MFIC

Business Context and Reporting Period

This summary covers the Form 10-Q filed by Apollo Investment Corporation (AIC) for the quarterly period ended September 30, 2018. AIC is a closed-end, externally managed business development company (BDC) and regulated investment company (RIC) that invests primarily in debt and equity of private middle-market companies. The company is managed by Apollo Investment Management, L.P., an affiliate of Apollo Global Management.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total investment income decreased by $3.6 million compared to the prior year period, primarily driven by a $2.3 million decrease in dividend income due to the sale of structured product investments (CLOs) and a $0.9 million decrease in interest income.
• Expense Increase: Net expenses increased slightly to $65.9 million from $65.7 million. This was driven by a $1.9 million increase in general and administrative expenses (largely due to higher legal fees) and a $0.4 million increase in interest expenses due to higher average debt outstanding and leverage.
• Realized Losses: Net realized losses increased significantly to $31.3 million from $237.4 million in the prior year. The current period losses were primarily driven by $23.5 million in losses on WTI Crude Oil options and a $10.1 million loss on the sale of Accelerate Parent Corp. (American Tire).
• Unrealized Gains: Net change in unrealized losses improved to $8.8 million compared to $230.5 million in the prior year, largely due to significant unrealized gains on Merx Aviation Finance ($11.0 million) and WTI Crude Oil options ($10.4 million).
• Debt Levels: Total debt increased by approximately $156 million compared to March 31, 2018, reflecting increased borrowing under the Senior Secured Facility.

Guidance, Outlook, and Risks

• Reverse Stock Split: On October 30, 2018, the Board approved a one-for-three reverse stock split, effective November 30, 2018. Pro-forma NAV per share would be $19.40.
• Share Repurchases: The Board approved a new $50 million repurchase plan, bringing total available capacity to approximately $53.3 million. The company repurchased 4.26 million shares during the six-month period at an average price of $5.64.
• Distributions: A distribution of $0.15 per share (pre-split) was declared, payable January 4, 2019. The company maintains an "opt-out" dividend reinvestment plan.
• Legal Proceedings: AIC is a defendant in a lawsuit filed by the bankruptcy trustee of DSI Renal Holdings alleging fraudulent conveyance. The company intends to vigorously defend itself but cannot currently assess potential liability.
• Market Risk: The portfolio is heavily weighted toward floating-rate debt (94% of total debt portfolio). A 100 basis point increase in interest rates would increase net investment income by approximately $7.6 million annually.
• Valuation Risk: 88.9% of the portfolio is classified as Level 3 (unobservable inputs), requiring significant management judgment and independent valuation firm input.

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with the Senior Secured Facility covenants, specifically the asset coverage ratio (minimum 2.0:1.0) and minimum stockholders' equity requirements.
• PIK Income Sustainability: Assess the collectability of Payment-in-Kind (PIK) income, which totaled $5.0 million for the six-month period, as this non-cash income must be distributed to maintain RIC status.
• Derivative Exposure: Review the impact of WTI Crude Oil options, which generated significant realized losses ($23.5 million) and unrealized gains ($10.4 million) during the period.
• Non-Qualifying Assets: Monitor the percentage of non-qualifying assets (15.7% as of Sept 30, 2018) to ensure the company remains compliant with the 70% qualifying asset requirement under the 1940 Act.
• Legal Contingency: Track the status of the DSI Renal Holdings litigation for potential material financial impact.