MFIC

Business Context and Reporting Period

Company: Apollo Investment Corporation (AIC)
Filing Type: Form 10-K (Annual Report)
Period Ended: March 31, 2016
Business Overview: AIC is a closed-end, externally managed, non-diversified Business Development Company (BDC) and Regulated Investment Company (RIC). It invests primarily in secured and unsecured debt, loans, and equity of private middle-market companies, as well as structured products like CLOs and CLNs. The company is managed by Apollo Investment Management, L.P. (AIM), an affiliate of Apollo Global Management.

Key Financial Metrics

Liquidity: As of March 31, 2016, the company had $16.5 million in cash and $655.8 million of unused capacity under its Senior Secured Facility. The company repurchased $62.4 million of common stock during the fiscal year.

Material Changes vs. Prior Period

• Investment Income Decline: Total investment income decreased by $53.9 million (12.4%) primarily due to a lower income-bearing portfolio, an increase in non-accrual status investments, and a decrease in prepayment fees and OID acceleration income.
• Net Loss: The company reported a net decrease in net assets of $44.5 million, compared to a net increase of $75.4 million in the prior year. This was driven by net realized losses of $195.4 million and net unrealized losses of $42.4 million.
• Portfolio Composition: The portfolio decreased from 105 to 89 portfolio companies. Investments made totaled $1.1 billion (down from $2.2 billion), while repayments and sales totaled $1.3 billion (down from $2.3 billion).
• NAV Decline: NAV per share decreased from $8.18 to $7.28, reflecting the net losses and share repurchases.

Guidance, Outlook, and Risks

Management Commentary: Management noted that the decrease in investment income was offset partially by an increase in dividend income from specific portfolio companies. The company continues to focus on generating current income and capital appreciation through its middle-market debt strategy.

Fee Waivers: Effective April 1, 2016, the Investment Adviser agreed to waive 25% of its base management fee (reducing it from 2.0% to 1.5%) and up to 25% of its performance-based incentive fee for the fiscal year ending March 31, 2017, contingent on cumulative net losses.

Key Risks:

• Credit Risk: High exposure to non-investment grade debt and private middle-market companies, with 8.4% of the portfolio on non-accrual status (up from 1.3% in 2015).
• Market Volatility: Sensitivity to interest rate changes, oil price volatility (impacting energy sector investments), and global economic uncertainty.
• Liquidity: Illiquidity of private investments may limit the ability to sell assets quickly without significant discounts.
• Regulatory: Risks associated with maintaining BDC and RIC status, including asset coverage requirements and distribution obligations.

Investor Verification Checklist

• Non-Accrual Status: Verify the specific portfolio companies contributing to the 8.4% non-accrual rate and the likelihood of recovery.
• Realized Losses: Review the details of significant realized losses, particularly in PlayPower Holdings, Miller Energy Resources, and Magnetation.
• Debt Covenants: Confirm continued compliance with the 2.0:1.0 asset coverage ratio and minimum shareholders' equity covenants under the Senior Secured Facility.
• Fee Waiver Impact: Assess the financial impact of the new fee waiver structure on future net investment income.
• Share Repurchases: Evaluate the sustainability of the share repurchase program given the decline in NAV and net losses.