Business Context and Reporting Period
This summary covers the Form 10-Q for Apollo Investment Corporation (Note: The input metadata listed "Midcap Financial Investment Corp," but the filing text identifies the registrant as Apollo Investment Corporation). The report covers the quarterly period ended December 31, 2016, and the nine-month period ended December 31, 2016. Apollo Investment Corporation is a closed-end, externally managed, non-diversified business development company (BDC) that invests primarily in debt and equity of private middle-market companies.
Key Financial Metrics
| Metric | Period Ended Dec 31, 2016 | Period Ended Dec 31, 2015 |
|---|---|---|
| Net Investment Income | $111.95 million (9 months) | $148.64 million (9 months) |
| Net Realized Gains (Losses) | $44.69 million (9 months) | ($120.37 million) (9 months) |
| Net Change in Unrealized Gains (Losses) | ($146.33 million) (9 months) | ($49.40 million) (9 months) |
| Net Increase (Decrease) in Net Assets from Operations | $10.32 million (9 months) | ($21.13 million) (9 months) |
| Earnings Per Share (Basic) | $0.05 (9 months) | ($0.09) (9 months) |
| Total Investments at Fair Value | $2.53 billion | $2.92 billion (Mar 31, 2016) |
| Total Debt Outstanding | $1.03 billion (net of deferred costs) | $1.31 billion (Mar 31, 2016) |
| Cash and Restricted Cash | $58.92 million | $12.53 million (Dec 31, 2015) |
| Net Asset Value (NAV) Per Share | $6.86 | $7.28 (Mar 31, 2016) |
Material Changes vs. Prior Period
- Investment Income Decline: Total investment income for the nine months ended December 31, 2016, decreased by approximately $80.8 million compared to the prior year. This was driven by a $59.0 million decrease in interest income and a $17.7 million decrease in dividend income, attributed to a lower income-bearing portfolio and increased non-accrual status investments.
- Expense Reduction: Net expenses decreased by approximately $44.2 million year-over-year. This was primarily due to a $29.6 million reduction in management and incentive fees (net of waivers) and a $17.8 million decrease in interest and debt expenses following the repayment of convertible notes and senior secured notes.
- Realized Gains Improvement: The company reported net realized gains of $44.7 million for the nine months ended December 31, 2016, a significant improvement from net realized losses of $120.4 million in the prior year period. Significant gains included Generation Brands Holdings, Inc. ($46.2 million) and Golden Bear Warehouse LLC ($34.2 million).
- Unrealized Losses: Net change in unrealized losses increased to $146.3 million for the nine months ended December 31, 2016, compared to $49.4 million in the prior year. Significant unrealized losses were recorded for Solarplicity Group Limited ($42.1 million), Venoco, Inc. ($42.2 million), and Generation Brands Holdings, Inc. ($43.8 million).
- Debt Reduction: Total debt outstanding decreased from $1.31 billion as of March 31, 2016, to $1.03 billion as of December 31, 2016, reflecting debt repayments and a reduction in the Senior Secured Facility utilization.
Guidance, Outlook, and Risks
- Management Commentary: Management noted that the decrease in investment income was offset by significant expense reductions. The company continues to focus on generating current income and capital appreciation through its portfolio of secured and unsecured debt and equity investments.
- Fee Waivers: The Investment Adviser has agreed to waive 25% of its base management fee (reducing it from 2% to 1.50%) and up to 25% of its performance-based incentive fee through March 31, 2017, contingent on cumulative net losses.
- Share Repurchases: The company repurchased 6.46 million shares during the nine months ended December 31, 2016, at a weighted average price of $5.87 per share, representing a discount of approximately 16.11% to the average NAV. As of December 31, 2016, $49.6 million remained available under repurchase plans.
- 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. The complaint seeks approximately $41 million in damages from the company. The company intends to vigorously defend itself.
- Non-Qualifying Assets: As of December 31, 2016, non-qualifying assets represented approximately 27.4% of total assets. The company must maintain at least 70% of assets in qualifying assets to comply with the 1940 Act.
- Interest Rate Risk: A significant portion of the portfolio and debt consists of floating-rate instruments. A 100 basis point increase in interest rates would increase net investment income by approximately $6.5 million annually.
- Subsequent Events: On February 3, 2017, the Board declared a distribution of $0.15 per share payable on April 6, 2017.
Important Facts for Investors to Verify
- Valuation of Level 3 Assets: Approximately 88% ($2.22 billion) of the investment portfolio is classified as Level 3, relying on unobservable inputs and management estimates. Verify the sensitivity of these valuations to changes in discount rates and commodity prices.
- Non-Accrual Status: As of December 31, 2016, 2.6% of total investments at fair value were on non-accrual status. Review the specific portfolio companies on non-accrual and the likelihood of recovery.
- Debt Covenants: Verify compliance with the Senior Secured Facility covenants, including the asset coverage ratio (minimum 2.0:1.0) and minimum shareholders' equity requirements.
- PIK Income: Payment-in-kind (PIK) income totaled $22.0 million for the nine months ended December 31, 2016. Confirm the company's ability to distribute this non-cash income to maintain RIC status without depleting cash reserves.
- Legal Exposure: Monitor the status of the DSI Renal Holdings litigation and any potential impact on financial results.