MIDCAP FINANCIAL INVESTMENT CORPORATION The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto contained elsewhere in this report. Some of the statements in this report constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained herein involve risks and uncertainties, including statements as to: •our future operating results; •our business prospects and the prospects of our portfolio companies; •the impact of investments that we expect to make; •our contractual arrangements and relationships with third parties; •the dependence of our future success on the general economy and its impact on the industries in which we invest; •the ability of our portfolio companies to achieve their objectives; •our expected financings and investments; •the adequacy of our cash resources and working capital; •the current and future effects of the COVID-19 pandemic on us and our portfolio companies; and •the timing of cash flows, if any, from the operations of our portfolio companies. We generally use words such as "anticipates," "believes," "expects," "intends" and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason, including any factors set forth in "Risk Factors" and elsewhere in this report. We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with theSecurities and Exchange Commission ("SEC"), including any annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. OverviewApollo Investment Corporation (the "Company," "Apollo Investment ," "AIC," "we," "us," or "our") was incorporated under the Maryland General Corporation Law inFebruary 2004 . We have elected to be treated as a business development company ("BDC") under the Investment Company Act of 1940 (the "1940 Act"). As such, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in "qualifying assets," including securities of private or thinly traded publicU.S. companies, cash equivalents,U.S. government securities and high-quality debt investments that mature in one year or less. In addition, for federal income tax purposes we have elected to be treated as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). Pursuant to this election and assuming we qualify as a RIC, we generally do not have to pay corporate-level federal income taxes on any income we distribute to our stockholders. We commenced operations onApril 8, 2004 upon completion of our initial public offering that raised$870 million in net proceeds from selling 62 million shares of common stock at a price of$15.00 per share (20.7 million shares at a price of$45.00 per share adjusted for the one-for-three reverse stock split). Since then, and throughDecember 31, 2021 , we have raised approximately$2.21 billion in net proceeds from additional offerings of common stock and we have repurchased common stock for$243.4 million . 86 -------------------------------------------------------------------------------- Table of ContentsApollo Investment Management, L.P. (the "Investment Adviser" or "AIM") is our investment adviser and an affiliate of Apollo Global Management, Inc. and its consolidated subsidiaries ("AGM"). The Investment Adviser, subject to the overall supervision of our Board of Directors, manages the day-to-day operations of, and provides investment advisory services to the Company. AGM and other affiliates manage other funds that may have investment mandates that are similar, in whole or in part, with ours. AIM and its affiliates may determine that an investment is appropriate both for us and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, AIM may determine that we should invest on a side-by-side basis with one or more other funds. We make all such investments subject to compliance with applicable regulations and interpretations, and our allocation procedures. Certain types of negotiated co-investments may be made only in accordance with the terms of the exemptive order (the "Order") we received from theSEC permitting us to do so. Under the terms of the Order, a "required majority" (as defined in Section 57(o) of the 1940 Act) of our independent directors must be able to reach certain conclusions in connection with a co-investment transaction, including that (1) the terms of the proposed transaction are reasonable and fair to us and our stockholders and do not involve overreaching of us or our stockholders on the part of any person concerned, and (2) the transaction is consistent with the interests of our stockholders and is consistent with our Board of Directors' approved criteria. In certain situations where co-investment with one or more funds managed by AIM or its affiliates is not covered by the Order, the personnel of AIM or its affiliates will need to decide which fund will proceed with the investment. Such personnel will make these determinations based on allocation policies and procedures, which are designed to reasonably ensure that investment opportunities are allocated fairly and equitably among affiliated funds over time and in a manner that is consistent with applicable laws, rules and regulations. The Order is subject to certain terms and conditions so there can be no assurance that we will be permitted to co-invest with certain of our affiliates other than in the circumstances currently permitted by regulatory guidance and the Order.Apollo Investment Administration, LLC (the "Administrator" or "AIA"), an affiliate of AGM, provides, among other things, administrative services and facilities for the Company. In addition to furnishing us with office facilities, equipment, and clerical, bookkeeping and recordkeeping services, AIA also oversees our financial records as well as prepares our reports to stockholders and reports filed with theSEC . AIA also performs the calculation and publication of our net asset value, the payment of our expenses and oversees the performance of various third-party service providers and the preparation and filing of our tax returns. Furthermore, AIA provides on our behalf managerial assistance to those portfolio companies to which we are required to provide such assistance. COVID-19 Developments There is an ongoing global outbreak of COVID-19, which has spread to over 200 countries and territories, including every state inthe United States . The global impact of the outbreak has been rapidly evolving, and as cases of COVID-19, including new variants, have continued to be identified in additional countries, many countries have reacted, and continue to react, by instituting quarantines and restrictions on travel, closing financial markets and/or restricting trading, and limiting operations of non-essential businesses. Such actions have created disruption in global supply chains, and adversely impacted many industries. Supply chain disruptions could significantly impact the businesses of our portfolio companies and lead to increased costs, inventory shortages, shipping delays and an inability to meet customer demands. The outbreak has had a continued adverse impact on economic and market