Business Context and Reporting Period
Company: Apollo Investment Corporation (AIC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2011
Business Overview: A closed-end, non-diversified management investment company organized as a Business Development Company (BDC) and a Regulated Investment Company (RIC). The company invests primarily in subordinated debt, senior secured loans, and equity of private middle-market companies.
Key Financial Metrics
| Metric | Q2 2011 (Three Months Ended June 30) | Q2 2010 (Three Months Ended June 30) |
|---|---|---|
| Total Assets | $3,259,302,000 | $3,148,813,000 (Prior Quarter) |
| Total Debt | $1,249,203,000 | $1,053,443,000 (Prior Quarter) |
| Net Assets | $1,911,232,000 | $1,961,031,000 (Prior Quarter) |
| Net Asset Value (NAV) Per Share | $9.76 | $10.03 (Prior Quarter) |
| Total Investment Income | $94,592,000 | $78,248,000 |
| Total Expenses | $46,930,000 | $37,421,000 |
| Net Investment Income | $47,662,000 | $40,827,000 |
| Net Realized Gain (Loss) | $(45,948,000) | $3,867,000 |
| Net Change in Unrealized Gain (Loss) | $(1,658,000) | $(129,004,000) |
| Net Increase (Decrease) in Net Assets from Operations | $56,000 | $(84,310,000) |
| Earnings Per Share (Basic & Diluted) | $0.00 | $(0.45) |
| Dividends Paid (Cash) | $49,733,000 | $44,505,000 |
Material Changes vs. Prior Comparable Period
- Investment Income: Increased by approximately 21% to $94.6 million, driven primarily by higher prepayment premiums and deal-related fees compared to the prior year quarter.
- Expenses: Increased by approximately 25% to $46.9 million. The primary driver was a rise in interest and debt expenses ($16.0 million vs. $9.9 million) due to the issuance of long-term fixed-rate debt and higher average interest costs (4.43% weighted average annual cost).
- Realized Gains/Losses: Shifted from a net realized gain of $3.9 million in Q2 2010 to a net realized loss of $45.9 million in Q2 2011. The loss was primarily attributed to the realization of previously reported unrealized losses on the Playpower Holdings investment.
- Unrealized Depreciation: Net change in unrealized depreciation was significantly lower in Q2 2011 ($1.7 million) compared to Q2 2010 ($129.0 million), reflecting a stabilization in capital market conditions and the reversal of unrealized depreciation upon realization of losses.
- Debt Levels: Total debt increased by approximately $196 million from the prior quarter to $1.25 billion, utilizing the revolving credit facility and new note issuances.
Guidance, Outlook, Risks, and Unusual Items
- Portfolio Activity: The company invested $836 million across 9 new and 10 existing portfolio companies during the quarter, compared to $221 million in the prior year quarter. Sales and prepayments totaled $733 million.
- Debt Structure: The company maintains a $1.25 billion senior secured revolving credit facility with $430 million of unused capacity as of June 30, 2011. It also holds $225 million in Senior Secured Notes (6.25% fixed) and $200 million in Senior Unsecured Convertible Notes (5.75% fixed).
- Interest Rate Risk: Approximately 40% of the income-bearing portfolio is floating rate. A hypothetical 1% increase in LIBOR would decrease earnings by approximately $0.03 per share over the next twelve months.
- Legal Proceedings: A portfolio company, InnKeepers USA Trust (subsidiary of Grand Prix Holdings, LLC), filed for Chapter 11 bankruptcy in July 2010. A plan of reorganization was confirmed by the court on June 29, 2011. A prior lawsuit regarding property improvement guarantees was dismissed without prejudice in November 2010.
- Dividend Policy: The company paid $0.28 per share in dividends for the quarter. To maintain RIC status, it must distribute at least 90% of taxable income. The company utilizes an "opt-out" dividend reinvestment plan.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the 2.0:1.0 asset coverage ratio and minimum liquidity requirements under the revolving credit facility.
- Playpower Holdings: Review the impact of the realized losses on Playpower Holdings and the status of remaining exposure to this controlled portfolio company.
- InnKeepers USA Restructuring: Monitor the post-reorganization performance of InnKeepers USA Trust and the valuation of the company's remaining equity and debt interests.
- Interest Rate Sensitivity: Assess the impact of potential LIBOR fluctuations on net investment income given the 40% floating-rate exposure.
- PIK Income: Note that $3.5 million of investment income was accrued Payment-In-Kind (PIK), which must be distributed to maintain RIC status despite not being received in cash.