Business Context and Reporting Period
Company: Apollo Investment Corporation (Note: Input metadata listed "Midcap Financial Investment Corp," but the filing text identifies the registrant as Apollo Investment Corporation).
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended September 30, 2010.
Business Overview: Apollo Investment Corporation is a closed-end, non-diversified management investment company organized as a Business Development Company (BDC) and a Regulated Investment Company (RIC). It invests primarily in middle-market companies through mezzanine and senior secured loans, often with equity components.
Key Financial Metrics
| Metric | Six Months Ended Sep 30, 2010 | Three Months Ended Sep 30, 2010 | Net Assets (Sep 30, 2010) |
|---|---|---|---|
| Total Investment Income | $169.7 million | $91.5 million | $1,862.3 million |
| Total Expenses | $78.7 million | $41.3 million | |
| Net Investment Income | $91.0 million | $50.2 million | |
| Net Realized Loss | ($85.5 million) | ($89.4 million) | |
| Net Change in Unrealized Gain/Loss | ($21.6 million) | $107.4 million | $9.58 per share |
| Net Increase/(Decrease) in Net Assets from Operations | ($16.1 million) | $68.2 million | |
| Earnings/(Loss) Per Share | ($0.08) | $0.35 | $1,093.4 million |
| Credit Facility Borrowings Outstanding | $1,093.4 million | $1,093.4 million | |
| Cash and Cash Equivalents | $27.7 million | $26.0 million | $515.3 million |
| Unused Credit Facility Capacity | $515.3 million | $515.3 million |
Material Changes vs. Prior Period
- Operating Results: For the six months ended September 30, 2010, the Company reported a net decrease in net assets of $16.1 million, compared to a net increase of $193.6 million for the same period in 2009. This decline was driven by a net realized loss of $85.5 million and net unrealized depreciation of $21.6 million, offsetting net investment income of $91.0 million.
- Expense Increases: Total expenses rose to $78.7 million for the six months ended September 30, 2010, from $66.2 million in the prior year period. The increase was primarily due to higher interest and credit facility expenses ($20.6 million vs. $9.5 million) following a December 2009 amendment to the revolving credit facility.
- Portfolio Composition: As of September 30, 2010, the portfolio consisted of 67 companies, invested 31% in senior secured loans, 59% in subordinated debt, 1% in preferred equity, and 9% in common equity/warrants. This compares to 71 companies at September 30, 2009.
- Investment Activity: The Company invested $184 million in the quarter ended September 30, 2010, compared to $39 million in the same quarter of 2009. Sales/prepayments totaled $127 million in the current quarter versus $30 million in the prior year.
Guidance, Outlook, Risks, and Unusual Items
- Portfolio Company Distress: Grand Prix Holdings, LLC (Innkeepers USA Trust), a portfolio company, filed for Chapter 11 bankruptcy protection on July 19, 2010. The Company's preferred equity and common equity investments in this entity were written down to zero fair value. The Company is engaged in discussions regarding reorganization terms.
- Legal Proceedings: A complaint filed by Midland Loan Services, Inc. against the Company regarding a guaranty for Innkeepers' property improvement projects was dismissed without prejudice by a New York State Supreme Court judge on November 4, 2010.
- Capital Markets Activity: On October 4, 2010 (subsequent to the period end), the Company sold $225 million in five-year senior secured notes at a 6.25% fixed rate. Proceeds were used for new investments and to reduce borrowings on the revolving credit facility.
- Dividends: Dividends paid for the six months ended September 30, 2010, totaled $108.7 million ($0.56 per share). The Company maintains an "opt-out" dividend reinvestment plan.
- Market Risk: The Company is subject to interest rate risk, though floating-rate assets and liabilities were closely matched as of September 30, 2010. No interest rate hedging activities were engaged in during the period.
Investor Verification Checklist
- Bankruptcy Exposure: Verify the current status of the Innkeepers USA Trust (Grand Prix Holdings) reorganization and the potential recovery value of the Company's $101.3 million cost basis investment.
- Debt Covenants: Confirm continued compliance with the asset coverage ratio (2.0:1.0) and minimum liquidity requirements under the $1.61 billion revolving credit facility.
- Valuation Methodology: Review the fair value determination for Level 3 assets (97% of total investments), which rely on unobservable inputs and board discretion, particularly given the volatility in the credit markets.
- Realized Losses: Assess the impact of the $85.5 million net realized loss on the Company's ability to maintain dividend distributions and meet RIC tax requirements.
- Interest Rate Sensitivity: Monitor the impact of rising LIBOR rates on the Company's floating-rate debt portfolio (37% of income-bearing portfolio) and its credit facility costs.