conditions and has triggered a period of global economic slowdown. Although vaccines have been widely distributed in theU.S. , certainU.S. states are planning on reopening and we believe the economy is beginning to rebound in certain respects, the uncertainty surrounding the COVID-19 pandemic, including uncertainty regarding new variants of COVID-19, the efficacy of existing vaccines against new variants and acceptance of vaccines and other factors have and may continue to contribute to significant volatility in the global markets. COVID-19 and the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our performance, financial condition, results of operations and ability to pay distributions. LIBOR Developments OnJuly 27, 2017 , the U.K Financial Conduct Authority ("FCA") announced that it would phase out LIBOR as a benchmark by the end of 2021. As ofDecember 31, 2021 , all non-U.S. dollar LIBOR publications have been phased out. The phase out of a majority of theU.S. dollar publications is delayed untilJune 30, 2023 . The Alternative Reference Rates Committee ("ARRC") of theFederal Reserve Bank of New York previously confirm that this constitutes a "benchmark transition event" and established "benchmark replacement dates" in ARRC standard LIBOR transition provisions that exist in manyU.S. law contracts using LIBOR. 87 -------------------------------------------------------------------------------- Table of Contents The publication of all EUR and CHF LIBOR settings, the Spot Next/Overnight, 1 week, 2 month and 12 month JPY and GBP LIBOR settings, and the 1 week and 2 months USD LIBOR settings has ceased. The publication of the overnight, 1 month, 3 month, 6 month, and 12 months USD LIBOR settings will cease afterJune 30, 2023 . TheFCA plans to consult the market on creating "synthetic" 1 month, 3 month and 6 month rates for GBP and JPY LIBOR, to be published for a limited time. TheNew York State legislation was signed into law to aid "tough legacy" LIBOR contracts. Other legislative solutions are being pursued at the Federal level, in theU.K. and inEurope . TheU.S. Federal banking agencies have also issued guidance encouraging banking and global organizations to cease reference to USD LIBOR as soon as practicable and, in any event, byDecember 31, 2021 . The E.U. Benchmarks Regulation imposed conditions under which only compliant benchmarks may be used in new contracts after 2021. The ARRC has identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative rate for LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by theU.S. Treasury securities, and is based on directly observableU.S. Treasury -backed repurchase transactions. However, the COVID-19 pandemic may adversely impact the timing of many firms' transition planning, and we continue to assess the potential impact of the COVID-19 pandemic on our transition plans. Although SOFR appears to be the preferred replacement rate forU.S. dollar LIBOR, it is not possible at this time to predict the effect of any such changes, any establishment of alternative reference rates, whether the COVID-19 pandemic will have further effect on LIBOR transition timelines or plans, or other reforms to LIBOR that may be enacted inthe United States ,United Kingdom or elsewhere. The discontinuation of LIBOR could have a significant impact on our business. We anticipate significant operational challenges for the transition away from LIBOR, including, but not limited to, amending existing loan agreements with borrowers on investments that may have not been modified with fallback language and adding effective fallback language to new agreements in the event that LIBOR is discontinued before maturity. Beyond these challenges, we anticipate there may be additional risks to our current processes and information systems that we will need to identify and evaluate. Due to the uncertainty of the replacement for LIBOR, the potential effect of any such event on our cost of capital and net investment income cannot yet be determined. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market value of any LIBOR-linked securities, loans and other financial obligations or extensions of credit held by or due to us and could have a material adverse effect on our business, financial condition and results of operations. Investments Our investment objective is to generate current income and capital appreciation. We invest primarily in various forms of debt investments, including secured and unsecured debt, loan investments, and/or equity in private middle-market companies. We may also invest in the securities of public companies and in structured products and other investments such as collateralized loan obligations ("CLOs") and credit-linked notes ("CLNs"). Our portfolio is comprised primarily of investments in debt, including secured and unsecured debt of private middle-market companies that, in the case of senior secured loans, generally are not broadly syndicated and whose aggregate tranche size is typically less than$250 million . Our portfolio also includes equity interests such as common stock, preferred stock, warrants or options. Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity for such companies, the general economic environment, the competitive environment for the types of investments we make and, market disruptions due to COVID-19. As a BDC, we must not acquire any assets other than "qualifying assets" specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). As ofDecember 31, 2021 , non-qualifying assets represented approximately 13.0% of the total assets of the Company. 88 -------------------------------------------------------------------------------- Table of Contents Revenue We generate revenue primarily in the form of interest and dividend income from the securities we hold and capital gains, if any, on investment securities that we may acquire in portfolio companies. Our debt investments, whether in the form of mezzanine or senior secured loans, generally have a stated term of five to ten years and bear interest at a fixed rate or a floating rate usually determined on the basis of a benchmark, such as the LIBOR, the federal funds rate, or the prime rate. Interest on debt securities is generally payable quarterly or semiannually and whileU.S. subordinated debt and corporate notes typically accrue interest at fixed rates, some of our investments may include zero coupon and/or step-up bonds that accrue income on a constant yield to call or maturity basis. In addition, some of our investments provide for payment-in-kind ("PIK") interest or dividends. Such amounts of accrued PIK interest or dividends are added to the cost of the investment on the respective capitalization dates and generally become due at maturity of the investment or upon the investment being called by the issuer. We may also generate revenue in the form of commitment, origination, structuring fees, fees for providing managerial assistance and, if applicable, consulting