Business Context and Reporting Period
Company: Apollo Investment Corporation (AIC)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended December 31, 2013
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 December 31, 2013, the company had 224,741,351 shares outstanding.
Key Financial Metrics
| Metric | 9 Months Ended Dec 31, 2013 | 9 Months Ended Dec 31, 2012 |
|---|---|---|
| Total Investment Income | $284.9 million | $247.4 million |
| Net Investment Income | $151.6 million | $125.3 million |
| Net Realized Gain/(Loss) | ($109.5 million) | ($68.7 million) |
| Net Change in Unrealized Appreciation | $158.9 million | ($17.9 million) |
| Net Increase in Net Assets from Operations | $201.0 million | $38.7 million |
| Earnings Per Share (Basic) | $0.90 | $0.19 |
| Net Assets | $1.93 billion | $1.68 billion (Mar 31, 2013) |
| Net Asset Value (NAV) Per Share | $8.57 | $8.27 (Mar 31, 2013) |
| Total Debt Outstanding | $1.26 billion | $1.16 billion (Mar 31, 2013) |
| Cash and Cash Equivalents | $12.6 million | $3.9 million (Mar 31, 2013) |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased by approximately 15% compared to the prior year period, driven by a larger investment portfolio and growth in dividend income from structured products. Prepayment fees contributed significantly ($19.4 million in the current period vs. $3.7 million previously).
- Expense Increases: Net expenses rose to $133.3 million from $122.1 million. This was primarily due to a $7.9 million increase in interest and debt expenses (attributed to higher average debt balances and new note issuances) and a $2.6 million increase in management and incentive fees.
- Realized Losses: The company reported a net realized loss of $109.5 million, compared to $68.7 million in the prior year. This was largely due to the sale of three portfolio companies (Cengage Learning Acquisitions, ATI Acquisition Company, and Texas Competitive Electric Holdings), partially offset by gains from other exits and derivative settlements.
- Unrealized Gains: A significant turnaround occurred in unrealized appreciation, which swung from a $17.9 million depreciation in the prior year to a $158.9 million appreciation. This was driven by the reversal of previously recognized unrealized depreciation upon the exit of specific portfolio companies and improved valuations across the remainder of the portfolio.
- Capital Activity: The company raised approximately $182.3 million in net proceeds from the sale of 21.85 million shares of common stock in May 2013.
Guidance, Outlook, Risks, and Unusual Items
- Dividends: The Board declared a dividend of $0.20 per share for the third fiscal quarter of 2014, payable April 7, 2014. For the nine months ended Dec 31, 2013, total dividends paid were $134.8 million ($0.60 per share).
- Fee Waivers: The Investment Adviser (AIM) voluntarily waived management and incentive fees associated with incremental common shares issued in April 2012 and May 2013 through March 31, 2014. Total fees waived for the nine months ended Dec 31, 2013, were $8.7 million.
- Debt Structure: The company amended its Senior Secured Facility in September 2013, increasing commitments to $1.25 billion and extending maturity to 2018. It also issued $150 million in 2043 Notes in June 2013. As of period end, $747.3 million of unused capacity remained on the Senior Secured Facility.
- Legal Proceedings: AIC is named as a defendant in a complaint by the bankruptcy trustee of DSI Renal Holdings alleging fraudulent conveyance. The complaint seeks approximately $41 million in damages from AIC. The company intends to vigorously defend itself and has filed a motion to dismiss.
- Portfolio Dissolution: During the quarter, the company dissolved three special purpose entities (Apollo FDC, Apollo TXU, and Apollo Boots) and the holding company AIC Credit Opportunity Fund LLC, transferring remaining assets to the company or closing the positions.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the asset coverage ratio (2.0:1.0) and minimum stockholders' equity requirements under the Senior Secured Facility.
- Legal Exposure: Monitor the status of the DSI Renal Holdings litigation and potential financial impact of the $41 million claim.
- PIK Income: Assess the sustainability of dividends given that $21.4 million of investment income for the nine-month period was accrued Payment-in-Kind (PIK) interest, which is non-cash.
- Valuation Methodology: Review the fair value hierarchy disclosures, noting that 50% of the portfolio ($1.59 billion) is classified as Level 3 (unobservable inputs), requiring significant management judgment.
- Fee Waiver Expiration: Note that voluntary fee waivers on specific equity issuances expire on March 31, 2014, which may impact future expense ratios.