Business Context and Reporting Period
This summary covers the Form 10-Q for Apollo Investment Corporation (AINV), a closed-end, externally managed business development company (BDC). The report covers the quarterly period ended December 31, 2019, and the nine-month period ended December 31, 2019. The Company invests primarily in debt and equity of private middle-market companies. As of December 31, 2019, the Company had 66,545,741 shares of common stock outstanding.
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 2019 | Nine Months Ended Dec 31, 2019 | Net Assets (Dec 31, 2019) |
|---|---|---|---|
| Total Investment Income | $68.5 million | $205.3 million | $1,215.9 million |
| Net Investment Income | $36.2 million | $106.5 million | |
| Net Realized & Unrealized Gains (Losses) | ($35.9 million) | ($75.3 million) | |
| Net Increase in Net Assets from Operations | $0.3 million | $31.2 million | |
| Earnings Per Share (Basic) | $0.00 | $0.46 | Net Asset Value Per Share: $18.27 |
| Total Debt Outstanding | $1,790.7 million (Principal) | Debt to Net Assets: ~1.47x | |
| Cash and Cash Equivalents | $36.3 million | Unused Credit Facility Capacity: $263.1 million |
Material Changes vs. Prior Period
- Investment Income: Total investment income increased by $4.4 million (6.9%) for the three months ended Dec 31, 2019, compared to the same period in 2018, driven by a larger income-bearing portfolio. For the nine months, income increased by $11.6 million (6.0%).
- Expenses: Net expenses decreased slightly for the quarter ($32.3 million vs. $32.6 million) due to lower performance-based incentive fees under a new total return-based fee structure effective Jan 1, 2019. However, for the nine-month period, net expenses increased to $98.8 million from $98.5 million, primarily due to higher interest and debt expenses ($54.4 million vs. $42.7 million) resulting from increased leverage.
- Realized Gains/Losses: The Company recognized net realized gains of $3.8 million for the quarter, a significant improvement from net realized losses of $19.0 million in the prior year quarter. For the nine months, net realized losses were $6.3 million, compared to $50.2 million in the prior year.
- Unrealized Gains/Losses: Net change in unrealized losses was $39.8 million for the quarter and $69.0 million for the nine months, compared to $13.7 million and $4.9 million respectively in the prior year periods. Significant unrealized losses were driven by portfolio companies including Spotted Hawk, Glacier Oil & Gas, and Carbonfree Chemicals.
- Debt: Average debt outstanding increased significantly to $1.58 billion for the quarter and $1.44 billion for the nine months, compared to $0.93 billion and $0.97 billion in the prior year periods, respectively.
Guidance, Outlook, and Risks
- Management Commentary: Management noted that the increase in investment income was offset by a decrease in the average yield of the total debt portfolio to 9.2% (quarter) and 9.6% (nine months) from 10.7% in the prior year. The Company continues to actively manage its portfolio, with 51 new portfolio companies added in the nine-month period.
- Share Repurchases: The Company repurchased 2,331,245 shares for $37.2 million during the nine months ended Dec 31, 2019, at a weighted average price of $15.95 per share. As of Dec 31, 2019, $41.9 million remained available under the repurchase plans.
- Distributions: A distribution of $0.45 per share was declared on Feb 4, 2020, payable April 6, 2020. The Company intends to maintain its status as a Regulated Investment Company (RIC) by distributing at least 90% of taxable income.
- Risks and Contingencies:
- Legal Proceedings: The Company is a defendant in a lawsuit filed by the bankruptcy trustee of DSI Renal Holdings alleging fraudulent conveyance, seeking approximately $41 million in damages. The Company intends to vigorously defend itself.
- Portfolio Concentration: 96.7% of investments are classified as Level 3 (unobservable inputs), creating valuation uncertainty. Non-qualifying assets represented 17.0% of total assets.
- Interest Rate Risk: The portfolio is 100% floating rate. A 200 basis point increase in rates would increase net investment income by approximately $13.0 million annually.
Key Facts for Investor Verification
- Valuation of Level 3 Assets: Verify the assumptions used for the $2.87 billion in Level 3 assets, particularly regarding discount rates and recovery analyses for distressed positions like Spotted Hawk and Glacier Oil & Gas.
- Debt Covenants: Confirm continued compliance with the Senior Secured Facility covenants, specifically the 150% asset coverage ratio and minimum stockholders' equity requirements, given the high leverage ratio.
- DSI Litigation: Monitor the status of the DSI Renal Holdings lawsuit and any potential impact on financial statements or cash reserves.
- PIK Income: Assess the collectability of Payment-in-Kind (PIK) income, which totaled $9.8 million for the nine months, as this is non-cash income that must be distributed to maintain RIC status.
- Share Repurchase Program: Track the utilization of the remaining $41.9 million repurchase authorization and the impact on Net Asset Value (NAV) per share.