fees, etc. Expenses For all investment professionals of AIM and their staff, when and to the extent engaged in providing investment advisory and management services to us, the compensation and routine overhead expenses of that personnel which is allocable to those services are provided and paid for by AIM. We bear all other costs and expenses of our operations and transactions, including those relating to: •investment advisory and management fees; •expenses incurred by AIM payable to third parties, including agents, consultants or other advisors, in monitoring our financial and legal affairs and in monitoring our investments and performing due diligence on our prospective portfolio companies; •calculation of our net asset value (including the cost and expenses of any independent valuation firm); •direct costs and expenses of administration, including independent registered public accounting and legal costs; •costs of preparing and filing reports or other documents with theSEC ; •interest payable on debt, if any, incurred to finance our investments; •offerings of our common stock and other securities; •registration and listing fees; •fees payable to third parties, including agents, consultants or other advisors, relating to, or associated with, evaluating and making investments; •transfer agent and custodial fees; •taxes; •independent directors' fees and expenses; •marketing and distribution-related expenses; •the costs of any reports, proxy statements or other notices to stockholders, including printing and postage costs; •our allocable portion of the fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums; •organizational costs; and •all other expenses incurred by us or the Administrator in connection with administering our business, such as our allocable portion of overhead under the administration agreement, including rent and our allocable portion of the cost of our Chief Financial Officer, Chief Legal Officer and Chief Compliance Officer and their respective staffs. We expect our general and administrative operating expenses related to our ongoing operations to increase moderately in dollar terms. During periods of asset growth, we generally expect our general and administrative operating expenses to decline as a percentage of our total assets and increase during periods of asset declines. Incentive fees, interest expense and costs relating to future offerings of securities, among others, may also increase or reduce overall operating expenses based on portfolio performance, interest rate benchmarks, and offerings of our securities relative to comparative periods, among other factors. 89 -------------------------------------------------------------------------------- Table of Contents Portfolio and Investment Activity Our portfolio and investment activity during the three and nine months endedDecember 31, 2021 and 2020 was as follows: Three Months Ended December 31, Nine Months Ended December 31, (in millions)* 2021 2020 2021 2020
Investments made in portfolio companies $ 335.5
(7.4) (17.8) (18.1) (101.1)
Net activity before repaid investments 328.1 139.4 902.7 299.9
Investments repaid (350.8) (269.5) (782.5) (628.0)
Net investment activity $ (22.7) $
(130.1)
Portfolio companies at beginning of period 144 147 135 152 Number of new portfolio companies 7 7 27 10 Number of exited portfolio companies (12) (11) (23) (19) Portfolio companies at end of period 139 143 139 143 Number of investments made in existing portfolio companies 62 35 79 62 ____________________
*Totals may not foot due to rounding.
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Our portfolio composition and weighted average yields as of December 31, 2021
and March 31, 2021 were as follows:
December 31, 2021 March 31, 2021
Portfolio composition, at fair value:
First lien secured debt 87 % 78 %
Second lien secured debt 4 % 10 %
Total secured debt 91 % 88 %
Unsecured debt 1 % 1 %
Structured products and other 0 % 0 %
Preferred equity 1 % 1 %
Common equity/interests and warrants 6 % 10 %
Weighted average yields, at amortized cost (1):
First lien secured debt (2) 7.9 % 7.8 %
Second lien secured debt (2) 9.6 % 9.9 %
Secured debt portfolio (2) 8.0 % 8.0 %
Unsecured debt portfolio (2) 5.3 % 5.3 %
Total debt portfolio (2) 7.9 % 8.0 %
Total portfolio (3) 6.9 % 6.5 %
Interest rate type, at fair value (4):
Fixed rate amount $0.0 billion -
Floating rate amount $2.0 billion $1.9 billion
Fixed rate, as percentage of total 1 % -
Floating rate, as percentage of total 99 % 100 %
Interest rate type, at amortized cost (4):
Fixed rate amount $0.0 billion -
Floating rate amount $2.0 billion $1.9 billion
Fixed rate, as percentage of total 1 % -
Floating rate, as percentage of total 99 % 100 %
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(1)An investor's yield may be lower than the portfolio yield due to sales loads and other expenses. (2)Exclusive of investments on non-accrual status. (3)Inclusive of all income generating investments, non-income generating investments and investments on non-accrual status. (4)The interest rate type information is calculated using the Company's corporate debt portfolio and excludes aviation, oil and gas, structured credit, renewables, shipping, commodities and investments on non-accrual status. Since the initial public offering ofApollo Investment inApril 2004 and throughDecember 31, 2021 , invested capital totaled$22.8 billion in 579 portfolio companies. Over the same period,Apollo Investment completed transactions with more than 100 different financial sponsors. Recent Developments OnFebruary 3, 2022 , the Company's Board of Directors approved a new stock repurchase plan (the "Repurchase Plan") to acquire up to$25 million of the Company's common stock. The new Repurchase Plan is in addition to the Company's existing share repurchase authorization, of which approximately$5.8 million of repurchase capacity remains. Accordingly, the Company now has approximately$30.8 million available for stock repurchases under its repurchase program. 91 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, gains and losses. Changes in the economic environment, financial markets, credit worthiness of portfolio companies and any other parameters used in determining such estimates could cause actual results to differ materially. In addition to the discussion below, our critical accounting policies are further described in the notes to the financial statements. Fair Value Measurements The Company follows guidance in ASC 820, Fair Value Measurement ("ASC 820"), where fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are determined within a framework that establishes a three-tier hierarchy which maximizes the use of observable market data and minimizes the use of unobservable inputs to establish a classification of fair value measurements for disclosure purposes. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value using a pricing model and/or the risk inherent in the inputs for the valuation technique. