Business Context and Reporting Period
This summary covers the Form 10-Q filed by Apollo Investment Corporation (AIC) for the quarterly period ended September 30, 2014. AIC 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 236,741,351 shares of common stock outstanding.
Key Financial Metrics
| Metric | Six Months Ended Sep 30, 2014 | Six Months Ended Sep 30, 2013 |
|---|---|---|
| Total Investment Income | $221.49 million | $190.38 million |
| Net Investment Income | $119.24 million | $101.95 million |
| Net Realized Gain (Loss) | ($1.74 million) | ($113.21 million) |
| Net Change in Unrealized Gain (Loss) | ($10.90 million) | $106.48 million |
| Net Increase in Net Assets from Operations | $106.60 million | $95.23 million |
| Earnings Per Share (Basic) | $0.45 | $0.43 |
| Net Asset Value (NAV) per Share | $8.72 | $8.67 (Mar 31, 2014) |
| Total Debt Outstanding | $1.58 billion | $1.37 billion (Mar 31, 2014) |
| Cash and Cash Equivalents | $9.26 million | $13.41 million (Mar 31, 2014) |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased by approximately 16% compared to the prior year period, driven by a larger portfolio size (average cost of $3.56 billion vs. $3.05 billion) and higher prepayment fees. This was partially offset by a slight decrease in the weighted average yield on debt investments (11.0% vs. 11.3%).
- Expense Increases: Net expenses rose to $102.25 million from $88.43 million. This increase was primarily due to higher interest and debt expenses (driven by a higher average debt balance of $1.55 billion) and increased management and incentive fees.
- Realized Gains/Losses: The company reported a net realized loss of $1.74 million, a significant improvement from the $113.21 million net realized loss in the prior year period. The prior year loss was heavily influenced by exits from ATI Acquisition Company and Cengage Learning Acquisitions.
- Unrealized Losses: Net change in unrealized gains/losses turned negative at ($10.90 million), contrasting with a $106.48 million gain in the prior year. Significant unrealized losses were recorded for Molycorp, Inc., LVI Group Investments, LLC, and Walter Energy, Inc.
- Debt Levels: Total debt increased by approximately $205 million to $1.58 billion, reflecting the issuance of the 2043 Notes and increased utilization of the Senior Secured Facility.
Guidance, Outlook, and Risks
- Capital Resources: The company maintains a Senior Secured Facility with $1.27 billion in commitments, of which $807.5 million was outstanding, leaving $437.3 million in unused capacity. An At-the-Market (ATM) equity program was announced in September 2014, allowing for the sale of up to 16 million shares, though no shares had been sold as of the period end.
- Dividends: The Board declared a dividend of $0.20 per share for the second fiscal quarter of 2015, payable in January 2015. The company aims to maintain its status as a RIC by distributing at least 90% of taxable income.
- 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 and has filed a motion to dismiss.
- Market Risk: The portfolio is exposed to interest rate risk, with approximately 49% of the income-bearing portfolio measured at fair value consisting of floating-rate instruments. A 100 basis point increase in interest rates is estimated to decrease net investment income by $3.4 million.
- Fee Waivers: The investment adviser has agreed to waive management and incentive fees on shares issued in 2012 and 2013 through March 31, 2015, which reduces the effective expense ratio.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the Senior Secured Facility covenants, specifically the asset coverage ratio (minimum 2.0:1.0) and minimum stockholders' equity requirements.
- Unrealized Loss Drivers: Review the specific valuation methodologies and underlying financial performance of portfolio companies contributing to significant unrealized losses, particularly Molycorp, Inc. and Walter Energy, Inc.
- DSI Renal Litigation: Monitor the status of the DSI Renal bankruptcy trustee lawsuit and any potential impact on the company's financial position or reputation.
- PIK Income: Assess the sustainability of Payment-In-Kind (PIK) income, which totaled $14.6 million for the six-month period, and its impact on cash flow versus reported net investment income.
- Portfolio Concentration: Evaluate the concentration risk in the top 10 portfolio companies and the impact of the 68% of investments classified as Level 3 (unobservable inputs) on valuation stability.