443208. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for this credit rating include Morningstar, Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' trends and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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