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company's own assumptions about the assumptions market participants would use in pricing the asset or liability based on the information available. The inputs or methodology used for valuing assets or liabilities may not be an indication of the risks associated with investing in those assets or liabilities. ASC 820 classifies the inputs used to measure these fair values into the following hierarchy: Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by us at the measurement date. Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices. Level 3: Unobservable inputs for the asset or liability. In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment. The level assigned to the investment valuations may not be indicative of the risk or liquidity associated with investing in such investments. Because of the inherent uncertainties of valuation, the values reflected in the financial statements may differ materially from the values that would be received upon an actual disposition of such investments. As ofDecember 31, 2021 ,$2.59 billion or 99.93% of the Company's investments were classified as Level 3. The high proportion of Level 3 investments relative to our total investments is directly related to our investment philosophy and target portfolio, which consists primarily of long-term secured debt, as well as unsecured and mezzanine positions of private middle-market companies. A fundamental difference exists between our investments and those of comparable publicly traded fixed income investments, namely high-yield bonds, and this difference affects the valuation of our private investments relative to comparable publicly traded instruments. Senior secured loans, or senior loans, are higher in the capital structure than high-yield bonds, and are typically secured by assets of the borrowing company. This improves their recovery prospects in the event of default and affords senior loans a structural advantage over high-yield bonds. Many of the Company's investments are also privately negotiated and contain covenant protections that limit the issuer to take actions that could harm us as a creditor. High-yield bonds typically do not contain such covenants. Given the structural advantages of capital seniority and covenant protection, the valuation of our private debt portfolio is driven more by investment specific credit factors than movements in the broader debt capital markets. Each security is evaluated individually and as indicated below, we value our private investments based upon a multi-step valuation process, including valuation recommendations from independent valuation firms. 92 -------------------------------------------------------------------------------- Table of Contents Investment Valuation Process Under procedures established by our Board of Directors, we value investments, including certain secured debt, unsecured debt, and other debt securities with maturities greater than 60 days, for which market quotations are readily available, at such market quotations (unless they are deemed not to represent fair value). We attempt to obtain market quotations from at least two brokers or dealers (if available, otherwise from a principal market maker, primary market dealer or other independent pricing service). We utilize mid-market pricing as a practical expedient for fair value unless a different point within the range is more representative. If and when market quotations are deemed not to represent fair value, we typically utilize independent third party valuation firms to assist us in determining fair value. Accordingly, such investments go through our multi-step valuation process as described below. In each case, our independent valuation firms consider observable market inputs together with significant unobservable inputs in arriving at their valuation recommendations for such investments. Investments purchased within the quarter before the valuation date and debt investments with remaining maturities of 60 days or less may each be valued at cost with interest accrued or discount accreted/premium amortized to the date of maturity (although they are typically valued at available market quotations), unless such valuation, in the judgment of our Investment Adviser, does not represent fair value. In this case, such investments shall be valued at fair value as determined in good faith by or under the direction of our Board of Directors, including using market quotations where available. Investments that are not publicly traded or whose market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of our Board of Directors. Such determination of fair values may involve subjective judgments and estimates. With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, our Board of Directors has approved a multi-step valuation process each quarter, as described below: 1.Our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of our Investment Adviser who are responsible for the portfolio investment. 2.Preliminary valuation conclusions are then documented and discussed with senior management of our Investment Adviser. 3.Independent valuation firms are engaged by our Board of Directors to conduct independent appraisals by reviewing our Investment Adviser's preliminary valuations and then making their own independent assessment. 4.The Audit Committee of the Board of Directors reviews the preliminary valuation of our Investment Adviser and the valuation prepared by the independent valuation firms and responds, if warranted, to the valuation recommendation of the independent valuation firms. 5.The Board of Directors discusses valuations and determines in good faith the fair value of each investment in our portfolio based on the input of our Investment Adviser, the applicable independent valuation firm, and the Audit Committee of the Board of Directors. 6.For Level 3 investments entered into within the current quarter, the cost (purchase price adjusted for accreted original issue discount/amortized premium) or any recent comparable trade activity on the security investment shall be considered to reasonably approximate the fair value of the investment, provided that no material change has since occurred in the issuer's business, significant inputs or the relevant environment. 