MFIC

Business Context and Reporting Period

This summary covers the Form 10-Q filed by Apollo Investment Corporation (AINV) for the quarterly period ended June 30, 2021. The Company is a closed-end, externally managed business development company (BDC) and regulated investment company (RIC) that invests primarily in debt and equity of private middle-market companies. As of June 30, 2021, the Company had 65,113,604 shares outstanding and a Net Asset Value (NAV) per share of $16.02.

Key Financial Metrics

Material Changes vs. Prior Period

• Investment Income Decline: Total investment income decreased by $6.1 million compared to Q2 2020. This was primarily driven by a lower income-bearing investment portfolio and a decrease in the average yield of the total debt portfolio from 8.1% to 7.9%. This was partially offset by an increase in prepayment fees and income from the acceleration of discounts/premiums.
• Expense Reduction: Net expenses decreased by $3.2 million, largely due to a $2.7 million reduction in interest and other debt expenses. This reduction resulted from a decrease in average debt outstanding (from $1.79 billion in Q2 2020 to $1.46 billion in Q2 2021) and lower net leverage.
• Valuation Improvements: The Company recognized a net change in unrealized gains of $6.7 million, a significant improvement from the $16.8 million unrealized loss in Q2 2020. Significant unrealized gains were driven by Carbonfree Chemicals ($9.8 million) and Paper Source ($3.0 million), while losses were noted in Dynamic Product Tankers ($(5.4) million) and Glacier Oil & Gas ($(4.0) million).
• Share Repurchases: The Company repurchased 145,572 shares during the quarter at a weighted average price of $13.92, totaling $2.0 million.

Outlook, Risks, and Contingencies

• LIBOR Transition: The Company faces operational challenges and potential impacts on its cost of capital and net investment income due to the phase-out of LIBOR. Most debt investments and borrowings are LIBOR-based. The Company is assessing the transition to the Secured Overnight Financing Rate (SOFR).
• COVID-19 Impact: While vaccines have been distributed, the pandemic continues to create uncertainty. The Company notes that the downturn in the aviation industry has resulted in impairment losses for its portfolio company Merx Aviation, which may lead to further unrealized depreciation. The Company expects some portfolio companies to experience financial distress or default.
• Legal Proceedings: The Company settled a long-standing adversary proceeding related to DSI Renal Holdings. A settlement agreement was approved by the Bankruptcy Court on May 3, 2021, and the Company made its settlement payment on June 15, 2021. The litigation was dismissed with prejudice on June 23, 2021.
• Distributions: The Board declared a distribution of $0.31 per share and a supplemental distribution of $0.05 per share for the quarter, payable on October 8, 2021. The Board expects to declare a quarterly base distribution of $0.31 per share going forward, with supplemental amounts to be determined.

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with the Senior Secured Facility covenants, specifically the asset coverage ratio (1.5:1.0) and minimum stockholders' equity requirements.
• LIBOR Hedging: Assess the Company's specific strategy and timeline for transitioning LIBOR-linked assets and liabilities to alternative reference rates like SOFR.
• Portfolio Concentration: Review the exposure to the aviation sector (Merx Aviation) and energy sector (Glacier Oil & Gas, Spotted Hawk) given the noted impairments and unrealized losses in these areas.
• Non-Qualifying Assets: Monitor the percentage of non-qualifying assets (15.5% as of June 30, 2021) to ensure the Company remains compliant with the 70% qualifying asset requirement under the 1940 Act.
• Unfunded Commitments: Evaluate the $557.6 million in unfunded commitments to portfolio companies and the potential impact on liquidity if these are drawn down.