Business Context and Reporting Period
This summary covers the Form 10-Q for Apollo Investment Corporation (AIC), a closed-end, externally managed business development company (BDC) and regulated investment company (RIC). The report covers the quarter and six months ended September 30, 2015. AIC invests primarily in debt and equity of private middle-market companies. As of November 5, 2015, there were 233,400,951 shares of common stock outstanding.
Key Financial Metrics
| Metric | Six Months Ended Sep 30, 2015 | Six Months Ended Sep 30, 2014 |
|---|---|---|
| Total Investment Income | $200.1 million | $221.5 million |
| Net Investment Income | $100.5 million | $119.2 million |
| Net Realized Gain (Loss) | ($111.1 million) | ($1.7 million) |
| Net Change in Unrealized Gain (Loss) | $15.2 million | ($10.9 million) |
| Net Increase in Net Assets from Operations | $4.6 million | $106.6 million |
| Earnings Per Share (Basic) | $0.02 | $0.45 |
| Net Asset Value (NAV) per Share | $7.83 | $8.18 (Mar 31, 2015) |
| Total Debt Outstanding | $1.37 billion | $1.50 billion (Mar 31, 2015) |
| Cash and Cash Equivalents | $11.4 million | $3.8 million (Mar 31, 2015) |
| Portfolio Turnover Ratio | 43.1% | 62.1% |
Material Changes vs. Prior Period
- Investment Income Decline: Total investment income decreased by $21.4 million (9.7%) compared to the prior six-month period. This was primarily driven by a $35.4 million decrease in interest income due to a lower income-bearing portfolio and an increase in non-accrual investments. This was partially offset by a $14.3 million increase in dividend income.
- Significant Realized Losses: The company reported a net realized loss of $111.1 million, a sharp deterioration from the $1.7 million loss in the prior year. Major contributors to losses included PlayPower Holdings Inc. ($39.7 million), Molycorp, Inc. ($22.1 million), Artsonig Pty Ltd. ($21.7 million), and Venoco, Inc. ($16.2 million).
- Expense Reduction: Net expenses decreased by $2.7 million to $99.5 million. This was driven by a $9.3 million reduction in management and incentive fees (net of waivers) due to lower gross assets and fee offsets. However, interest and debt expenses increased due to the issuance of the 2025 Notes in March 2015, raising the total annualized cost of debt to 5.93% from 4.86%.
- Share Repurchases: The company repurchased 3,340,400 shares for $21.2 million under its 2015 Repurchase Plan, representing a discount of approximately 19.89% to the average NAV per share.
Guidance, Outlook, Risks, and Unusual Items
- Debt Maturities: Significant debt maturities are due within one year, including $225 million in Senior Secured Notes (repaid October 4, 2015, per subsequent events), $29 million in Series A Notes, and $200 million in Convertible Notes. The Senior Secured Facility was amended in April 2015 to increase commitments to $1.31 billion and extend maturity to 2020.
- Non-Accrual Status: As of September 30, 2015, 2.2% of total investments at fair value were on non-accrual status, up from 0.1% at March 31, 2015.
- Legal Proceedings: AIC is a defendant in a lawsuit filed by the bankruptcy trustee of DSI Renal Holdings alleging fraudulent conveyance. The complaint seeks approximately $41 million in damages from AIC. The company intends to vigorously defend itself and has filed a motion to dismiss.
- PIK Income: Payment-in-kind (PIK) income totaled $16.3 million for the six months ended September 30, 2015. This non-cash income must be distributed to maintain RIC status, creating a cash flow obligation despite the lack of cash receipt.
- Valuation: 84% of the portfolio ($2.70 billion) is classified as Level 3 (unobservable inputs), reflecting the private nature of the investments.
Investor Verification Checklist
- Debt Refinancing: Verify the company's ability to refinance or repay the $454 million in debt maturing within one year, specifically the Convertible Notes and Senior Secured Notes.
- Credit Quality: Review the specific portfolio companies contributing to the 2.2% non-accrual rate and the $111 million in realized losses to assess future impairment risks.
- Cash Flow Coverage: Analyze the ability to fund quarterly distributions ($0.20/share) given the reliance on PIK income and the cash outflows required for debt service.
- Legal Exposure: Monitor the status of the DSI Renal Holdings litigation and potential financial impact.
- Fee Waivers: Confirm the sustainability of voluntary management and incentive fee waivers, which significantly reduced the expense ratio for the period.