93 -------------------------------------------------------------------------------- Table of Contents Investments determined by these valuation procedures which have a fair value of less than$1 million during the prior fiscal quarter may be valued based on inputs identified by the Investment Adviser without the necessity of obtaining valuation from an independent valuation firm, if once annually an independent valuation firm using the procedures described herein provides a valuation. Investments in all asset classes are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, seniority of investment in the investee company's capital structure, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company's ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, our principal market (as the reporting entity) and enterprise values, among other factors. When readily available, broker quotations and/or quotations provided by pricing services are considered in the valuation process of independent valuation firms. During the nine months endedDecember 31, 2021 , there were no significant changes to the Company's valuation techniques and related inputs considered in the valuation process. Investment Income Recognition The Company records interest and dividend income, adjusted for amortization of premium and accretion of discount, on an accrual basis. Some of our loans and other investments, including certain preferred equity investments, may have contractual PIK interest or dividends. PIK income computed at the contractual rate is accrued into income and reflected as receivable up to the capitalization date. Certain PIK investments offer issuers the option at each payment date of making payments in cash or in additional securities. When additional securities are received, they typically have the same terms, including maturity dates and interest rates as the original securities issued. On these payment dates, the Company capitalizes the accrued interest or dividends receivable (reflecting such amounts as the basis in the additional securities received). PIK generally becomes due at maturity of the investment or upon the investment being called by the issuer. At the point the Company believes PIK is not expected to be realized, the PIK investment will be placed on non-accrual status. When a PIK investment is placed on non-accrual status, the accrued, uncapitalized interest or dividends are reversed from the related receivable through interest or dividend income, respectively. The Company does not reverse previously capitalized PIK interest or dividends. Upon capitalization, PIK is subject to the fair value estimates associated with their related investments. PIK investments on non-accrual status are restored to accrual status if the Company believes that PIK is expected to be realized. Investments that are expected to pay regularly scheduled interest and/or dividends in cash are generally placed on non-accrual status when principal or interest/dividend cash payments are past due 30 days or more and/or when it is no longer probable that principal or interest/dividend cash payments will be collected. Such non-accrual investments are restored to accrual status if past due principal and interest or dividends are paid in cash, and in management's judgment, are likely to continue timely payment of their remaining interest or dividend obligations. Interest or dividend cash payments received on non-accrual designated investments may be recognized as income or applied to principal depending upon management's judgment. Loan origination fees, original issue discount ("OID"), and market discounts are capitalized and accreted into interest income over the respective terms of the applicable loans using the effective interest method or straight-line, as applicable. Upon the prepayment of a loan, prepayment premiums, any unamortized loan origination fees, OID, or market discounts are recorded as interest income. Other income generally includes amendment fees, administrative fees, management fees, bridge fees, and structuring fees which are recorded when earned. The Company records as dividend income the accretable yield from its beneficial interests in structured products such as CLOs based upon a number of cash flow assumptions that are subject to uncertainties and contingencies. Such assumptions include the rate and timing of principal and interest receipts (which may be subject to prepayments and defaults) of the underlying pools of assets. These assumptions are updated on at least a quarterly basis to reflect changes related to a particular security, actual historical data, and market changes. A structured product investment typically has an underlying pool of assets. Payments on structured product investments are payable solely from the cash flows from such assets. As such any unforeseen event in these underlying pools of assets might impact the expected recovery and future accrual of income. Expenses Expenses include management fees, performance-based incentive fees, interest expense, insurance expenses, administrative service fees, legal fees, directors' fees, audit and tax service expenses, third-party valuation fees and other general and administrative expenses. Expenses are recognized on an accrual basis. 94 -------------------------------------------------------------------------------- Table of Contents Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses) We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized gains or losses previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized gain (loss) reflects the net change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized gains or losses. Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. Results of Operations Operating results for the three and nine months endedDecember 31, 2021 and 2020 were as follows: Three Months Ended December 31, Nine Months Ended December 31, (in millions)* 2021 2020 2021 2020 Investment Income Interest income (excluding Payment-in-kind ("PIK") interest income)$ 51.9 $ 50.4 $ 147.6 $ 155.9 Dividend income 0.5 1.1 3.6 3.4 PIK interest income 1.0 1.6 3.5 4.8 Other income 1.6 1.2 3.8 1.8 Total investment income$ 55.0 $ 54.4 $ 158.4 $ 165.9 Expenses Management and performance-based incentive fees$ 14.6 $ 9.0 $ 37.7 $ 27.7 Interest and other debt expenses, net of reimbursements 14.1 13.2 40.7 42.4 Administrative services expense, net of reimbursements 1.4 1.1 4.2 3.4 Other general and administrative expenses 2.4 2.8 6.7 8.0 Net Expenses$ 32.5 $ 26.1 $ 89.3 $ 81.5 Net Investment Income$ 22.5 $ 28.2 $ 69.1 $ 84.4 Net Realized and Change in Unrealized Gains (Losses) Net realized gains (losses)$ (0.6) $ (6.7) $ (65.3) $ (18.1) Net change in unrealized gains (losses) (1.3) 11.6 74.4 3.2 Net Realized and Change in Unrealized Gains (Losses)$ (2.0) $ 4.9 $ 9.1 $ (14.9) Net Increase in Net Assets Resulting from Operations$ 20.5 $
33.2
Net Investment Income on Per Average Share Basis (1)$ 0.35 $ 0.43 $ 1.07 $ 1.29 Earnings per share - basic (1)$ 0.32 $
0.51
____________________
*Totals may not foot due to rounding.
(1)Based on the weighted average number of shares outstanding for the period
presented.
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Total Investment Income
For the three months ended December 31, 2021 as compared to the three months
ended December 31, 2020
The increase in total investment income for the three months ended December 31,
2021 compared to the three months ended December 31, 2020 was primarily driven
by the increase in total interest income (including PIK) of $0.9 million .
