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)
Reporting Period: Fiscal year ended March 31, 2013.
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, mezzanine investments, and equity of private 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 2013 | Fiscal Year 2012 |
|---|---|---|
| Total Investment Income | $331.99 million | $357.58 million |
| Net Investment Income | $167.36 million ($0.83 per share) | $172.74 million ($0.88 per share) |
| Net Realized and Unrealized Gains (Losses) | ($62.89 million) | ($259.01 million) |
| Net Increase (Decrease) in Net Assets from Operations | $104.47 million ($0.51 per share) | ($86.26 million) ($0.44 per share) |
| Total Assets | $2.94 billion | $2.78 billion |
| Total Debt Outstanding | $1.16 billion | $1.01 billion |
| Total Net Assets | $1.68 billion | $1.69 billion |
| Net Asset Value (NAV) per Share | $8.27 | $8.55 |
| Weighted Average Yield on Debt Portfolio | 11.9% | 11.9% |
| Portfolio Composition (Fair Value) | 44% Secured Debt, 43% Unsecured Debt, 7% Structured Products, 6% Equity | 32% Secured Debt, 57% Unsecured Debt, 3% Structured Products, 7% Equity |
Material Changes vs. Prior Period
- Investment Activity: The company invested $1.5 billion across 49 new and 36 existing portfolio companies in 2013, compared to $1.5 billion across 21 new and 18 existing companies in 2012. Investments sold or repaid totaled $1.3 billion in 2013 versus $1.6 billion in 2012.
- Portfolio Shift: There was a strategic shift toward secured debt, which increased from 32% of the portfolio in 2012 to 44% in 2013. Conversely, unsecured debt decreased from 57% to 43%.
- Income Decline: Total investment income decreased by approximately $25.6 million year-over-year, primarily driven by a smaller average income-producing portfolio, partially offset by slightly higher yields.
- Expense Reduction: Net expenses decreased to $164.6 million from $184.8 million. This reduction was due to lower interest costs (less debt outstanding on average), lower management and incentive fees (due to fee waivers and a smaller asset base), and reduced non-recurring expenses.
- Realized Losses: Net realized losses were $74.7 million in 2013, a significant improvement from $341.4 million in 2012. The 2012 losses were heavily influenced by the exit of Grand Prix Holdings.
Guidance, Outlook, Risks, and Contingencies
Management Commentary & Outlook: Management continues to focus on generating current income and capital appreciation. The company maintains a senior secured credit facility with $604 million of unused capacity as of March 31, 2013. The company raised an additional $181.9 million in net proceeds from a common stock offering in May 2013 (subsequent to the reporting period).
Risks:
- Market Disruption: Volatility in global capital markets, particularly in Europe, could impact liquidity and asset valuations.
- Leverage: The company uses debt to finance investments, which magnifies potential gains and losses. Asset coverage ratios must be maintained to comply with the 1940 Act.
- Interest Rate Risk: A hypothetical 1% increase in LIBOR would decrease earnings by approximately two cents per share, while a 2% or 3% increase would increase earnings by three or five cents, respectively, due to the mix of floating and fixed-rate assets and liabilities.
- Regulatory: Changes in regulations (e.g., Dodd-Frank Act) could increase compliance costs or reduce liquidity.
Contingencies:
- Legal Proceedings: Following the fiscal year end, the company was 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 the company. The company intends to vigorously defend itself and has not determined if the action is material.
- Commitments: As of March 31, 2013, the company had $105 million in outstanding commitments to purchase secured term loans and unsecured bridge loans.
Key Facts for Investor Verification
- Dividend Sustainability: Verify the company's ability to maintain its quarterly dividend of $0.20 per share given the requirement to distribute at least 90% of taxable income to maintain RIC status, especially considering the portion of income derived from non-cash Payment-in-Kind (PIK) interest ($20.3 million accrued in 2013).
- Debt Maturities: Review the maturity schedule of the Senior Secured Facility (amortization begins June 2015, final maturity May 2016) and Senior Secured Notes (maturity October 2015) to assess refinancing risks.
- Valuation Methodology: Confirm the reliance on Level 3 fair value measurements (unobservable inputs), which comprised approximately $1.64 billion (58%) of total investments as of March 31, 2013.
- Fee Waivers: Note that the investment adviser waived management and incentive fees on proceeds from equity issuances in April 2012 and May 2013 through March 31, 2014, which temporarily reduced expense ratios.
- Legal Exposure: Monitor the status of the DSI Renal Holdings litigation for potential financial impact.