MFIC

Business Context and Reporting Period

Company: Apollo Investment Corporation (AINV)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2020
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. The company is managed by Apollo Investment Management, L.P., an affiliate of Apollo Global Management, Inc.

Key Financial Metrics

Material Changes vs. Prior Period

• Decline in Net Investment Income: Net investment income decreased by approximately 18% year-over-year, driven primarily by a reduction in total interest income (including PIK) of $10.1 million. This was attributed to a decrease in the average yield of the total debt portfolio from 10.0% in Q2 2019 to 8.4% in Q2 2020, largely due to lower LIBOR rates.
• Unrealized Losses: The company recognized a net change in unrealized losses of $16.8 million, compared to $12.0 million in the prior year. Management attributes this increase to the adverse economic effects of the COVID-19 pandemic, which caused decreases in the fair value of several portfolio company investments.
• Realized Losses: The company reported net realized losses of $8.4 million, compared to net realized gains of $1.3 million in Q2 2019. A significant portion of this loss ($6.1 million) was related to a write-down of ZPower, LLC.
• Expense Reduction: Net expenses decreased to $28.4 million from $32.0 million, primarily due to a $2.1 million reduction in interest and other debt expenses resulting from lower LIBOR rates and the prior redemption of the 2043 Senior Unsecured Notes.

Guidance, Outlook, and Risks

• COVID-19 Impact: Management highlights that the pandemic has created significant uncertainty and has adversely impacted the fair value of the investment portfolio. The downturn in the aviation industry specifically impacted Merx Aviation Finance, LLC, a controlled affiliate, resulting in impairment losses. Management expects potential further unrealized depreciation and possible defaults among portfolio companies.
• LIBOR Transition: The company faces operational challenges and potential valuation impacts due to the impending phase-out of LIBOR by the end of 2021. A significant portion of the debt portfolio and borrowings are LIBOR-linked.
• Distributions: On August 6, 2020, the Board declared a quarterly distribution of $0.31 per share and a supplemental distribution of $0.05 per share, payable on October 7, 2020. The Board expects to continue declaring a quarterly base distribution of $0.31 per share, with supplemental amounts to be determined each quarter.
• Share Repurchases: The company suspended its stock repurchase program on March 19, 2020, and did not repurchase any shares during the quarter. As of June 30, 2020, $26.9 million remained available under existing repurchase plans.
• Liquidity: The company maintains $394.1 million of unused capacity under its Senior Secured Facility and believes its current cash resources and borrowing capacity are adequate for the next twelve months.

Investor Verification Checklist

• Portfolio Valuation Sensitivity: Verify the specific impact of the COVID-19 pandemic on the fair value of Level 3 investments, particularly in the aviation (Merx) and energy sectors.
• Non-Accrual Status: Review the 6.1% of total investments at amortized cost that were on non-accrual status as of June 30, 2020, and assess the likelihood of recovery.
• Debt Covenants: Confirm continued compliance with the 150% asset coverage ratio and other covenants under the Senior Secured Facility amidst potential portfolio value fluctuations.
• LIBOR Exposure: Assess the company's strategy and timeline for transitioning LIBOR-linked assets and liabilities to alternative reference rates (e.g., SOFR).
• PIK Income Sustainability: Evaluate the sustainability of Payment-in-Kind (PIK) income, which totaled $1.5 million for the quarter, given the increased risk of borrower distress.