The increase in total interest income (including PIK) was primarily due to a
higher income bearing investment portfolio. Furthermore there was an increase in
prepayment fees and income recognized from the acceleration of discount,
premium, or deferred fees on repaid investments, which totaled $2.4 million for
the three months ended December 31, 2020 and $4.0 million for the three months
ended December 31, 2021 . This was partially offset by the $0.6 million decrease
in dividend income. Furthermore, there was also an increase in other income of
$0.4 million due to higher bridge fees.
For the nine months ended December 31, 2021 as compared to the nine months ended
December 31, 2020
The decrease in total investment income for the nine months ended December 31,
2021 compared to the nine months ended December 31, 2020 was primarily driven by
the decrease in total interest income (including PIK) of $9.6 million . The
decrease in total interest income (including PIK) was primarily due to a
decrease in the portfolio of second lien secured debt. This was partially offset
by an increase in prepayment fees and income recognized from the acceleration of
discount, premium, or deferred fees on repaid investments, which totaled $4.7
million for the nine months ended December 31, 2020 and $8.7 million for the for
the nine months ended December 31, 2021 . The $0.2 million increase in dividend
income was primarily due to an increase in dividends received from MSEA Tankers
LLC . Furthermore, there was an increase in other income of $2.0 million due to
higher amendment fees and bridge fees.
Net Expenses
For the three months ended December 31, 2021 as compared to the three months
ended December 31, 2020
The increase in net expenses for the three months ended December 31, 2021
compared to the three months ended December 31, 2020 was primarily due to the
increase in management and performance-based incentive fees. The increase of
$5.6 million in management and performance-based incentive fees was due to an
increase in performance based incentive fees and an increase in the investment
portfolio. Furthermore, there was an increase in interest and other debt
expenses, which was attributed to increase in the average debt outstanding and
net leverage from $1.53 billion and 1.43x, respectively during the three months
ended December 31, 2020 , to $1.58 billion and 1.52x, respectively during
the three months ended December 31, 2021 . Additionally there was increase in the
total annualized cost of debt, from 3.42% for the three months ended December
31, 2020 to 3.55% for the three months ended December 31, 2021 .
For the nine months ended December 31, 2021 as compared to the nine months ended
December 31, 2020
The increase in net expenses for the nine months ended December 31, 2021
compared to the nine months ended December 31, 2020 was primarily due to the
increase in management and performance-based incentive fees. The increase of
$10.0 million in management and performance-based incentive fees was due to an
increase in performance based incentive fees and an increase in the investment
portfolio. Furthermore there was a decrease in interest and other debt expenses,
which was attributed to a decrease in the average debt outstanding, from $1.66
billion during the nine months ended December 31, 2020 , to $1.53 billion during
the nine months ended December 31, 2021 . This was partially offset by an
increase in the total annualized cost of debt from 3.38% for the nine months
ended December 31, 2020 to 3.54% for the nine months ended December 31, 2021 .
96-------------------------------------------------------------------------------- Table of Contents Net Realized Gains (Losses) For the three months endedDecember 31, 2021 as compared to the three months endedDecember 31, 2020 During the three months endedDecember 31, 2021 , we recognized gross realized gains of$0.6 million and gross realized losses of$1.3 million , resulting in net realized losses of$0.6 million . Significant realized gains (losses) for the three months endedDecember 31, 2021 are summarized below: (in millions) Net Realized Gain (Loss) Sequential Brands Group, Inc. $ (1.1) During the three months endedDecember 31, 2020 , we recognized gross realized gains of$4.6 million and gross realized losses of$11.3 million , resulting in net realized losses of$6.7 million . Significant realized gains (losses) for the three months endedDecember 31, 2020 are summarized below: (in millions) Net Realized Gain (Loss) AMP Solar Group, Inc. $ 4.2 KLO Holdings, LLC (4.8) Garden Fresh (2.5) Learfield Communications (1.9) FiscalNote (1.5) For the nine months endedDecember 31, 2021 as compared to the nine months endedDecember 31, 2020 During the nine months endedDecember 31, 2021 , we recognized gross realized gains of$4.0 million and gross realized losses of$69.4 million , resulting in net realized losses of$65.3 million . Significant realized gains (losses) for the nine months endedDecember 31, 2021 are summarized below: Net Realized Gain (in millions) (Loss) Niacet Corporation $ 1.1 Spotted Hawk (44.4)Glacier Oil & Gas Corp. (f/k/aMiller Energy Resources, Inc. )
(20.9)
Sequential Brands Group, Inc. (1.1) During the nine months endedDecember 31, 2020 , we recognized gross realized gains of$5.3 million and gross realized losses of$23.5 million , resulting in net realized losses of$18.1 million . Significant realized gains (losses) for the nine months endedDecember 31, 2020 are summarized below: (in millions) Net Realized Gain (Loss) AMP Solar Group, Inc. $ 4.2 KLO Holdings, LLC (8.5) ZPower, LLC (6.1) Garden Fresh (2.5) Learfield Communications (1.9) FiscalNote (1.5) 97
