Business Context and Reporting Period
Company: Apollo Investment Corporation (AINV)
Filing Type: Form 10-K (Annual Report)
Period Ended: March 31, 2019
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, loans, and equity of private middle-market companies. It is managed by Apollo Investment Management, L.P. (AIM), an affiliate of Apollo Global Management.
Key Financial Metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total Investment Income | $255.1 million | $259.3 million |
| Net Investment Income | $127.8 million | $133.4 million |
| Net Realized and Change in Unrealized Gains (Losses) | ($55.8 million) | ($46.4 million) |
| Net Increase in Net Assets from Operations | $72.0 million | $87.0 million |
| Net Asset Value (NAV) per Share | $19.06 | $19.67 |
| Earnings per Share (Basic) | $1.02 | $1.19 |
| Total Debt Outstanding | $1.13 billion | $0.79 billion |
| Portfolio Yield (Total) | 9.6% | 9.6% |
| Portfolio Composition (Fair Value) | 89% Secured Debt, 8% Equity, 2% Structured Products | 82% Secured Debt, 9% Equity, 3% Structured Products |
Material Changes vs. Prior Period
- Investment Activity: The Company invested $1.28 billion across 42 new and 46 existing portfolio companies in 2019, compared to $1.05 billion across 39 new and 28 existing companies in 2018. The portfolio grew to 113 companies from 90.
- Income Decline: Total investment income decreased by $4.2 million, driven primarily by a $4.4 million drop in dividend income (due to sales of structured products and lower dividends from Merx Aviation) and a $1.7 million decrease in interest income (due to lower prepayment fees and acceleration of discounts).
- Expense Increase: Net expenses increased by $1.4 million. This was primarily due to a $5.3 million increase in interest and debt expenses (driven by higher average debt outstanding and leverage) and a $1.8 million increase in general and administrative expenses (legal fees). These increases were partially offset by a $5.5 million decrease in management and incentive fees.
- Realized Losses: Net realized losses were $50.0 million in 2019, significantly lower than the $258.1 million in 2018. Major 2019 losses included WTI Crude Oil options ($30.0 million), Accelerate Parent Corp ($10.1 million), and Elements Behavioral Health ($11.9 million).
- Debt Leverage: Total debt increased from $0.79 billion to $1.13 billion. The Company amended its Senior Secured Facility to increase commitments to $1.64 billion.
Guidance, Outlook, and Risks
- Regulatory Change: Effective April 4, 2019, the Company's asset coverage ratio requirement was reduced from 200% to 150% under the Small Business Credit Availability Act, allowing for increased leverage (up to $2 of debt for every $1 of net assets).
- Fee Structure Change: A new total return-based incentive fee structure became effective January 1, 2019. No performance-based incentive fees were accrued for the quarter ended March 31, 2019, under the new structure.
- Fee Offset Agreement: On January 16, 2019, the Company entered into an agreement to receive a credit against incentive fees based on revenue generated by AIM affiliates managing aircraft assets.
- Key Risks:
- Interest Rate Risk: 100% of the debt portfolio is floating rate. A 1% increase in LIBOR would increase earnings by approximately $0.04 per share.
- Credit Risk: Significant exposure to middle-market companies, with 90.6% of investments classified as Level 3 (unobservable inputs).
- Liquidity: Investments are largely illiquid. The Senior Secured Facility begins amortizing in December 2022.
- Concentration: Top 10 portfolio companies represent 40.1% of the portfolio, with Merx Aviation Finance, LLC alone representing 17.7%.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the Senior Secured Facility covenants, particularly given the increased leverage and the upcoming amortization schedule starting in 2022.
- Fee Offset Impact: Monitor the actual dollar value of the fee offset credit received from AIM affiliates regarding aircraft asset management to assess its impact on future expense ratios.
- Portfolio Valuation: Review the independent valuation reports for Level 3 assets, specifically the large positions in Merx Aviation Finance, LLC and Dynamic Product Tankers, LLC, to ensure fair value assumptions remain robust.
- PIK Income: Assess the cash flow implications of Payment-in-Kind (PIK) income, which totaled $8.6 million in 2019, as this income must be distributed to maintain RIC status despite not being received in cash.
- Legal Proceedings: Monitor the status of the DSI Renal Holdings bankruptcy litigation, where the Company faces potential damages of approximately $41 million.