Business Context and Reporting Period
This summary covers the Form 10-Q filed by Apollo Investment Corporation (AINV) for the quarterly period ended September 30, 2021. The Company is a closed-end, externally managed business development company (BDC) and regulated investment company (RIC) focused on generating current income and capital appreciation through debt and equity investments in private middle-market companies. As of the reporting date, the Company had 64,662,651 shares of common stock outstanding.
Key Financial Metrics
| Metric | Six Months Ended Sep 30, 2021 | Six Months Ended Sep 30, 2020 |
|---|---|---|
| Net Investment Income | $46.6 million | $56.1 million |
| Net Realized and Unrealized Gains (Losses) | $11.0 million | $(19.9) million |
| Net Increase in Net Assets from Operations | $57.6 million | $36.3 million |
| Earnings Per Share (Basic) | $0.88 | $0.56 |
| Net Asset Value (NAV) Per Share | $16.07 | $15.44 |
| Total Debt Outstanding | $1.60 billion | $1.47 billion (as of Mar 31, 2021) |
| Cash and Cash Equivalents | $23.6 million | $50.2 million (as of Mar 31, 2021) |
| Portfolio Turnover Rate (Annualized) | 35.04% | 18.12% |
Material Changes vs. Prior Period
- Investment Income Decline: Total investment income decreased by approximately $8.0 million (7.2%) for the six months ended September 30, 2021, compared to the prior year period. This was primarily driven by a $10.5 million decrease in interest income, largely due to lower yields on second lien secured debt. This was partially offset by a $2.5 million increase in prepayment fees and income from the acceleration of discounts/premiums.
- Expense Increase: Net expenses increased by $1.5 million to $56.9 million. The primary driver was a $4.3 million increase in management and performance-based incentive fees, attributed to portfolio growth and the accrual of incentive fees. Interest and debt expenses decreased slightly due to lower average debt outstanding, despite a higher annualized cost of debt (3.54% vs 3.36%).
- Realized Losses: The Company recognized net realized losses of $64.7 million for the six-month period, compared to $11.4 million in the prior year. Significant losses were driven by write-downs in Spotted Hawk (SHD Oil & Gas) and Glacier Oil & Gas Corp. (Miller Energy Resources).
- Unrealized Gains: Net change in unrealized gains was $75.7 million, a significant improvement from a loss of $8.4 million in the prior year. This was driven by mark-to-market gains in Spotted Hawk, Carbonfree Chemicals, and Glacier Oil & Gas.
- Share Repurchases: The Company repurchased 596,525 shares for $7.9 million during the six-month period, compared to no repurchases in the same period of 2020.
Guidance, Outlook, and Risks
- Distribution Policy: On November 4, 2021, the Board declared a quarterly distribution of $0.31 per share and a supplemental distribution of $0.05 per share, payable January 6, 2022. The Board indicated it may continue to declare quarterly supplemental distributions, though no assurances were given.
- LIBOR Transition: The Company faces operational challenges and potential cost of capital impacts due to the phase-out of LIBOR. The Company is assessing the transition to the Secured Overnight Financing Rate (SOFR) and other alternative reference rates.
- COVID-19 Impact: While the economy is rebounding, the Company notes that uncertainty regarding the pandemic and new variants continues to contribute to market volatility and impacts portfolio company performance.
- Legal Proceedings: A significant legal matter involving DSI Renal Holdings was settled in April 2021, with the Company making a settlement payment in June 2021. The matter is now concluded.
- Valuation Risk: Approximately 99.98% of the portfolio is classified as Level 3 assets (unobservable inputs), making valuations subject to significant management judgment and potential volatility.
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.
- Portfolio Concentration: Review the concentration of investments in the Energy (Oil & Gas) and Aviation sectors, which have shown significant volatility in realized and unrealized gains/losses.
- PIK Income Sustainability: Assess the collectability of Payment-in-Kind (PIK) income, which totaled $2.5 million for the period, as this non-cash income must be distributed to maintain RIC status.
- LIBOR Hedging: Monitor the Company's progress in transitioning LIBOR-based loans to alternative rates and the potential impact on net investment income margins.
- Share Repurchase Capacity: Note that approximately $19.0 million remains available under the current repurchase plans as of September 30, 2021.