MFIC

Business Context and Reporting Period

Company: Apollo Investment Corporation (AIC)
Filing Type: Form 10-K (Annual Report)
Period Ended: March 31, 2018
Business Model: AIC is a closed-end, externally managed Business Development Company (BDC) and Regulated Investment Company (RIC). It invests primarily in debt (secured and unsecured) 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

Material Changes vs. Prior Period

• Investment Activity: Investments made increased to $1.05 billion in 2018 from $0.60 billion in 2017. However, net investment activity was negative ($104.6 million) due to repayments exceeding new investments.
• Income Decline: Total investment income decreased by $20.6 million, driven primarily by a $14.6 million drop in dividend income and a $7.6 million decrease in interest income. This was offset by an increase in portfolio yield.
• Realized Losses: Net realized losses were $258.1 million in 2018, significantly higher than the $41.8 million in 2017. Major losses included write-offs of Venoco, Inc. ($89.0 million) and Delta Educational Systems ($72.8 million).
• Unrealized Gains: Net change in unrealized losses improved significantly to $211.8 million in 2018 (a gain relative to the prior year's loss of $89.1 million), largely due to recoveries in previously written-down positions.
• Debt Reduction: Total debt outstanding decreased by approximately $58.6 million, aided by the redemption of the 2042 Senior Unsecured Notes in October 2017.

Guidance, Outlook, and Risks

• Fee Structure Change: Effective April 1, 2018, the base management fee was reduced from 2.0% to 1.5% of gross assets. The incentive fee on income now includes a total return requirement starting January 1, 2019.
• Regulatory Changes: The Board approved the application of modified asset coverage requirements (reducing the ratio from 200% to 150%), effective April 4, 2019, allowing for increased leverage capacity.
• Key Risks:
  • Interest Rate Risk: 92% of the debt portfolio is floating rate. A 1% increase in LIBOR would increase earnings by approximately $8.4 million annually.
  • Credit Risk: Significant exposure to non-investment grade and private middle-market companies. 3.3% of the portfolio was on non-accrual status as of March 31, 2018.
  • Liquidity: Investments are largely illiquid (Level 3 assets represent 86.5% of the portfolio). The Senior Secured Facility matures in December 2021.
  • PIK Income: Payment-in-kind (PIK) income totaled $20.2 million, representing non-cash income that must be distributed to maintain RIC status.

Investor Verification Checklist

• NAV Discount: Verify the current market price of AINV shares relative to the $6.56 NAV per share, as the stock has historically traded at a discount.
• Dividend Sustainability: Assess the ratio of Net Investment Income ($133.4M) to distributions paid ($131.5M) to confirm the dividend is covered by cash flow, noting the impact of non-cash PIK income.
• Concentration Risk: Review the top 10 portfolio companies, which represented a significant portion of the portfolio (e.g., Merx Aviation Finance at 17.9%).
• Debt Maturity Wall: Confirm the refinancing strategy for the Senior Secured Facility maturing in 2021 and the Series B Notes maturing in 2018.
• Fee Waivers: Monitor the expiration of voluntary fee waivers and the impact of the new fee structure on future Net Investment Income.