Business Context and Reporting Period
Company: Apollo Investment Corporation (AIC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: AIC is a closed-end, non-diversified management investment company organized as a Business Development Company (BDC) and a Regulated Investment Company (RIC). It invests primarily in middle-market companies through mezzanine and senior secured loans, often with equity components.
Key Financial Metrics
| Metric | Q2 2010 (Three Months Ended June 30) | Q2 2009 (Three Months Ended June 30) |
|---|---|---|
| Total Net Assets | $1,842.9 million | $1,588.3 million (Derived from prior period data) |
| Net Asset Value (NAV) Per Share | $9.51 | $10.06 (Beginning of period) |
| Total Investment Income | $78.2 million | $82.6 million |
| Total Expenses | $37.4 million | $33.2 million |
| Net Investment Income | $40.8 million | $49.3 million |
| Net Realized Gain (Loss) | $3.9 million | ($98.2 million) |
| Net Change in Unrealized Gain (Loss) | ($129.0 million) | $133.4 million |
| Net Increase (Decrease) in Net Assets from Operations | ($84.3 million) | $84.5 million |
| Earnings (Loss) Per Share | ($0.45) | $0.59 |
| Cash and Cash Equivalents | $218.9 million | $5.1 million |
| Debt Outstanding (Credit Facility) | $993.0 million | $1,060.6 million (Prior quarter) |
Material Changes vs. Prior Period
- Operational Loss: The Company reported a net decrease in net assets from operations of $84.3 million, a significant reversal from the $84.5 million increase in the same period in 2009. This was driven primarily by a $129.0 million net unrealized depreciation on investments.
- Investment Income Decline: Total investment income decreased by approximately $4.4 million year-over-year, attributed to a reduction in the size of the income-producing portfolio.
- Expense Increase: Total expenses rose by $4.2 million, primarily due to higher interest and credit facility expenses following a December 2009 amendment to the revolving credit facility.
- Realized Gains: The Company recorded a net realized gain of $3.9 million, contrasting sharply with a $98.2 million net realized loss in Q2 2009. The 2010 gain was largely derived from foreign currency transactions.
- Capital Activity: Net assets increased by $70.1 million overall due to capital share transactions, including $204.3 million in net proceeds from the sale of 17.25 million shares in May 2010.
Outlook, Risks, and Contingencies
- Portfolio Composition: As of June 30, 2010, the portfolio consisted of 68 companies. Asset allocation was 32% senior secured loans, 57% subordinated debt, 1% preferred equity, and 10% common equity/warrants. Weighted average yields were 8.8% for senior secured loans and 13.3% for subordinated debt.
- Liquidity and Debt: The Company maintains a $1.56 billion senior secured revolving credit facility. As of June 30, 2010, $993 million was outstanding with $566 million of unused capacity. The weighted average annual interest cost was 2.95%.
- Legal Proceedings (InnKeepers USA): A portfolio company, InnKeepers USA Trust, filed for Chapter 11 bankruptcy on July 19, 2010. A special servicer had previously sued AIC regarding a guaranty for property improvements; AIC filed a motion to dismiss. AIC entered into a letter agreement to purchase 50% of the equity in the reorganized InnKeepers for $107.5 million, subject to court confirmation.
- Commitments: AIC committed to purchase $210 million of senior notes and make a $21 million equity investment in Altegrity, Inc. to fund the acquisition of Kroll, Inc. The transaction closed in August 2010 for $130 million in notes and $15.5 million in equity.
- Valuation Risks: The majority of the portfolio ($2.85 billion) is categorized as Level 3 (unobservable inputs), making valuations subject to significant management judgment and market volatility.
Investor Verification Checklist
- Unrealized Depreciation Drivers: Verify the specific portfolio companies contributing to the $129 million unrealized loss and assess the sustainability of their fundamentals.
- InnKeepers Exposure: Confirm the final terms of the Chapter 11 reorganization and the actual cash outlay required for the $107.5 million equity purchase agreement.
- Dividend Sustainability: Review the ratio of net investment income to dividends paid ($40.8 million income vs. $54.3 million dividends) to assess reliance on capital or retained earnings to fund distributions.
- Debt Covenants: Ensure continued compliance with the asset coverage ratio (2.0:1.0) and minimum liquidity requirements under the revolving credit facility.
- Level 3 Valuations: Scrutinize the independent valuation reports for Level 3 assets, particularly given the significant unrealized depreciation in the quarter.