Business Context and Reporting Period
Company: Apollo Investment Corporation (AIC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2012
Business Overview: AIC is a closed-end, externally managed Business Development Company (BDC) and Regulated Investment Company (RIC). It invests primarily in senior secured loans, subordinated debt, and equity of private middle-market companies. As of December 31, 2012, the portfolio consisted of 71 companies.
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 2012 | Nine Months Ended Dec 31, 2012 | Dec 31, 2012 Balance Sheet |
|---|---|---|---|
| Total Investment Income | $83.2 million | $247.4 million | N/A |
| Total Expenses | $41.1 million | $122.1 million | N/A |
| Net Investment Income | $42.1 million | $125.3 million | N/A |
| Net Realized Gain (Loss) | ($9.3 million) | ($68.7 million) | N/A |
| Net Change in Unrealized Appreciation (Depreciation) | ($55.5 million) | ($17.9 million) | N/A |
| Net Increase (Decrease) in Net Assets from Operations | ($22.7 million) | $38.7 million | N/A |
| Earnings Per Share (Basic) | ($0.11) | $0.19 | N/A |
| Total Assets | N/A | N/A | $2,779.5 million |
| Total Debt | N/A | N/A | $1,040.9 million |
| Cash and Cash Equivalents | N/A | N/A | $41.5 million |
| Net Assets | N/A | N/A | $1,652.1 million |
| Net Asset Value (NAV) per Share | N/A | N/A | $8.14 |
Material Changes vs. Prior Period
- Investment Income: Gross investment income decreased slightly for the three months ended Dec 31, 2012 ($83.2M) compared to the same period in 2011 ($83.8M). For the nine-month period, income decreased from $272.4M in 2011 to $247.4M in 2012, attributed to a smaller portfolio base and repositioning up the capital structure.
- Expenses: Total expenses declined to $41.1M (3-month) and $122.1M (9-month) in 2012, down from $45.3M and $140.7M in 2011. This reduction was driven by a smaller portfolio base, voluntary fee waivers by the Investment Adviser, and lower average debt outstanding.
- Realized Losses: Net realized losses improved significantly. The nine-month loss was $68.7M in 2012 compared to $341.1M in 2011. The 2011 loss was heavily impacted by the exit of Grand Prix Holdings ($274M loss).
- Unrealized Depreciation: The portfolio experienced a net change in unrealized depreciation of $55.5M for the quarter and $17.9M for the nine months ended Dec 31, 2012. This contrasts with a net unrealized appreciation of $300.2M for the quarter ended Dec 31, 2011, which included a reclassification of previously recognized losses on Grand Prix Holdings.
- Portfolio Composition: As of Dec 31, 2012, the portfolio was 40% senior secured loans, 48% subordinated debt, 5% CLOs, and 7% equity/warrants. This shifted from March 31, 2012, where senior secured loans were 30% and subordinated debt was 60%.
Guidance, Outlook, Risks, and Unusual Items
- Capital Activity: In April 2012, a subsidiary of Apollo Global Management purchased 5.85 million shares for $50 million. The Investment Adviser waived management and incentive fees on this capital for one year.
- Debt Refinancing: In May 2012, the Company amended its Senior Secured Facility, extending commitments to $1.14 billion through May 2015. In October 2012, the Company issued $150 million of 6.625% Senior Unsecured Notes due 2042.
- Dividends: The Board declared a dividend of $0.20 per share for the fourth fiscal quarter of 2013, payable April 4, 2013. For the nine months ended Dec 31, 2012, total dividends were $121.7 million ($0.60 per share).
- Unusual Items: The nine-month 2012 results included $1.1 million in net non-recurring expenses related to the refinancing of the Senior Secured Facility. The nine-month 2011 results included approximately $4.0 million in net non-recurring expenses.
- Risks: The Company is subject to interest rate risk, with 39% of the income-bearing portfolio being floating rate. A 1% increase in LIBOR would decrease earnings by approximately one cent per share. The Company also faces risks related to the creditworthiness of portfolio companies and the ability to maintain RIC status.
Investor Verification Checklist
- Fee Waivers: Verify the impact of the voluntary management and incentive fee waivers on the reported expense ratios and net investment income.
- PIK Income: Review the level of Payment-in-Kind (PIK) interest accrued ($13.9M for the nine months) versus cash received, as this affects liquidity despite being recognized as income.
- Debt Covenants: Confirm compliance with the Senior Secured Facility covenants, specifically the asset coverage ratio (2.0:1.0) and minimum stockholders' equity requirements.
- Level 3 Valuations: Examine the fair value hierarchy disclosures, as 100% of the investment portfolio is categorized as Level 3 (unobservable inputs), relying heavily on management estimates and independent valuations.
- Unfunded Commitments: Note the $158.4 million in outstanding commitments to purchase loans as of Dec 31, 2012, which represents future capital deployment obligations.