Business Context and Reporting Period
This summary covers the Form 10-Q filed by Apollo Investment Corporation (AIC) for the quarterly period ended December 31, 2017. 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 filing includes unaudited financial statements for the three and nine months ended December 31, 2017, compared to the same periods in 2016.
Key Financial Metrics
| Metric | Nine Months Ended Dec 31, 2017 | Nine Months Ended Dec 31, 2016 |
|---|---|---|
| Total Investment Income | $197.8 million | $213.6 million |
| Net Investment Income | $101.4 million | $112.0 million |
| Net Realized and Change in Unrealized Gains (Losses) | ($35.0 million) | ($101.6 million) |
| Net Increase in Net Assets from Operations | $66.4 million | $10.3 million |
| Earnings Per Share (EPS) | $0.30 | $0.05 |
| Net Assets | $1,441.1 million | $1,481.8 million (Mar 31, 2017) |
| Net Asset Value (NAV) Per Share | $6.60 | $6.74 (Mar 31, 2017) |
| Total Debt Outstanding | $886.8 million | $866.9 million (Mar 31, 2017) |
| Cash and Cash Equivalents | $12.2 million | $9.8 million (Mar 31, 2017) |
Portfolio Composition (at Fair Value): Secured debt (81%), Unsecured debt (5%), Structured products (4%), Preferred equity (1%), and Common equity/warrants (9%). The weighted average yield on the total debt portfolio was 10.5%.
Material Changes vs. Prior Period
- Investment Income Decline: Total investment income decreased by $15.8 million (7.4%) compared to the prior year, primarily driven by a $12.8 million decrease in dividend income due to exits from CLOs and restructuring of certain portfolio companies. This was partially offset by higher prepayment fees and income from the acceleration of discounts.
- Expense Reduction: Net expenses decreased by $5.2 million (5.1%) year-over-year. This was largely due to a $5.4 million reduction in interest and debt expenses following the early redemption of the 2042 Senior Unsecured Notes in October 2017 and a reduction in average debt outstanding.
- Realized Losses: The Company recognized net realized losses of $238.0 million for the nine months ended December 31, 2017, compared to net realized gains of $44.7 million in the prior year. Significant losses included write-offs of Venoco, Inc. ($89.0 million) and Delta Educational Systems/Gryphon Colleges ($72.8 million), as well as the sale of AIC SPV Holdings I, LLC ($44.3 million).
- Unrealized Gains: Net change in unrealized losses improved significantly to a gain of $202.9 million (compared to a loss of $146.3 million in the prior year), driven by recoveries in previously written-off positions (Venoco, Delta Career Education) and other portfolio adjustments.
- Share Repurchases: The Company repurchased 1,438,700 shares for $8.6 million during the period, representing a discount of approximately 10.74% to the average NAV.
Guidance, Outlook, and Risks
- Fee Waivers: The Investment Adviser has agreed to waive 25% of its base management fee (reducing it to 1.50%) and up to 25% of its performance-based incentive fee through March 31, 2018, contingent on cumulative net losses.
- Debt Management: The Company redeemed its 2042 Senior Unsecured Notes ($150 million) in October 2017, resulting in a realized loss of $5.8 million but reducing future interest costs. The Senior Secured Facility had $805.4 million of unused capacity as of December 31, 2017.
- Subsequent Events: Following the quarter-end, a significant portion of the investment in Solarplicity Group Limited was repaid, reducing exposure by approximately $106.4 million. Additionally, the Board declared a distribution of $0.15 per share payable in April 2018.
- Risks: The portfolio contains a high proportion of Level 3 assets (87.8%), which rely on unobservable inputs and management judgment for valuation. The Company faces risks related to the creditworthiness of portfolio companies, interest rate fluctuations (92% of the debt portfolio is floating rate), and the ability to maintain RIC status through distributions.
- Legal Proceedings: The Company is a defendant in a bankruptcy proceeding involving DSI Renal Holdings (seeking approx. $41 million) and has settled an adversary proceeding with the Trustee of Energy & Exploration Partners, Inc.
Investor Verification Checklist
- Write-off Realization: Verify the impact of the $238 million in realized losses, specifically the write-offs of Venoco and Delta Career Education, on the long-term capital loss carryforwards and future tax implications.
- PIK Income Sustainability: Assess the collectability of Payment-in-Kind (PIK) income, which totaled $17.6 million for the period, as this non-cash income must be distributed to maintain RIC status.
- Level 3 Valuations: Review the significant unobservable inputs (discount rates, EBITDA multiples) used to value the 87.8% of the portfolio classified as Level 3 assets.
- Debt Covenant Compliance: Confirm continued compliance with the Senior Secured Facility covenants, particularly the asset coverage ratio and borrowing base requirements.
- Solarplicity Exposure: Monitor the remaining exposure to Solarplicity Group Limited following the partial repayment disclosed in subsequent events.