Business Context and Reporting Period
Company: Apollo Investment Corporation (AINV)
Filing Type: Form 10-K (Annual Report)
Period Ended: March 31, 2020
Business Model: A closed-end, externally managed Business Development Company (BDC) and Regulated Investment Company (RIC). The Company invests primarily in secured and unsecured debt and equity of private middle-market companies. It is managed by Apollo Investment Management, L.P. (AIM), an affiliate of Apollo Global Management, Inc.
Key Financial Metrics
| Metric | 2020 (in millions) | 2019 (in millions) |
|---|---|---|
| Total Investment Income | $276.9 | $255.1 |
| Net Investment Income | $145.3 | $127.8 |
| Net Realized and Change in Unrealized Gains (Losses) | $(261.3) | $(55.8) |
| Net Increase (Decrease) in Net Assets from Operations | $(116.1) | $72.0 |
| Net Asset Value (NAV) per Share | $15.70 | $19.06 |
| Total Assets | $2,871.1 | $2,497.8 |
| Total Debt Outstanding | $1,794.6 | $1,128.7 |
| Net Assets | $1,024.3 | $1,312.6 |
| Weighted Average Yield on Total Portfolio | 8.0% | 9.6% |
| Total Return (Market Price + Distributions) | (48.6)% | 8.3% |
Material Changes vs. Prior Period
- Significant Unrealized Losses: The Company reported a net decrease in net assets of $116.1 million, driven primarily by a $255.0 million net change in unrealized losses. This is a sharp deterioration from the $5.8 million unrealized loss in 2019. Management attributes this primarily to the immediate adverse economic effects of the COVID-19 pandemic and the re-pricing of credit risk.
- Increased Leverage: Total debt outstanding increased by approximately 59% to $1.79 billion (from $1.13 billion), raising net leverage from 0.83x to 1.71x. This was funded by a Senior Secured Credit Facility and $350 million in 2025 Notes.
- Expense Growth: Net expenses increased to $131.6 million from $127.3 million. Interest and debt expenses rose by $15.2 million due to higher debt levels, partially offset by a decrease in performance-based incentive fees ($1.98 million in 2020 vs. $21.19 million in 2019) due to the implementation of a total return-based fee structure.
- Portfolio Composition: The portfolio grew to 152 companies (from 113). The portfolio is now 94% secured debt and 6% common equity/interests. The weighted average yield on the debt portfolio declined to 8.7% from 10.2%.
Guidance, Outlook, and Risks
- COVID-19 Impact: The pandemic is identified as an extraordinary circumstance materially impacting fair value. Management expects potential defaults, financial distress, and further unrealized depreciation in portfolio companies, particularly in aviation, energy, and hospitality sectors. Specific impairments were noted for Merx Aviation Finance, LLC.
- Liquidity and Capital Resources: The Company maintains a $1.81 billion Senior Secured Credit Facility with $354.4 million of unused capacity. Management believes current resources are adequate for the next 12 months, though the facility begins amortizing in December 2022.
- Interest Rate Risk: 100% of the debt portfolio is floating rate (LIBOR-based). A hypothetical 100 basis point increase in LIBOR would increase net investment income by approximately $6.0 million ($0.092 per share).
- Legal Proceedings: The Company is a defendant in a fraudulent conveyance lawsuit filed by the bankruptcy trustee of DSI Renal Holdings, seeking approximately $41 million in damages. The Company intends to vigorously defend itself.
- Dividends: The Company declared quarterly distributions of $0.45 per share throughout the fiscal year. To maintain RIC status, it must distribute at least 90% of investment company taxable income.
Investor Verification Checklist
- Valuation Sensitivity: Verify the methodology used to value Level 3 investments (100% of the portfolio) given the significant unrealized losses attributed to the pandemic.
- Credit Quality: Review the specific exposure to distressed sectors (Aviation, Energy, Hospitality) and the status of non-accrual loans.
- Leverage Covenants: Confirm compliance with the 150% asset coverage ratio and the Senior Secured Credit Facility covenants, especially given the decline in NAV.
- Fee Structure: Understand the impact of the total return-based incentive fee on future expense volatility.
- Legal Exposure: Monitor the status of the DSI Renal Holdings litigation and potential liability exposure.