Business Context and Reporting Period
Company: Apollo Investment Corporation (AIC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2018
Business Overview: AIC 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. (AIM), an affiliate of Apollo Global Management.
Key Financial Metrics
| Metric | Q2 2018 | Q2 2017 |
|---|---|---|
| Total Investment Income | $63.6 million | $66.7 million |
| Net Investment Income | $31.5 million | $33.3 million |
| Net Realized and Change in Unrealized Gains (Losses) | ($18.3 million) | ($4.5 million) |
| Net Increase in Net Assets from Operations | $13.3 million | $28.8 million |
| Earnings Per Share (Basic) | $0.06 | $0.13 |
| Net Asset Value (NAV) Per Share | $6.47 | $6.56 (Prior Quarter) |
| Total Debt Outstanding | $1.10 billion | $0.79 billion (Prior Quarter) |
| Cash and Cash Equivalents | $11.6 million | $14.0 million (Prior Quarter) |
| Portfolio Yield (Total) | 9.7% | 9.6% (Prior Quarter) |
Material Changes vs. Prior Comparable Period
- Revenue Decline: Total investment income decreased by $3.1 million (4.6%) compared to Q2 2017, driven primarily by a lower income-bearing portfolio and reduced prepayment fees. PIK income dropped significantly from $5.8 million to $2.7 million.
- Expense Reduction: Net expenses decreased by $1.4 million to $32.0 million. This was largely due to lower interest and debt expenses following the redemption of higher-rate 2042 Senior Unsecured Notes in late 2017 and lower management fees due to reduced gross assets.
- Realized Losses: Net realized losses were $23.2 million, a significant improvement from the $233.8 million loss in Q2 2017. The prior year's loss was heavily impacted by write-offs of Venoco, Delta Career Education, and Magnetation.
- Unrealized Gains: The company reported a net change in unrealized losses of $4.9 million, a stark contrast to the $229.2 million unrealized gain in Q2 2017 (which included reversals of previously recorded losses on the aforementioned write-offs).
- Debt Expansion: Total debt increased by approximately $313 million from the prior quarter ($789.8 million to $1.10 billion) as the company drew down on its Senior Secured Facility to fund new investments.
Guidance, Outlook, and Risks
- Management Commentary: Management noted that the decrease in investment income was offset by an increase in the overall yield of the total debt portfolio to 10.7%. The company continues to deploy capital, with net investment activity of $250.3 million for the quarter.
- Fee Waivers: The Investment Adviser waived 25% of its performance-based incentive fee for the period, reducing the effective rate to 15%.
- Share Repurchases: The company repurchased 1.39 million shares for $7.9 million during the quarter at a weighted average price of $5.68, representing a 12.8% discount to NAV. Approximately $22.0 million remains available under current repurchase plans.
- Distributions: The Board declared a distribution of $0.15 per share for the quarter. The tax character of distributions may include return of capital.
- Risks and Contingencies:
- Legal Proceedings: AIC 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.
- Asset Coverage: Non-qualifying assets represented 14.1% of total assets. The company is subject to asset coverage requirements under the 1940 Act, though recent legislation (SBCAA) allows for a reduction in the requirement to 150% starting April 2019.
- Interest Rate Risk: 94% of the portfolio is floating rate. A 100 basis point increase in rates would increase net investment income by approximately $7.2 million annually.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the Senior Secured Facility covenants, specifically the asset coverage ratio and borrowing base, given the significant increase in debt drawdowns.
- PIK Sustainability: Monitor the realization of Payment-in-Kind (PIK) income, which is non-cash but must be distributed to maintain RIC status. The balance of capitalized PIK increased to $26.4 million.
- Legal Exposure: Track the status of the DSI Renal Holdings litigation to assess potential liability impacts.
- Portfolio Concentration: Review the top 10 portfolio companies, which represent a significant portion of the portfolio, particularly the controlled investments in Merx Aviation and SHD Oil & Gas.
- Share Repurchase Impact: Assess the impact of ongoing share repurchases on NAV accretion and the remaining capacity under the $150 million repurchase authorization.