Business Context and Reporting Period
Company: Apollo Investment Corporation (AINV)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended June 30, 2019
Business Overview: Apollo Investment Corporation is a closed-end, externally managed business development company (BDC) and regulated investment company (RIC). It invests primarily in debt and equity of private middle-market companies. The company is managed by Apollo Investment Management, L.P., an affiliate of Apollo Global Management.
Key Financial Metrics
| Metric | Q2 2019 | Q2 2018 |
|---|---|---|
| Total Assets | $2,700.4 million | $2,497.8 million |
| Net Assets | $1,290.7 million | $1,312.6 million |
| Net Asset Value (NAV) Per Share | $19.00 | $19.06 |
| Total Investment Income | $66.5 million | $63.6 million |
| Net Investment Income | $34.5 million | $31.5 million |
| Net Realized Gains (Losses) | $1.3 million | $(23.2) million |
| Net Change in Unrealized Gains (Losses) | $(12.0) million | $4.9 million |
| Net Increase in Net Assets from Operations | $23.8 million | $13.3 million |
| Earnings Per Share (Basic) | $0.35 | $0.18 |
| Total Debt Outstanding | $1,359.5 million | $1,138.9 million |
| Cash and Cash Equivalents | $29.2 million | $36.3 million |
| Portfolio Yield (Total) | 9.2% | 9.6% |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased by $2.9 million (4.6%) compared to Q2 2018, driven primarily by an $8.6 million increase in interest income (including PIK). This was due to a larger income-bearing portfolio and the restoration of a previously non-accrual investment to accrual status.
- Expense Reduction: Net expenses decreased slightly to $32.0 million from $32.0 million (gross), but management and performance-based incentive fees dropped significantly by $4.9 million. This was due to a change in the fee structure effective January 1, 2019, resulting in no performance-based incentive fees accrued in Q2 2019 compared to $5.6 million in Q2 2018.
- Debt Expansion: Total debt increased by approximately $220 million to $1.36 billion, reflecting increased leverage to fund new investments. Average debt outstanding rose from $929.5 million to $1.25 billion.
- Realized Gains: The company reported net realized gains of $1.3 million, a significant improvement from net realized losses of $23.2 million in the prior year period. The prior year loss was heavily influenced by a $10.1 million loss on Accelerate Parent Corp.
- Unrealized Losses: Net change in unrealized gains/losses turned negative at $(12.0) million, compared to a positive $4.9 million in Q2 2018. Significant unrealized losses were recorded in SHD Oil & Gas, Carbonfree Chemicals, and Glacier Oil & Gas.
Guidance, Outlook, and Risks
- Share Repurchases: The company repurchased 949,633 shares for $15.1 million during the quarter at a weighted average price of $15.92, representing a 16.32% discount to average NAV. As of June 30, 2019, $63.9 million remained available under repurchase plans.
- Distributions: The company declared a distribution of $0.45 per share for the quarter. The tax character of distributions may include return of capital, though the exact amount is not yet determined.
- Subsequent Events:
- On July 12, 2019, the company elected to redeem all $150 million of its 6.875% Senior Notes due 2043, with redemption expected on August 12, 2019.
- On July 22, 2019, the Board approved an amendment to reduce authorized shares from 400 million to 130 million following a prior reverse stock split.
- Risks and Contingencies:
- Legal Proceedings: The company is a defendant in a lawsuit filed by the bankruptcy trustee of DSI Renal Holdings alleging fraudulent conveyance, seeking approximately $41 million in damages. The company intends to vigorously defend itself.
- Non-Qualifying Assets: Non-qualifying assets represented 16.3% of total assets, requiring the company to maintain at least 70% qualifying assets under the 1940 Act.
- Interest Rate Risk: 99% of the debt portfolio is floating rate. A 100 basis point increase in rates would increase net investment income by approximately $7.8 million annually.
Key Facts for Investor Verification
- Debt Redemption: Verify the completion of the $150 million 2043 Notes redemption scheduled for August 12, 2019, and its impact on future interest expense.
- Fee Structure Impact: Confirm the ongoing impact of the new total return-based incentive fee structure on future expense ratios and net investment income.
- Portfolio Concentration: Review the concentration of unrealized losses in specific sectors (Oil & Gas, Chemicals) and the status of non-accrual investments (1.7% of portfolio at fair value).
- Legal Exposure: Monitor the status of the DSI Renal Holdings litigation and any potential financial impact.
- Share Count: Verify the reduction in authorized shares and the continued execution of the share repurchase program at discounts to NAV.