Business Context and Reporting Period
This Form 8-K filing by Apollo Investment Corporation (NASDAQ: AINV) reports financial results for the fiscal quarter ended June 30, 2006. Apollo is a closed-end investment company operating as a business development company, primarily investing in senior secured loans, mezzanine loans, and equity in middle-market private companies. The filing includes a press release and unaudited financial statements.
Key Financial Metrics
- Investment Portfolio: $1.79 billion at fair value (Cost: $1.70 billion).
- Net Assets: $1.27 billion.
- Net Asset Value (NAV) per Share: $15.59.
- Net Investment Income: $31.7 million ($0.39 per share).
- Net Realized and Unrealized Gains: $39.4 million ($0.49 per share).
- Net Increase in Net Assets from Operations: $71.2 million ($0.88 per share).
- Dividends: $0.45 per share (9.7% yield).
- Debt and Liquidity: $536 million in borrowings outstanding under a $1.25 billion credit facility; $714 million available for use.
- Portfolio Composition: 48 companies; 63% subordinated debt, 25% senior secured loans, 9% common equity, 3% preferred equity.
Material Changes vs. Prior Period
Comparing the three months ended June 30, 2006, to the same period in 2005:
- Investment Income: Increased from $37.8 million to $55.9 million, driven by portfolio growth and asset mix changes. Notable items included a $4.9 million dividend from LM Acquisition, Ltd. and a $0.6 million write-off on Diam International.
- Expenses: Rose from $12.5 million to $24.1 million. This increase was primarily due to higher base management fees ($8.5M vs $4.5M) and interest/credit facility expenses ($5.6M vs $0.5M) resulting from portfolio expansion.
- Net Investment Income: Increased to $31.7 million from $25.2 million, though per-share income decreased slightly to $0.39 from $0.40.
- Realized Gains/Losses: Shifted from a net realized gain of $6.8 million in 2005 to a net realized loss of $3.0 million in 2006. The 2006 loss was largely attributable to a $2.9 million currency hedge loss on a forward Euro contract.
- Unrealized Appreciation: Net unrealized appreciation increased by $42.4 million in 2006, compared to a decrease of $18.5 million in 2005.
- Portfolio Activity: Investments totaled $287 million (4 new companies) versus $250 million in the prior year. Exits totaled $124 million.
Outlook, Risks, and Management Commentary
Management Commentary: CEO John J. Hannan stated the company is well-positioned to take advantage of market conditions showing "increasingly better value," citing a strong balance sheet and a growing investment team. Management expects to deliver continued strong returns and stable dividends.
Liquidity and Capital: The company relies on a $1.25 billion credit facility maturing in April 2011. It may raise additional equity or debt or securitize investments in the future. It has access to an additional $750 million in credit commitments as its equity base grows.
Risks and Contingencies:
- Dividend Sustainability: The company cannot assure future distributions at specific levels. Failure to distribute 90% of taxable income or 98% of total income could result in adverse tax consequences and loss of Regulated Investment Company (RIC) status.
- Asset Coverage: Distributions may be limited by asset coverage tests under the Investment Company Act of 1940 and credit facility provisions.
- Forward-Looking Statements: Future results depend on general economic conditions, portfolio company performance, and the ability to execute expected financings.
Investor Verification Checklist
- Verify the impact of the $2.9 million currency hedge loss on future hedging strategies and realized gains.
- Confirm the status of Diam International, which is in non-accrual status following a $0.6 million write-off.
- Monitor the utilization of the $1.25 billion credit facility, currently at $536 million, and the company's ability to access the additional $750 million in commitments.
- Review the composition of the portfolio, specifically the 63% allocation to subordinated debt and the weighted average yield of 13.3% on the total debt portfolio.
- Assess the sustainability of the 9.7% dividend yield given the requirement to distribute 90% of taxable income to maintain RIC status.