MFIC

SEC Filing Summary: Apollo Investment Corporation (10-Q)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended December 31, 2006, and the nine-month period ended on the same date. Apollo Investment Corporation is a closed-end, non-diversified management investment company organized as a Business Development Company (BDC) and a Regulated Investment Company (RIC). The company invests primarily in middle-market companies through mezzanine and senior secured loans, often with an equity component.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total investment income increased significantly to $190.8 million for the nine months ended Dec 31, 2006, compared to $110.4 million in the prior year period. This was driven by portfolio growth and asset mix changes.
• Expense Increases: Net expenses rose to $86.6 million (nine months) from $43.9 million in the prior year. Increases were primarily due to higher base management fees (linked to asset growth) and increased interest/credit facility expenses ($26.7 million vs. $7.0 million previously).
• Realized Gains/Losses: The company reported a net realized gain of $26.3 million for the nine months ended Dec 31, 2006, compared to $10.9 million in the prior year. However, the quarter ended Dec 31, 2006, saw a net realized loss of $0.5 million, largely due to foreign currency losses of $3.5 million.
• Leverage: Borrowings under the credit facility increased substantially. Outstanding borrowings were $926.4 million at Dec 31, 2006, compared to $323.9 million at March 31, 2006.
• Portfolio Composition: The portfolio expanded to 54 companies. Subordinated debt comprised 65% of the portfolio, while senior secured loans made up 25%.

Guidance, Outlook, and Risks

• Capital Raising: Subsequent to the reporting period, the company closed a follow-on equity offering on January 18, 2007, issuing 18 million shares for approximately $386 million in net proceeds. An additional 2.7 million shares were issued on February 7, 2007, for approximately $58 million.
• Investment Strategy: Management noted a highly competitive marketplace with downward pressure on credit spreads. The company remains disciplined, selecting only opportunities meeting risk-reward standards. Gross investments for the quarter totaled $233.9 million.
• Dividends: Dividends paid for the nine months ended Dec 31, 2006, totaled $115.9 million ($1.42 per share). The company intends to maintain its status as a RIC by distributing at least 90% of taxable income.
• Risks: Key risks include the illiquidity of private market investments, the uncertainty of fair value determinations for non-public securities, interest rate fluctuations affecting net investment income, and the potential inability to replicate the historical success of Apollo's private funds. The company is also subject to regulatory constraints as a BDC regarding asset coverage ratios.
• Commitments: The company has a commitment to make an additional investment of approximately €16.9 million in Serpering Investments B.V. (Casema), expected to close in the fourth fiscal quarter.

Investor Verification Checklist

• Verify the valuation methodology for the 54 portfolio companies, particularly the 65% held in subordinated debt, given the reliance on fair value determinations by the Board.
• Confirm the impact of the $926.4 million credit facility drawdown on the asset coverage ratio and compliance with the 200% requirement under the Investment Company Act of 1940.
• Review the foreign currency exposure, noting the $7.0 million realized loss on foreign currencies for the nine-month period and the $20.7 million unrealized depreciation on foreign currency borrowings.
• Assess the sustainability of the dividend payout ratio given the requirement to distribute 90% of taxable income to maintain RIC status.
• Monitor the deployment of the $444 million in net proceeds from the January and February 2007 equity offerings to ensure they are invested in qualifying assets.