-------------------------------------------------------------------------------- Table of Contents Net Change in Unrealized Gains (Losses) For the three months endedDecember 31, 2021 as compared to the three months endedDecember 31, 2020 During the three months endedDecember 31, 2021 , we recognized gross unrealized gains of$26.9 million and gross unrealized losses of$28.2 million , including the impact of transferring unrealized to realized gains (losses), resulting in net change in unrealized losses of$1.3 million . Significant changes in unrealized gains (losses) for the three months endedDecember 31, 2021 are summarized below: Net Change in Unrealized Gain (in millions) (Loss) ChyronHego Corporation $ 6.3 Glacier Oil & Gas Corp. (f/k/a Miller Energy Resources, Inc.) 5.2 Merx Aviation Finance, LLC 3.4 Pelican 2.2 Sequential Brands Group, Inc. 1.1 Dynamic Product Tankers (Prime), LLC (10.3) Spotted Hawk (3.9) Ambrosia Buyer Corp. (3.1) MSEA Tankers LLC (1.6) During the three months endedDecember 31, 2020 , we recognized gross unrealized gains of$49.6 million and gross unrealized losses of$38.0 million , including the impact of transferring unrealized to realized gains (losses), resulting in net change in unrealized gains of$11.6 million . Significant changes in unrealized gains (losses) for the three months endedDecember 31, 2020 are summarized below: Net Change in Unrealized Gain (in millions) (Loss) ChyronHego Corporation $ 5.7 KLO Holdings, LLC 5.2 Garden Fresh 2.5 NFA Group 2.5 MSEA Tankers LLC 2.0 Learfield Communications 1.9 CARE Fertility 1.8 MYCOM 1.8 PIB Group 1.5 AMP Solar Group, Inc. 1.4 Spotted Hawk (9.5) Ambrosia Buyer Corp. (6.5) Renew Financial LLC (f/k/a Renewable Funding, LLC) (2.4) Glacier Oil & Gas Corp. (f/k/a Miller Energy Resources, Inc.) (2.2) Dynamic Product Tankers (Prime), LLC (1.8) Sonar Entertainment (1.1) 98
-------------------------------------------------------------------------------- Table of Contents For the nine months endedDecember 31, 2021 as compared to the nine months endedDecember 31, 2020 During the nine months endedDecember 31, 2021 , we recognized gross unrealized gains of$115.2 million and gross unrealized losses of$40.8 million , including the impact of transferring unrealized to realized gains (losses), resulting in net change in unrealized gains of$74.4 million . Significant changes in unrealized gains (losses) for the nine months endedDecember 31, 2021 are summarized below: Net Change in (in millions) Unrealized Gain (Loss) Spotted Hawk $ 37.3 Glacier Oil & Gas Corp. (f/k/a Miller Energy Resources, Inc.) 24.0
18.7
ChyronHego Corporation 6.8
Paper Source 3.0
Merx Aviation Finance, LLC 2.7
Sequential Brands Group, Inc. 2.2
Pelican 2.2
US Legal Support 1.5
Genesis Healthcare, Inc. 1.5
Dynamic Product Tankers (Prime), LLC (19.8)
Ambrosia Buyer Corp. (5.7)
MSEA Tankers LLC (4.1)
Niacet Corporation (1.1)
99-------------------------------------------------------------------------------- Table of Contents During the nine months endedDecember 31, 2020 , we recognized gross unrealized gains of$91.3 million and gross unrealized losses of$88.1 million , including the impact of transferring unrealized to realized gains (losses), resulting in net change in unrealized losses of$3.2 million . Significant changes in unrealized gains (losses) for the nine months endedDecember 31, 2020 are summarized below: Net Change in (in millions) Unrealized Gain (Loss) KLO Holdings, LLC $ 11.6 ZPower, LLC 4.8 NFA Group 4.8 ChyronHego Corporation 3.2 CARE Fertility 3.1 CT Technologies Intermediate Holdings, Inc 3.0 PIB Group 3.0 MYCOM 2.8 MSEA Tankers LLC 2.3 McLarens 2.2 Spotted Hawk (14.6) Dynamic Product Tankers (Prime), LLC (11.3) Merx Aviation Finance, LLC (9.1)
(8.9)
Ambrosia Buyer Corp. (7.6)
Glacier Oil & Gas Corp. (f/k/a Miller Energy Resources, Inc.) (6.5)
Paper Source (2.3)
Renew Financial LLC (f/k/a Renewable Funding, LLC) (1.8)
Sonar Entertainment (1.2)
Solarplicity Group Limited (f/k/a AMP Solar UK) (1.1)
100
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Liquidity and Capital Resources
The Company's liquidity and capital resources are generated and generally
available through periodic follow-on equity and debt offerings, our Senior
Secured Facility (as defined in Note 6 to the financial statements), our senior
secured notes, our senior unsecured notes, investments in special purpose
entities in which we hold and finance particular investments on a non-recourse
basis, as well as from cash flows from operations, investment sales of liquid
assets and repayments of senior and subordinated loans and income earned from
investments.
We believe that our current cash and cash equivalents on hand, our short-term
investments, our available borrowing capacity under our Senior Secured Facility
and our anticipated cash flows from operations will be adequate to meet our cash
needs for our daily operations for at least the next twelve months. This
"Liquidity and Capital Resources" section should be read in conjunction with
"COVID-19 Developments" section above.
Cash Equivalents
The Company defines cash equivalents as securities that are readily convertible
into known amounts of cash and near their maturity that they present
insignificant risk of changes in value because of changes in interest rates.
