Midcap Financial Investment Corp current report, 29 May 2007

Business Context and Reporting Period

This Form 8-K, filed on May 29, 2007, reports the financial results for Apollo Investment Corporation (NASDAQ: AINV) for the quarter and fiscal year ended March 31, 2007. Apollo is a closed-end investment company operating as a business development company, primarily investing in senior secured loans, mezzanine debt, and equity in middle-market private companies.

Key Financial Metrics

Quarter Ended March 31, 2007

  • Net Income: $102.8 million ($1.04 per share)
  • Net Investment Income (after incentive fee accrual): $21.7 million ($0.22 per share)
  • Net Realized Gains: $106.6 million ($1.08 per share)
  • Net Change in Unrealized Appreciation: ($25.6 million) ($0.26 per share)
  • Dividends Declared: $0.51 per share
  • Investment Portfolio Value: $2.35 billion
  • Net Assets: $1.85 billion
  • Net Asset Value (NAV) per Share: $17.87

Fiscal Year Ended March 31, 2007

  • Net Income: $312.2 million ($3.64 per share)
  • Net Investment Income (after incentive fee accrual): $125.3 million ($1.46 per share)
  • Net Realized Gains: $132.9 million ($1.55 per share)
  • Net Change in Unrealized Appreciation: $54.0 million ($0.63 per share)
  • Total Dividends Declared: $1.93 per share

Liquidity and Capital Resources

  • Credit Facility: $1.7 billion total commitment; $492 million outstanding; $1.208 billion available.
  • Equity Offering: Closed a follow-on offering in the quarter, issuing 20.7 million shares for $443 million in net proceeds.
  • Portfolio Composition: 61% subordinated debt, 26% senior secured loans, 9% common equity/warrants, 4% preferred equity.
  • Weighted Average Yields: 13.1% on total debt portfolio.

Material Changes vs. Prior Period

  • Net Income Growth: Net income for the quarter increased from $42.3 million in the prior year to $102.8 million, driven primarily by a $107.6 million realized gain from the sale of equity securities in Prysmian (Lux) Sarl.
  • Realized Gains: Net realized gains surged from $0.3 million in the prior quarter to $106.6 million. For the fiscal year, gains increased from $11.2 million to $132.9 million.
  • Unrealized Appreciation: The quarter saw a decrease of $25.6 million in unrealized appreciation, largely due to the reversal of unrealized gains on the Prysmian investment upon realization. The fiscal year showed an increase of $54.0 million compared to $20.1 million in the prior year.
  • Expenses: Net expenses rose to $53.1 million for the quarter (from $19.8 million) and $139.7 million for the fiscal year (from $63.7 million). This increase was primarily due to a $21.3 million accrual for net realized capital gain incentive fees and higher base management fees associated with portfolio growth.
  • Portfolio Activity: Investment sales and prepayments totaled $349 million for the quarter and $845 million for the fiscal year, compared to $91 million and $452 million in the respective prior periods.

Outlook, Management Commentary, and Risks

  • Management Commentary: CEO John J. Hannan highlighted strong relationships with sponsors and banks, noting total invested capital since IPO exceeds $3.4 billion with an IRR over 21%. The company remains well-positioned with significant capital resources and good dividend visibility for fiscal 2008.
  • Recent Transactions:
    • Prysmian: Apollo indirectly owns approximately 4% of Prysmian SpA following an IPO in Milan. The position is subject to a 180-day lock-up.
    • Innkeepers USA Trust: Apollo agreed to acquire Innkeepers for $17.75 per share in cash plus assumption of debt. Apollo committed up to $200 million in equity. Closing is expected in the second quarter of 2007.
  • Risks and Contingencies: The filing includes standard forward-looking statement disclaimers regarding future operating results, portfolio company performance, general economic conditions, and the timing of cash flows. The Prysmian investment is subject to a lock-up period, and the Innkeepers acquisition is subject to shareholder approval and customary closing conditions.

Investor Verification Checklist

  • Verify the sustainability of net investment income excluding the one-time $107.6 million Prysmian realized gain.
  • Confirm the status and closing timeline of the Innkeepers USA Trust acquisition.
  • Monitor the 180-day lock-up expiration for the Prysmian SpA equity position.
  • Review the impact of the $21.3 million accrued incentive fee on future cash distributions.
  • Assess the utilization of the $1.208 billion available credit facility for future investments.