Business Context and Reporting Period
Company: Apollo Investment Corporation (AIC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
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 middle-market companies via mezzanine and senior secured loans, often with equity components.
Key Financial Metrics
| Metric | Six Months Ended Sep 30, 2008 | Three Months Ended Sep 30, 2008 | Net Assets (Sep 30, 2008) |
|---|---|---|---|
| Total Investment Income | $194.5 million | $103.5 million | $1,953.0 million |
| Net Investment Income | $102.8 million | $56.5 million | |
| Net Realized Loss | ($59.8 million) | ($30.0 million) | |
| Net Unrealized Depreciation | ($209.1 million) | ($264.5 million) | |
| Net Decrease in Net Assets (Operations) | ($166.1 million) | ($238.0 million) | $13.73 per share |
| Earnings (Loss) Per Share | ($1.21) | ($1.67) | |
| Credit Facility Borrowings | $1,657.2 million outstanding | ||
| Cash and Cash Equivalents | $411.2 million |
Material Changes vs. Prior Period
- Performance Decline: The company reported a net decrease in net assets of $166.1 million for the six months ended September 30, 2008, compared to a net increase of $154.5 million in the same period in 2007. This reversal was driven primarily by significant unrealized depreciation.
- Unrealized Losses: Net unrealized depreciation totaled $209.1 million for the six-month period, contrasting with net unrealized appreciation of $59.8 million in the prior year period. Total net unrealized depreciation on the portfolio stood at $406.2 million as of September 30, 2008.
- Realized Losses: Net realized losses increased to $59.8 million (six months 2008) from $21.6 million (six months 2007). A significant portion of the Q3 realized loss ($38.5 million) stemmed from the exit of the Lexicon Marketing investment.
- Expense Growth: Net expenses rose to $91.7 million for the six months ended September 30, 2008, from $58.6 million in the prior year period, largely due to increased management and incentive fees driven by portfolio growth.
- NAV Decline: Net Asset Value (NAV) per share decreased from $15.83 at March 31, 2008, to $13.73 at September 30, 2008.
Outlook, Risks, and Management Commentary
- Portfolio Composition: As of September 30, 2008, the portfolio consisted of 78 companies. Asset allocation was 57% subordinated debt, 23% senior secured loans, 16% common equity/warrants, and 4% preferred equity. Fixed-rate debt comprised 66% of the interest-bearing portfolio.
- Liquidity and Capital: The company maintains a $1.7 billion senior secured revolving credit facility with $43 million remaining unused. Cash and cash equivalents totaled $411.2 million. The company recently raised approximately $369.6 million in net proceeds from a follow-on equity offering in May 2008.
- Valuation Methodology: Investments are valued at fair value. For assets without readily available market quotations, the Board of Directors determines fair value using a multi-step process involving the investment adviser and independent valuation firms. All investments were categorized as Level 3 (unobservable inputs) under SFAS 157.
- Risks: The filing highlights risks associated with the general economic environment, the ability of portfolio companies to achieve objectives, and the impact of market volatility on investment valuations. The company is subject to interest rate risk, though it did not engage in hedging activities during the period.
- Dividends: The company intends to continue distributing quarterly dividends to maintain RIC status. Dividends paid for the six months ended September 30, 2008, totaled $147.9 million ($1.04 per share).
Investor Verification Checklist
- Valuation Sensitivity: Verify the impact of Level 3 valuation inputs on the $406.2 million net unrealized depreciation, given the lack of active market quotations for many portfolio assets.
- Credit Facility Covenants: Confirm continued compliance with the 2.0:1.0 asset coverage ratio and minimum stockholders' equity requirements under the $1.7 billion credit facility.
- Portfolio Concentration: Review the top 10 portfolio company exposures to assess concentration risk, particularly in the subordinated debt segment which comprises the majority of the portfolio.
- Realized Loss Drivers: Investigate the specific circumstances surrounding the $38.5 million realized loss on the Lexicon Marketing exit and any potential impairment indicators for other portfolio companies.
- Dividend Sustainability: Assess whether the current net investment income of $102.8 million (six months) is sufficient to support the dividend payout rate of $147.9 million without eroding capital.