Business Context and Reporting Period
Company: Apollo Investment Corporation (AIC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2013
Business Overview: AIC is a closed-end, externally managed business development company (BDC) and regulated investment company (RIC). Its objective is to generate current income and capital appreciation primarily through debt and equity investments in private middle-market companies. As of September 30, 2013, the portfolio consisted of 93 portfolio companies.
Key Financial Metrics
| Metric | Six Months Ended Sep 30, 2013 | Three Months Ended Sep 30, 2013 | As of Sep 30, 2013 |
|---|---|---|---|
| Total Investment Income | $190.4 million | $93.7 million | - |
| Net Investment Income | $102.0 million | $49.6 million | - |
| Net Realized Loss | $(113.2) million | $(17.3) million | - |
| Net Change in Unrealized Appreciation | $106.5 million | $44.1 million | - |
| Net Increase in Net Assets from Operations | $95.2 million | $76.4 million | - |
| Earnings Per Share (Basic) | $0.43 | $0.34 | - |
| Net Asset Value (NAV) per Share | - | - | $8.30 |
| Total Debt Outstanding | - | - | $1.082 billion |
| Cash and Cash Equivalents | - | - | $4.5 million |
| Portfolio Turnover Ratio | 35.5% | - | - |
Material Changes vs. Prior Period
- Investment Income Growth: Net investment income increased to $102.0 million for the six months ended September 30, 2013, compared to $83.2 million in the prior year period. This was driven by a larger investment portfolio and non-recurring income (prepayment fees) of approximately $15.3 million.
- Expense Increases: Net expenses rose to $88.4 million (six months 2013) from $81.0 million (six months 2012). The increase was primarily due to higher interest and debt expenses ($33.3 million vs. $28.1 million) resulting from a larger average debt balance and the issuance of new notes in 2012 and 2013.
- Realized Losses: Net realized losses were $113.2 million for the six months ended September 30, 2013, compared to $59.4 million in the prior year. Significant losses were driven by the exits of Cengage Learning Acquisitions, ATI Acquisition Company, and Texas Competitive Electric Holdings (TXU).
- Unrealized Gains: Net change in unrealized appreciation was $106.5 million, largely due to the reversal of previously recognized unrealized depreciation upon the exit of the aforementioned portfolio companies.
- Capital Activity: The Company issued 21.85 million shares of common stock on May 20, 2013, raising approximately $181.9 million in net proceeds.
Guidance, Outlook, Risks, and Unusual Items
- Dividends: The Board declared a dividend of $0.20 per share for the second fiscal quarter of 2014, payable January 6, 2014. For the six months ended September 30, 2013, total dividends were $89.9 million ($0.40 per share).
- Fee Waivers: Apollo Investment Management, L.P. (AIM) has agreed to waive base management and incentive fees associated with equity capital raised on May 20, 2013, through March 31, 2014. Total fees waived for the six months ended September 30, 2013, were $5.3 million.
- Legal Proceedings: On May 20, 2013, AIC was named as a defendant in a complaint 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.
- Iran Transactions Disclosure: The Company disclosed that an affiliate (CEVA) engaged in minor transactions with Iran (total revenue approx. $2,267) in violation of internal compliance policies. CEVA has self-reported these to the OFAC. The Company states these activities do not involve AIC directly.
- Liquidity: As of September 30, 2013, AIC had $934 million of unused capacity under its $1.25 billion Senior Secured Facility. The Company is in compliance with all debt covenants.
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.
- Legal Exposure: Monitor the status of the DSI Renal Holdings litigation and potential financial impact of the $41 million claim.
- Portfolio Concentration: Review the industry breakdown; Business Services (12.5%), Oil & Gas (11.4%), and Financial Services (11.1%) represent the largest sectors.
- PIK Income: Assess the sustainability of dividends given that accrued Payment-in-Kind (PIK) interest totaled $13.0 million for the six-month period, representing non-cash income that must be distributed to maintain RIC status.
- Fee Waiver Expiration: Note that fee waivers associated with the May 2013 equity issuance expire on March 31, 2014, which may impact future expense ratios.