Business Context and Reporting Period
Company: Apollo Investment Corporation (Note: The input metadata listed "Midcap Financial Investment Corp," but the filing text identifies the registrant as Apollo Investment Corporation, a Business Development Company (BDC) and Regulated Investment Company (RIC).)
Reporting Period: Fiscal year ended March 31, 2012.
Business Overview: Apollo Investment is a closed-end, externally managed BDC that invests primarily in senior secured loans, subordinated (mezzanine) debt, and equity of private middle-market companies. The company is managed by Apollo Investment Management, L.P. (AIM), an affiliate of Apollo Global Management, LLC.
Key Financial Metrics
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Total Investment Income | $357.6 million | $358.8 million |
| Net Investment Income | $172.7 million ($0.88 per share) | $191.2 million ($0.99 per share) |
| Net Realized and Unrealized Gains (Losses) | ($259.0 million) | ($10.8 million) |
| Net Increase (Decrease) in Net Assets from Operations | ($86.3 million) / ($0.44 per share) | $180.4 million / $0.93 per share |
| Total Assets | $2.78 billion | $3.15 billion |
| Debt Outstanding | $1.01 billion | $1.05 billion |
| Total Net Assets | $1.69 billion | $1.96 billion |
| Net Asset Value (NAV) per Share | $8.55 | $10.03 |
| Weighted Average Yield on Debt Portfolio | 11.9% | 11.6% |
| Portfolio Composition (Fair Value) | 30% Senior Secured Loans, 60% Subordinated Debt, 10% Equity | 33% Senior Secured Loans, 58% Subordinated Debt, 9% Equity |
Material Changes vs. Prior Period
- Operating Loss: The company reported a net decrease in net assets from operations of $86.3 million in 2012, compared to a net increase of $180.4 million in 2011. This reversal was driven primarily by significant net realized losses.
- Realized Losses: Net realized losses totaled $341.4 million in 2012, a sharp increase from $152.0 million in 2011. The 2012 losses were largely attributed to the exit of Grand Prix Holdings (Innkeepers USA), which accounted for over $273 million of the realized loss, reversing previously recorded unrealized losses.
- Net Investment Income Decline: Net investment income decreased by approximately 9.7% year-over-year, primarily due to a smaller income-producing portfolio size, partially offset by an increase in the weighted average portfolio yield.
- Expense Increase: Total net expenses rose to $184.8 million from $167.6 million. This increase was driven by higher interest and debt expenses (up ~100 basis points in weighted average annual interest cost) and over $4 million in non-recurring general and administrative expenses.
- Portfolio Turnover: Investment activity increased, with $1.5 billion invested in 2012 compared to $1.1 billion in 2011. Sales and prepayments also increased significantly to $1.6 billion from $977 million.
Guidance, Outlook, Risks, and Unusual Items
- Dividends: The company declared total dividends of $1.04 per share for the fiscal year ($0.28 per quarter for the first three quarters, reduced to $0.20 for the fourth quarter). The company maintains an "opt-out" dividend reinvestment plan.
- Capital Markets & Liquidity: Management noted that capital markets remain challenging. The company has a senior secured revolving credit facility with $715 million of unused capacity as of March 31, 2012. Subsequent to the period end, the facility was amended and restated to extend commitments through May 2015 with a final maturity of May 2016.
- Key Risks:
- Credit Risk: High exposure to middle-market companies with speculative characteristics; significant realized losses in 2012 highlight this risk.
- Leverage: The company uses debt to finance investments, which magnifies gains and losses. Asset coverage ratios must be maintained to comply with the 1940 Act.
- Valuation Uncertainty: A significant portion of the portfolio consists of private securities valued in good faith by the Board, involving subjective judgments and Level 3 inputs.
- Regulatory: Risks associated with maintaining RIC status (requiring 90% distribution of taxable income) and BDC status (70% investment in qualifying assets).
- Unusual Items: The $273 million realized loss on Grand Prix Holdings was a specific, material event driving the year's performance. Additionally, the company recognized over $4 million in non-recurring G&A expenses.
Important Facts for Investor Verification
- Realized Loss Drivers: Verify the specific details and recovery prospects regarding the Grand Prix Holdings (Innkeepers USA) exit, which dominated the realized losses for the year.
- Debt Covenants: Confirm continued compliance with asset coverage ratios and other financial covenants given the decline in NAV and the significant realized losses.
- Dividend Sustainability: Assess the ability to maintain dividend levels given the reduction in the fourth quarter and the reliance on non-cash income (PIK interest) to fund distributions.
- Portfolio Quality: Review the credit ratings and performance of the remaining 62 portfolio companies, particularly those in the subordinated debt tranche which comprises 60% of the portfolio.
- Fee Structure: Note that the investment adviser receives a base fee (2.00% of gross assets) and an incentive fee based on net investment income and capital gains, which may create conflicts regarding risk-taking.