Business Context and Reporting Period
Company: Apollo Investment Corporation (AIC), a closed-end, non-diversified business development company (BDC) and regulated investment company (RIC).
Reporting Period: Quarter and nine months ended December 31, 2009.
Overview: AIC invests primarily in middle-market companies through mezzanine and senior secured loans, often with equity components. The company reported a significant recovery in net asset value (NAV) compared to the prior year, driven by improving capital market conditions and portfolio valuations.
Key Financial Metrics
| Metric | 9 Months Ended Dec 31, 2009 | 9 Months Ended Dec 31, 2008 |
|---|---|---|
| Net Investment Income | $150.9 million | $155.6 million |
| Net Realized Loss | $(253.4) million | $(63.4) million |
| Net Change in Unrealized Gain | $375.6 million | $(733.9) million |
| Net Increase in Net Assets from Operations | $273.2 million | $(641.7) million |
| Earnings Per Share (Basic & Diluted) | $1.78 | $(4.63) |
| Net Asset Value (NAV) Per Share | $10.40 | $9.82 (Mar 31, 2009) |
| Total Net Assets | $1.83 billion | $1.40 billion (Mar 31, 2009) |
| Cash and Cash Equivalents | $508.1 million | $3.2 million |
| Debt Outstanding (Credit Facility) | $947.7 million | $1,057.6 million (Mar 31, 2009) |
| Unused Credit Facility Capacity | $611.1 million | N/A |
Material Changes vs. Prior Period
- Operational Turnaround: The company swung from a net decrease in net assets of $641.7 million in the prior year to a net increase of $273.2 million. This was primarily driven by a $375.6 million net unrealized gain, reversing the $733.9 million unrealized loss recorded in the same period of 2008.
- Realized Losses: Net realized losses increased to $253.4 million from $63.4 million, attributed to investment sales and prepayments totaling $167.1 million.
- Liquidity Position: Cash and cash equivalents surged from $3.2 million to $508.1 million, largely due to the purchase of $500 million in U.S. Treasury bills at quarter-end to enhance investment flexibility.
- Expense Reduction: Total expenses decreased to $100.5 million from $135.6 million. Interest and credit facility expenses dropped significantly ($14.5 million vs. $42.0 million) due to a decrease in average LIBOR rates.
- Portfolio Composition: The portfolio consists of 70 companies. Fixed-rate debt now comprises 63% of the income-bearing portfolio, up from 70% in 2008, while floating-rate debt is 37%.
Guidance, Outlook, and Risks
- Management Commentary: Management attributes the unrealized appreciation to improving capital market conditions and net changes in specific portfolio company fundamentals. The company continues to seek investment opportunities in middle-market companies.
- Capital Resources: AIC maintains a $1.56 billion senior secured revolving credit facility. As of December 31, 2009, $948 million was drawn with $611 million remaining unused. The facility was amended in December 2009 to extend maturities for certain lenders to 2013.
- Dividends: Dividends paid for the nine months ended December 31, 2009, totaled $132.0 million ($0.82 per share). The company maintains an "opt-out" dividend reinvestment plan.
- Risks and Contingencies:
- Valuation Risk: A significant portion of the portfolio (Level 3 assets) relies on unobservable inputs and fair value determinations by the Board of Directors, involving subjective judgments.
- Interest Rate Risk: While floating-rate assets and liabilities are closely matched, changes in LIBOR could impact net investment income.
- Regulatory Compliance: As a BDC, AIC must maintain specific asset coverage ratios and invest at least 70% of assets in qualifying assets.
Investor Verification Checklist
- Valuation Methodology: Verify the assumptions used for Level 3 fair value measurements, which constitute the majority of the portfolio, to ensure they align with current market conditions.
- Cash Position Sustainability: Confirm whether the $500 million in U.S. Treasury bills held at quarter-end represents a temporary liquidity buffer or a shift in investment strategy for the upcoming quarter.
- Debt Covenants: Review compliance with the credit facility covenants, specifically the asset coverage ratio (2.0:1.0) and minimum stockholders' equity requirements.
- Realized Loss Drivers: Investigate the specific portfolio companies contributing to the $253.4 million in realized losses to assess potential credit deterioration.
- Dividend Coverage: Analyze the ratio of net investment income to dividends paid to ensure the sustainability of the current distribution rate.