Business Context and Reporting Period
Company: Apollo Investment Corporation (Note: Input metadata listed "Midcap Financial Investment Corp," but the filing text identifies the registrant as Apollo Investment Corporation, a Business Development Company or "BDC").
Reporting Period: Fiscal year ended March 31, 2017.
Business Model: A closed-end, externally managed, non-diversified management investment company investing primarily in secured and unsecured debt, loans, and equity of private middle-market companies. The company also invests in structured products such as Collateralized Loan Obligations (CLOs) and Credit-Linked Notes (CLNs).
Portfolio Size: 86 portfolio companies as of March 31, 2017.
Key Financial Metrics
| Metric | 2017 (in millions) | 2016 (in millions) |
|---|---|---|
| Total Investment Income | $279.9 | $379.7 |
| Net Investment Income | $149.2 | $193.3 |
| Net Realized and Change in Unrealized Gains (Losses) | ($130.9) | ($237.8) |
| Net Increase in Net Assets from Operations | $18.4 | ($44.5) |
| Total Assets | $2,410.1 | $3,078.6 |
| Total Debt Outstanding | $848.4 | $1,313.0 |
| Net Assets | $1,481.8 | $1,645.6 |
| Net Asset Value (NAV) per Share | $6.74 | $7.28 |
| Weighted Average Yield on Debt Portfolio | 10.3% | 11.0% |
| Total Return | 31.4% | (17.5)% |
Material Changes vs. Prior Period
- Investment Activity: Investments made decreased to $601.1 million in 2017 from $1.09 billion in 2016. Investments sold or repaid totaled $1.09 billion in 2017 compared to $1.34 billion in 2016.
- Income Decline: Total investment income dropped by approximately $100 million, driven by a lower income-bearing portfolio and a decrease in the weighted average yield on the debt portfolio from 11.0% to 10.3%.
- Expense Reduction: Net expenses decreased by $55.9 million to $130.7 million. This was primarily due to a $40.2 million reduction in management and incentive fees (partially due to fee waivers and reversals of deferred fees on non-realizable PIK income) and a $21.1 million decrease in interest expenses due to lower average debt outstanding.
- Realized Losses: Net realized losses improved significantly to $41.8 million in 2017 from $195.4 million in 2016. Significant losses in 2017 included Garden Fresh Restaurant Corp. ($58.6 million) and Solarplicity Group Limited ($38.4 million), offset by gains from Generation Brands Holdings ($46.2 million) and Golden Bear Warehouse ($34.2 million).
- Unrealized Losses: Net change in unrealized losses was $89.1 million in 2017, an improvement from $42.4 million in 2016.
- Debt Reduction: Total debt outstanding decreased by approximately $465 million, reflecting repayments of the Senior Secured Notes (Series A) and Convertible Notes, and reduced utilization of the Senior Secured Facility.
Guidance, Outlook, and Risks
- Management Commentary: Management noted a decrease in investment income due to a lower portfolio size and yield. The company extended its 2017 Management Fee Waiver and Incentive Fee Waiver through March 31, 2018.
- Share Repurchases: The company repurchased 6.46 million shares during the fiscal year at a weighted average price of $5.87, representing a discount of approximately 15.5% to the average NAV. As of March 31, 2017, $49.6 million remained available under repurchase plans.
- Distributions: Distributions declared were $0.65 per share for the year, down from $0.80 per share in 2016. The company maintains an "opt-out" dividend reinvestment plan.
- Risks and Contingencies:
- Interest Rate Risk: The portfolio is 84% floating rate debt. A hypothetical 1% increase in LIBOR would increase earnings by $0.03 per share.
- Credit Risk: 7.0% of total investments at amortized cost were on non-accrual status as of March 31, 2017.
- Liquidity: The Senior Secured Facility matures in December 2021. The company has $923.4 million of unused capacity under this facility.
- Legal Proceedings: The company is a defendant in a lawsuit by the bankruptcy trustee of DSI Renal Holdings seeking approximately $41 million in damages; the company intends to vigorously defend itself.
Key Facts for Investor Verification
- Fee Waivers: Verify the impact of the extended management and incentive fee waivers on future expense ratios and net investment income.
- PIK Income: Confirm the cash flow implications of Payment-in-Kind (PIK) income, which totaled $28.2 million in 2017, as this income must be distributed to maintain RIC status despite not being received in cash.
- Debt Covenants: Monitor compliance with asset coverage ratios and borrowing base requirements under the Senior Secured Facility, especially given the reduction in portfolio size.
- Concentration Risk: Review the top 10 portfolio companies, which represented a significant portion of the portfolio (e.g., Merx Aviation Finance at 18.3%).
- Valuation Methodology: Note that 89.1% of investments are classified as Level 3 (unobservable inputs), requiring significant management judgment and independent valuation firm input.