MFIC

Business Context and Reporting Period

Company: Apollo Investment Corporation (AIC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: AIC is a closed-end, non-diversified management investment company organized as a Business Development Company (BDC) and a Regulated Investment Company (RIC). It invests primarily in middle-market companies through mezzanine and senior secured loans, often with equity components.

Key Financial Metrics

Material Changes vs. Prior Period

• Performance Reversal: The Company reported a net increase in net assets of $193.6 million for the six months ended September 30, 2009, compared to a net decrease of $166.1 million for the same period in 2008. This turnaround was driven by significant net unrealized appreciation of $194.2 million in the current period versus $209.1 million in depreciation in the prior year.
• Investment Income Decline: Gross investment income decreased to $167.0 million (six months 2009) from $194.5 million (six months 2008). Management attributed this to a reduction in the size of the income-producing portfolio and a decrease in yields as LIBOR fell over 300 basis points.
• Expense Reduction: Net operating expenses dropped to $66.2 million (six months 2009) from $91.7 million (six months 2008). The primary driver was a reduction in interest and credit facility expenses due to lower LIBOR rates.
• Realized Losses: Net realized losses increased to $101.3 million (six months 2009) from $59.8 million (six months 2008), reflecting sales and prepayments of investments.
• Portfolio Composition: As of September 30, 2009, the portfolio consisted of 71 companies, with 57% in subordinated debt, 26% in senior secured loans, 4% in preferred equity, and 13% in common equity/warrants.

Guidance, Outlook, and Risks

• Capital Markets: Management noted that net unrealized appreciation was primarily due to improving capital market conditions and changes in specific portfolio company fundamentals.
• Liquidity and Capital Resources: The Company maintains a $1.7 billion senior secured revolving credit facility with $797.7 million of unused capacity as of September 30, 2009. On August 18, 2009, AIC raised approximately $173.0 million in net proceeds from a follow-on equity offering of 20.7 million shares.
• Dividends: Dividends to stockholders for the six months ended September 30, 2009, totaled $82.8 million ($0.54 per share). The Company intends to distribute at least 90% of ordinary income to maintain RIC status.
• Valuation Risks: The Company utilizes a multi-step valuation process for Level 3 assets (investments without readily available market quotations). Management noted that limited trading activity and market dislocation may require significant adjustments to transaction prices to estimate fair value.
• Interest Rate Risk: While floating-rate assets and liabilities are closely matched, limiting the impact of rate changes on net investment income, the Company holds a mix of fixed and floating rate debt. Approximately 34% of the income-bearing portfolio is floating rate.

Investor Verification Checklist

• Valuation Methodology: Verify the assumptions used in the multi-step valuation process for Level 3 assets, which constitute the entirety of the investment portfolio ($2.65 billion).
• Credit Facility Covenants: Confirm continued compliance with the asset coverage ratio (minimum 2.0:1.0) and minimum stockholders' equity requirements under the $1.7 billion credit facility.
• Non-Accrual Status: Review the list of investments placed on non-accrual status (marked with *** in the Schedule of Investments) and the potential impact on future cash flows.
• Realized Losses: Analyze the specific portfolio companies contributing to the $101.3 million in net realized losses to assess credit quality trends.
• Dividend Sustainability: Assess the ability to maintain dividend distributions given the reliance on taxable income (including PIK interest) versus actual cash flow generation.