Business Context and Reporting Period
Company: Apollo Investment Corporation (Note: Input metadata listed "Midcap Financial Investment Corp," but the filing text identifies the registrant as Apollo Investment Corporation).
Filing Type: Form 10-K (Annual Report)
Period Ended: March 31, 2015
Business Overview: Apollo Investment Corporation is a closed-end, externally managed, non-diversified business development company (BDC) and regulated investment company (RIC). Its objective is to generate current income and capital appreciation by investing primarily in secured and unsecured debt, loans, and equity of private U.S. middle-market companies. The company is managed by Apollo Investment Management, L.P. (AIM), an affiliate of Apollo Global Management, LLC.
Key Financial Metrics
| Metric | Fiscal Year 2015 | Fiscal Year 2014 |
|---|---|---|
| Total Investment Income | $433.6 million | $381.3 million |
| Net Investment Income | $228.0 million | $201.2 million |
| Net Realized and Unrealized Gains (Losses) | ($152.6 million) | $69.6 million |
| Net Increase in Net Assets from Operations | $75.4 million | $270.9 million |
| Net Asset Value (NAV) per Share | $8.18 | $8.67 |
| Net Earnings per Share (Basic) | $0.32 | $1.21 |
| Total Debt Outstanding | $1.50 billion | $1.37 billion |
| Total Net Assets | $1.94 billion | $2.05 billion |
| Weighted Average Yield on Debt Portfolio | 11.2% | 11.1% |
Material Changes vs. Prior Period
- Portfolio Composition: The portfolio shifted toward secured debt, which increased from 56% to 60% of the portfolio. Unsecured debt decreased from 27% to 14%. Structured products and other investments increased from 6% to 11%.
- Investment Activity: New investments totaled $2.2 billion across 60 new and 47 existing companies, down from $2.8 billion in the prior year. Repayments and sales totaled $2.3 billion, resulting in a net decrease in portfolio size.
- Unrealized Losses: The company reported a net change in unrealized losses of $139.2 million, a significant reversal from the $176.1 million unrealized gains in 2014. Major unrealized losses were attributed to Venoco, Inc., LVI Group Investments, LLC, and Magnetation LLC.
- Realized Losses: Net realized losses were $13.4 million, driven by losses on Walter Energy Inc. and Altegrity, Inc., partially offset by gains on Aventine Renewable Energy Holdings, Inc.
- Expense Growth: Net expenses increased to $205.7 million from $180.1 million, primarily due to higher interest and debt expenses ($10.7 million increase) and management fees ($13.5 million increase).
Guidance, Outlook, and Risks
Management Commentary: Management noted that the increase in investment income was driven by a larger average portfolio size and higher prepayment fees. However, the decline in net assets was primarily due to significant unrealized depreciation in the portfolio. The company maintains a quarterly dividend of $0.20 per share.
Outlook: The company expects to continue distributing quarterly dividends. It has an "opt-out" dividend reinvestment plan. Management anticipates general and administrative expenses to increase moderately in dollar terms but decline as a percentage of assets during periods of growth.
Key Risks and Contingencies:
- Market and Credit Risk: Significant exposure to private middle-market companies, many of which are unrated or below investment grade. Rising interest rates could decrease the value of fixed-rate investments and increase borrowing costs.
- Liquidity Risk: Investments are largely illiquid. The company relies on its Senior Secured Facility (amended in April 2015 to extend maturity to 2020) and capital markets for liquidity.
- Regulatory Risk: As a BDC and RIC, the company is subject to asset coverage requirements and distribution requirements to maintain tax status. Failure to distribute 90% of taxable income could result in corporate-level taxes.
- Legal Proceedings: The company is a defendant in a lawsuit filed by the bankruptcy trustee of DSI Renal Holdings, alleging fraudulent conveyance with potential damages of approximately $41 million. The company intends to vigorously defend itself.
Investor Verification Checklist
- Debt Maturities: Verify the repayment schedule for the Senior Secured Notes ($225 million) maturing in October 2015 and Convertible Notes ($200 million) maturing in January 2016.
- Unrealized Loss Drivers: Review the specific credit deterioration in major unrealized loss contributors (Venoco, LVI Group, Magnetation) to assess potential for further write-downs.
- Dividend Sustainability: Confirm that Net Investment Income ($228 million) continues to cover the annual dividend obligation ($189 million) and assess the impact of Payment-in-Kind (PIK) income ($34.1 million) on cash flow.
- Legal Exposure: Monitor the status of the DSI Renal Holdings litigation and any potential impact on financial statements.
- Fee Waivers: Note that management and incentive fees were waived on certain shares; verify if these waivers are set to expire in the near term, which could impact future expense ratios.