Business Context and Reporting Period
Company: Apollo Investment Corporation (AINV)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Nine months ended December 31, 2021 (Unaudited)
Business Overview: Apollo Investment Corporation is a closed-end, externally managed business development company (BDC) and regulated investment company (RIC). It invests primarily in debt and equity of private middle-market companies. As of December 31, 2021, the company had 63,707,845 shares outstanding and a Net Asset Value (NAV) per share of $16.08.
Key Financial Metrics
| Metric (in thousands, except per share) | Nine Months Ended Dec 31, 2021 | Nine Months Ended Dec 31, 2020 |
|---|---|---|
| Total Investment Income | $158,414 | $165,924 |
| Net Investment Income | $69,072 | $84,391 |
| Net Realized Gains (Losses) | $(65,346) | $(18,127) |
| Net Change in Unrealized Gains (Losses) | $74,399 | $3,185 |
| Net Increase in Net Assets from Operations | $78,125 | $69,449 |
| Earnings Per Share (Basic) | $1.21 | $1.06 |
| Total Assets | $2,666,216 | $2,544,489 (Mar 31, 2021) |
| Total Debt (Principal) | $1,592,484 | $1,469,186 (Mar 31, 2021) |
| Cash and Cash Equivalents | $22,367 | $50,180 (Mar 31, 2021) |
| Net Assets | $1,024,276 | $1,036,330 (Mar 31, 2021) |
Material Changes vs. Prior Period
- Investment Income: Total investment income decreased by approximately $7.5 million compared to the prior year period, primarily driven by a decrease in interest income due to a reduction in the second lien secured debt portfolio. This was partially offset by an increase in other income (amendment and bridge fees).
- Expenses: Net expenses increased by approximately $7.8 million. This was primarily due to a $10.0 million increase in management and performance-based incentive fees, driven by portfolio performance and size. Interest and debt expenses decreased slightly due to lower average debt outstanding, though the annualized cost of debt increased.
- Realized Gains/Losses: The company recognized net realized losses of $65.3 million, a significant increase in losses compared to $18.1 million in the prior year. Major contributors to losses included Spotted Hawk ($44.4 million) and Glacier Oil & Gas Corp. ($20.9 million).
- Unrealized Gains/Losses: Net change in unrealized gains was $74.4 million, a substantial improvement from $3.2 million in the prior year. Significant unrealized gains were recorded for Spotted Hawk ($37.3 million) and Glacier Oil & Gas Corp. ($24.0 million).
- Portfolio Composition: First lien secured debt increased to 87% of the portfolio (from 78%), while common equity/interests decreased to 6% (from 10%).
Guidance, Outlook, and Risks
- Share Repurchases: The company repurchased 1,551,331 shares during the nine-month period for $20.3 million. On February 3, 2022, the Board approved a new $25 million repurchase plan, bringing total available capacity to approximately $30.8 million.
- Distributions: On February 3, 2022, the Board declared a quarterly distribution of $0.31 per share and a supplemental distribution of $0.05 per share, payable April 7, 2022. The company intends to maintain a quarterly base distribution but noted no assurance of future supplemental distributions.
- LIBOR Transition: The company faces operational challenges and potential cost impacts related to the phase-out of LIBOR, with U.S. dollar publications ceasing after June 30, 2023. The company is transitioning to the Secured Overnight Financing Rate (SOFR).
- Risks: Key risks include the ongoing impact of the COVID-19 pandemic on portfolio companies, inflationary pressures affecting profit margins, supply chain disruptions, and the inherent valuation uncertainty of Level 3 assets (which comprised 99.93% of investments).
Investor Verification Checklist
- Realized Losses: Verify the specific circumstances and future outlook for the significant realized losses in Spotted Hawk and Glacier Oil & Gas Corp.
- Debt Covenants: Confirm continued compliance with the Senior Secured Facility covenants, particularly the asset coverage ratio and minimum stockholders' equity requirements.
- LIBOR Exposure: Assess the extent of the portfolio indexed to LIBOR and the progress of transition plans to SOFR or other alternative reference rates.
- Non-Qualifying Assets: Monitor the percentage of non-qualifying assets (13.0% as of Dec 31, 2021) to ensure compliance with the 70% qualifying asset requirement under the 1940 Act.
- PIK Income: Review the sustainability of Payment-in-Kind (PIK) income, which totaled $3.5 million for the period, as it impacts taxable income distributions without providing immediate cash flow.