Generally, only securities with a maturity of three months or less from the date
of purchase would qualify, with limited exceptions. The Company deems that
certain money market funds, U.S. Treasury bills, repurchase agreements and other
high-quality, short-term debt securities would qualify as cash equivalents (See
Note 2 to the financial statements.) At the end of each fiscal quarter, we
consider taking proactive steps utilizing cash equivalents with the objective of
enhancing our investment flexibility during the following quarter, pursuant to
Section 55 of the 1940 Act. More specifically, we may purchase U.S. Treasury
bills from time-to-time on the last business day of the quarter and typically
close out that position on the following business day, settling the sale
transaction on a net cash basis with the purchase, subsequent to quarter end.
Apollo Investment may also utilize repurchase agreements or other balance sheet
transactions, including drawing down on our Senior Secured Facility, as we deem
appropriate. The amount of these transactions or such drawn cash for this
purpose is excluded from total assets for purposes of computing the asset base
upon which the management fee is determined.
Debt
See Note 6 to the financial statements for information on the Company's debt.
The following table shows the contractual maturities of our debt obligations as
of December 31, 2021 :
Payments Due by Period
(in millions) Total Less than 1 Year 1 to 3 Years 3 to 5 Years More than 5 Years
Senior Secured Facility (1) $ 1,117.5 $ - $ - $ 1,117.5 $ -
2025 Notes 350.0 - - 350.0 -
2026 Notes 125.0 - - 125.0 -
Total Debt Obligations $ 1,592.5 $ - $ - $ 1,592.5 $ -
____________________
(1)As of December 31, 2021 , aggregate lender commitments under the Senior
Secured Facility totaled $1.81 billion and $692.3 million of unused capacity. As
of December 31, 2021 , there were $0.2 million of letters of credit issued under
the Senior Secured Facility as shown as part of total commitments in Note 8 to
the financial statements.
Stockholders' Equity
See Note 7 to the financial statements for information on the Company's public
offerings and share repurchase plans.
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Distributions
Distributions paid to stockholders during the three and nine months ended
December 31, 2021 totaled $23.4 million ($0.36 per share) and $70.3 million
($1.08 per share), respectively. Distributions paid to stockholders during the
three and nine months ended December 31, 2020 totaled $23.5 million ($0.36 per
share) and $82.2 million ($1.26 per share), respectively. For income tax
purposes, distributions made to stockholders are reported as ordinary income,
capital gains, non-taxable return of capital, or a combination thereof. Although
the tax character of distributions paid to stockholders through December 31,
2021 may include return of capital, the exact amount cannot be determined at
this point. The final determination of the tax character of distributions will
not be made until we file our tax return for the tax year ended March 31, 2022 .
Tax characteristics of all distributions will be reported to stockholders on
Form 1099 after the end of the calendar year. Our quarterly distributions, if
any, will be determined by our Board of Directors.
To maintain our RIC status, we must distribute at least 90% of our ordinary
income and realized net short-term capital gains in excess of realized net
long-term capital losses, if any, out of the assets legally available for
distribution. Although we currently intend to distribute realized net capital
gains (i.e., net long-term capital gains in excess of short-term capital
losses), if any, at least annually, out of the assets legally available for such
distributions, we may in the future decide to retain such capital gains for
investment. Currently, we have substantial net capital loss carryforwards and
consequently do not expect to generate cumulative net capital gains in the
foreseeable future.
We maintain an "opt out" dividend reinvestment plan for our common stockholders.
As a result, if we declare a dividend, then stockholders' cash dividends will be
automatically reinvested in additional shares of our common stock, unless they
specifically "opt out" of the dividend reinvestment plan so as to receive cash
dividends.
We may not be able to achieve operating results that will allow us to make
distributions at a specific level or to increase the amount of these
distributions from time to time. In addition, due to the asset coverage test
applicable to us as a BDC, we may in the future be limited in our ability to
make distributions. Also, our revolving credit facility may limit our ability to
declare dividends if we default under certain provisions or fail to satisfy
certain other conditions. If we do not distribute a certain percentage of our
income annually, we may suffer adverse tax consequences, including possible loss
of the tax benefits available to us as a RIC. In addition, in accordance with
GAAP and tax regulations, we include in income certain amounts that we have not
yet received in cash, such as contractual PIK, which represents contractual
interest added to the loan balance that becomes due at the end of the loan term,
or the accrual of original issue or market discount. Since we may recognize
income before or without receiving cash representing such income, we may not be
able to meet the requirement to distribute at least 90% of our investment
company taxable income to obtain tax benefits as a RIC.
With respect to the distributions to stockholders, income from origination,
structuring, closing, commitment and other upfront fees associated with
investments in portfolio companies is treated as taxable income and accordingly,
distributed to stockholders.
PIK Income
For the three and nine months ended December 31, 2021 , PIK income totaled $1.0
million and $3.5 million on total investment income of $55.0 million and $158.4
million respectively. For the three and nine months ended December 31, 2020 , PIK
income totaled $1.6 million and $4.8 million on total investment income of $54.4
million and $165.9 million respectively. In order to maintain the Company's
status as a RIC, this non-cash source of income must be paid out to stockholders
annually in the form of distributions, even though the Company has not yet
collected the cash. See Note 5 to the financial statements for more information
on the Company's PIK income.
Related Party Transactions
See Note 3 to the financial statements for information on the Company's related
party transactions.
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