Business Context and Reporting Period
Company: Apollo Investment Corporation (AIC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2012
Business Overview: AIC is a closed-end, externally managed Business Development Company (BDC) and Regulated Investment Company (RIC). It invests primarily in subordinated debt (mezzanine) and senior secured loans of private middle-market companies, as well as equity interests. As of June 30, 2012, the portfolio consisted of 64 companies.
Key Financial Metrics
| Metric | Q2 2012 | Q2 2011 |
|---|---|---|
| Total Assets | $2,885.7 million | $2,775.3 million |
| Total Net Assets | $1,683.0 million | $1,685.2 million |
| Net Asset Value (NAV) per Share | $8.30 | $8.55 |
| Investment Income | $80.3 million | $94.6 million |
| Total Expenses | $41.6 million | $46.9 million |
| Net Investment Income | $38.7 million | $47.7 million |
| Net Realized Loss | $(18.8) million | $(45.9) million |
| Net Change in Unrealized Loss | $(31.5) million | $(1.7) million |
| Net Increase (Decrease) in Net Assets from Operations | $(11.6) million | $0.1 million |
| Earnings (Loss) per Share (Basic & Diluted) | $(0.06) | $0.00 |
| Debt Outstanding | $1,019.9 million | $1,009.3 million |
| Cash and Cash Equivalents | $102.8 million | $9.2 million |
Material Changes vs. Prior Period
- Investment Income Decline: Gross investment income decreased by $14.3 million (15%) compared to Q2 2011, primarily due to a smaller income-producing portfolio size, partially offset by an increase in weighted average portfolio yields.
- Expense Reduction: Total expenses decreased by $5.3 million (11%) due to lower management and incentive fees resulting from a smaller asset base. This was partially offset by $1.1 million in non-recurring expenses related to refinancing the revolving credit facility.
- Unrealized Depreciation: Net change in unrealized loss increased significantly to $31.5 million (vs. $1.7 million in Q2 2011), driven by declines in third-party valued investments, though offset by improving conditions in quoted portfolio segments.
- Realized Losses: Net realized losses improved to $18.8 million from $45.9 million in the prior year. The Q2 2012 losses included a $9.9 million foreign exchange loss from the sale of the AB Acquisitions investment.
- Liquidity Position: Cash and cash equivalents increased substantially to $102.8 million from $9.2 million, reflecting a $100 million purchase of U.S. Treasury bills at quarter-end to enhance investment flexibility.
Guidance, Outlook, and Risks
- Capital Raise: On April 2, 2012, a subsidiary of Apollo Global Management purchased approximately $50 million of newly issued common stock. The Investment Adviser waived management and incentive fees on these proceeds for one year.
- Debt Facility: The Company amended its revolving credit facility in May 2012, extending commitments to $1.14 billion through May 2015. As of June 30, 2012, $550 million was outstanding with $590 million of unused capacity.
- Dividends: Dividends paid totaled $40.6 million ($0.20 per share) for the quarter. The Company intends to distribute taxable income to maintain RIC status.
- Market Risk: The portfolio is exposed to interest rate risk. A hypothetical 1% increase in LIBOR would decrease earnings by approximately $0.02 per share over the next twelve months. No hedging activities were engaged in during the quarter.
- Commitments: The Company had $75 million in outstanding commitments to purchase secured term loans and unsecured bridge loans, and $75.5 million in commitments to fund senior loans ($69.4 million unfunded).
Investor Verification Checklist
- Fee Waiver Impact: Verify the duration and specific terms of the voluntary fee waiver on the $50 million equity issuance to understand its effect on future expense ratios.
- Unrealized Depreciation Drivers: Review the specific portfolio companies contributing to the $31.5 million increase in unrealized losses to assess credit quality trends.
- Foreign Exchange Exposure: Confirm the status of non-US borrowings (Euros and British Pounds) and the impact of currency fluctuations on the $9.9 million realized loss.
- Debt Covenants: Ensure continued compliance with the asset coverage ratio (2.0:1.0) and minimum stockholders' equity requirements under the amended credit facility.
- PIK Income: Monitor the $4.3 million in accrued Payment-in-Kind (PIK) income, as this non-cash income must be distributed to maintain RIC tax status.