Business Context and Reporting Period
This summary covers the Form 10-Q filed by Apollo Investment Corporation (AIC) for the quarterly period ended December 31, 2018. AIC 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. The filing includes unaudited financial statements for the three and nine months ended December 31, 2018, and December 31, 2017.
Key Financial Metrics
| Metric | Nine Months Ended Dec 31, 2018 | Nine Months Ended Dec 31, 2017 |
|---|---|---|
| Total Investment Income | $193.7 million | $197.8 million |
| Net Investment Income | $95.2 million | $101.4 million |
| Net Realized and Change in Unrealized Losses | ($55.1 million) | ($35.0 million) |
| Net Increase in Net Assets from Operations | $40.1 million | $66.4 million |
| Earnings Per Share (Basic) | $0.56 | $0.91 |
| Net Assets | $1,316.6 million | $1,418.1 million (Mar 31, 2018) |
| Net Asset Value Per Share | $19.03 | $19.67 (Mar 31, 2018) |
| Total Debt Outstanding | $1,005.0 million | $801.2 million (Mar 31, 2018) |
| Cash and Cash Equivalents | $22.7 million | $14.0 million (Mar 31, 2018) |
Material Changes vs. Prior Period
- Revenue Decline: Total investment income decreased by $4.1 million (2.1%) compared to the prior nine-month period. This was driven by a $4.3 million decrease in dividend income (due to sales of structured products and lower dividends from Merx Aviation) and a $1.7 million decrease in total interest income. These decreases were partially offset by a $2.0 million increase in other income from higher structuring and syndication fees.
- Expense Increase: Net expenses increased by $2.1 million to $98.5 million. The primary driver was a $2.2 million increase in interest and debt expenses due to higher average debt outstanding ($967.3 million vs. $909.9 million) and rising LIBOR rates. Other general and administrative expenses also rose by $2.2 million, largely due to increased legal fees.
- Realized Losses: Net realized losses increased significantly to $50.2 million from $238.0 million in the prior year. Significant losses included a $30.0 million loss on WTI Crude Oil options, an $11.9 million write-off of Elements Behavioral Health, Inc., and a $10.1 million loss on Accelerate Parent Corp. (American Tire).
- Unrealized Gains/Losses: Net change in unrealized losses was $4.9 million, a significant improvement from the $202.9 million unrealized gain in the prior year period. Notable unrealized losses included Glacier Oil & Gas Corp. ($15.5 million) and Renew Financial LLC ($6.6 million), partially offset by gains on WTI Crude Oil options ($19.1 million) and Merx Aviation Finance ($11.0 million).
- Share Repurchases: The Company repurchased 2.92 million shares for $46.0 million during the nine months ended December 31, 2018, at a weighted average price of $15.79 per share.
Guidance, Outlook, and Risks
- Fee Offset Agreement: On January 16, 2019, AIC entered into a fee offset agreement with its Investment Adviser. The Company will receive credits against incentive fees based on revenue generated by the Adviser from managing aircraft assets. The offset is initially 20% of such revenue, stepping down to 10% after $3 billion in aggregate capital is raised.
- Stock Repurchase Program: On February 6, 2019, the Board approved a new $50 million repurchase plan, bringing total available capacity to approximately $83.9 million.
- Distribution: On February 6, 2019, the Board declared a distribution of $0.45 per share, payable April 5, 2019.
- Legal Proceedings: AIC is a defendant in a lawsuit filed by the bankruptcy trustee of DSI Renal Holdings alleging fraudulent conveyance. The complaint seeks approximately $41 million in damages from AIC. The Company intends to vigorously defend itself but cannot currently assess materiality.
- Market Risk: The portfolio is heavily exposed to interest rate risk, with 100% of the debt portfolio at fair value being floating rate. A 100 basis point increase in rates would increase net investment income by approximately $6.7 million.
- Non-Qualifying Assets: As of December 31, 2018, non-qualifying assets represented 16.5% of total assets, remaining within the 30% limit required by the Investment Company Act of 1940.
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.
- PIK Income Sustainability: Assess the collectability of Payment-in-Kind (PIK) income, which totaled $7.1 million for the nine-month period, as this non-cash income must be distributed to maintain RIC status.
- Portfolio Concentration: Review the concentration of Level 3 assets (91.3% of investments) and the specific valuation methodologies used for significant unrealized losses in the energy and healthcare sectors.
- Legal Exposure: Monitor the status of the DSI Renal Holdings litigation and potential financial impact.
- Fee Offset Impact: Evaluate the future impact of the new fee offset agreement on net investment income and expense ratios.