Business Context and Reporting Period
Company: Apollo Investment Corporation (AIC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2017
Business Overview: AIC is a closed-end, externally managed business development company (BDC) and regulated investment company (RIC). It invests primarily in debt and equity of private middle-market companies. As of September 30, 2017, the company had 219,034,354 shares outstanding and a Net Asset Value (NAV) per share of $6.72.
Key Financial Metrics
| Metric | Six Months Ended Sep 30, 2017 | Six Months Ended Sep 30, 2016 |
|---|---|---|
| Total Investment Income | $133.2 million | $145.5 million |
| Net Investment Income | $67.5 million | $75.6 million |
| Net Realized Gains (Losses) | ($237.4 million) | $5.5 million |
| Net Change in Unrealized Gains (Losses) | $230.5 million | ($82.1 million) |
| Net Increase in Net Assets from Operations | $60.6 million | ($1.0 million) |
| Earnings Per Share (EPS) | $0.28 | $0.00 |
| Total Debt Outstanding | $882.7 million | $866.9 million (as of Mar 31, 2017) |
| Cash and Cash Equivalents | $31.2 million | $9.8 million (as of Mar 31, 2017) |
| Net Assets | $1,472.6 million | $1,481.8 million (as of Mar 31, 2017) |
Material Changes vs. Prior Period
- Investment Income Decline: Total investment income decreased by $12.3 million compared to the prior year period. This was driven by a $6.2 million decrease in interest income (due to a lower income-bearing portfolio and yield compression from 11.0% to 10.3%) and a $7.1 million decrease in dividend income (due to exits of Crowley Holdings, MCF CLOs, and restructuring of Golden Bear Warehouse).
- Significant Realized Losses: The company recognized a net realized loss of $237.4 million, a sharp contrast to the $5.5 million gain in the prior year. Major contributors included write-offs of Venoco, Inc. ($89.0 million), Delta Career Education Corporation ($72.8 million), and AIC SPV Holdings I, LLC ($44.3 million).
- Unrealized Gains Offset: The realized losses were largely offset by a $230.5 million net change in unrealized gains, primarily due to the reversal of previously recorded unrealized losses on the same investments that were written off or sold (Venoco, Delta, AIC SPV).
- Expense Reduction: Net expenses decreased by $4.2 million year-over-year, primarily due to a $3.2 million reduction in interest and debt expenses (lower average debt outstanding) and a $3.4 million decrease in general and administrative expenses (absence of non-recurring strategic transaction costs incurred in the prior year).
Guidance, Outlook, Risks, and Unusual Items
- Fee Waivers: The Investment Adviser waived 25% of the base management fee (reducing it from 2% to 1.5%) and up to 25% of the performance-based incentive fee for the period ending March 31, 2018. Without these waivers, the annualized ratio of total expenses to average net assets would have been 10.25% instead of 8.87%.
- Debt Redemption: On October 16, 2017 (subsequent to the period end), the company redeemed its entire $150 million aggregate principal amount of 2042 Notes, resulting in a realized loss on extinguishment of debt of $5.8 million.
- Share Repurchases: The company repurchased 660,300 shares during the six-month period at a weighted average price of $5.99. As of November 2, 2017, $45.7 million remained available under repurchase plans.
- Legal Proceedings: The company is a defendant in a bankruptcy proceeding involving DSI Renal Holdings (seeking approx. $41 million) and an adversary proceeding involving Energy & Exploration Partners, Inc. (ENXP). The company intends to vigorously defend these actions.
- Non-Qualifying Assets: Non-qualifying assets represented approximately 20.9% of total assets, requiring the company to maintain at least 70% qualifying assets under the 1940 Act.
Investor Verification Checklist
- Write-off Reversals: Verify the magnitude of unrealized gains recognized ($230.5 million) which were essentially reversals of prior losses on specific distressed assets (Venoco, Delta, etc.) rather than new value creation.
- Fee Waiver Sustainability: Assess the impact of the 25% management fee waiver on future expense ratios and net investment income if the waiver is not extended beyond March 31, 2018.
- Debt Covenants: Confirm continued compliance with the Senior Secured Facility covenants, specifically the asset coverage ratio and minimum stockholders' equity requirements, given the recent debt redemption and portfolio volatility.
- Legal Exposure: Monitor the status of the DSI Renal Holdings and ENXP litigation for potential material financial impact.
- PIK Income: Review the $11.8 million in Payment-in-Kind (PIK) income included in total investment income, noting that this is non-cash income that must be distributed to maintain RIC status.