Business Context and Reporting Period
Company: Apollo Investment Corporation (AIC)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended September 30, 2011
Business Model: A closed-end, non-diversified management investment company operating as a Business Development Company (BDC) and Regulated Investment Company (RIC). AIC invests primarily in subordinated debt, senior secured loans, and equity of private middle-market companies.
Key Financial Metrics
| Metric | Six Months Ended Sep 30, 2011 | Six Months Ended Sep 30, 2010 |
|---|---|---|
| Total Investment Income | $188.6 million | $169.7 million |
| Total Expenses | $95.4 million | $78.7 million |
| Net Investment Income | $93.2 million | $91.0 million |
| Net Realized Loss | $(66.1) million | $(85.5) million |
| Net Change in Unrealized Gain/Loss | $(294.3) million | $(21.6) million |
| Net Decrease in Net Assets from Operations | $(267.2) million | $(16.1) million |
| Net Asset Value (NAV) Per Share | $8.12 | $10.03 (Mar 31, 2011) |
| Total Debt Outstanding | $1,223.5 million | $1,053.4 million (Mar 31, 2011) |
| Cash and Cash Equivalents | $6.3 million | $5.5 million (Mar 31, 2011) |
Material Changes vs. Prior Period
- Portfolio Valuation Decline: Total net assets decreased by approximately $367 million (18.7%) from March 31, 2011, to September 30, 2011, driven primarily by a $294.3 million net unrealized depreciation. This contrasts with the prior year period which saw minimal unrealized depreciation.
- Expense Increase: Total expenses rose to $95.4 million from $78.7 million in the prior year period. This increase was primarily due to higher interest and debt expenses ($33.3 million vs. $20.6 million) resulting from increased leverage and higher interest rates on new debt issuances.
- Realized Losses: Net realized losses improved to $66.1 million from $85.5 million in the prior year period, attributed to exits of select investments (e.g., Playpower Holdings, TL Acquisitions) which reversed previously reported unrealized losses.
- Debt Levels: Total debt increased by approximately $170 million compared to the prior fiscal year-end, reflecting new issuances of senior secured notes and convertible notes.
Guidance, Outlook, and Risks
- Capital Markets: Management noted that the increase in unrealized depreciation was derived from a decline in general capital market conditions.
- Debt Strategy: The company recently closed a private offering of $45 million in senior secured notes and maintains a $1.254 billion revolving credit facility with approximately $500 million of unused capacity as of September 30, 2011.
- Share Repurchase: On August 11, 2011, the company adopted a plan to repurchase up to $200 million of common stock; however, no shares had been repurchased as of the reporting date.
- Legal Proceedings: A significant legal matter involving a portfolio company, InnKeepers USA Trust (Grand Prix Holdings), was resolved. The company received a general release from guaranty obligations following the confirmation of a Chapter 11 reorganization plan effective October 27, 2011.
- Interest Rate Risk: A hypothetical 1% increase in LIBOR would decrease earnings by approximately $0.03 per share over the next twelve months. The company did not engage in interest rate hedging activities during the period.
Investor Verification Checklist
- Unrealized Depreciation Drivers: Verify the specific portfolio companies contributing to the $294.3 million unrealized loss to assess credit quality deterioration.
- Debt Covenants: Confirm continued compliance with the 2.0:1.0 asset coverage ratio and minimum liquidity requirements under the revolving credit facility.
- PIK Income Sustainability: Review the $8.4 million in accrued Payment-in-Kind (PIK) interest to ensure it does not create a cash shortfall for required dividend distributions.
- Share Repurchase Execution: Monitor future filings for actual execution of the $200 million share repurchase plan.
- Convertible Note Conversion: Track the trading price of common stock relative to the $13.75 conversion price of the $200 million convertible notes to assess potential dilution.