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. 93 -------------------------------------------------------------------------------- Table of Contents 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 throughJune 30, 2021 , we have raised approximately$2.21 billion in net proceeds from additional offerings of common stock and we have repurchased common stock for$225.1 million .Apollo 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. 94 -------------------------------------------------------------------------------- Table of Contents COVID-19 Developments InMarch 2020 , theWorld Health Organization declared the outbreak of a novel coronavirus (COVID-19) a pandemic, which resulted in uncertainty and disruption in the global economy and financial markets. The global impact of the outbreak has been rapidly evolving, and as cases of COVID-19, as well as new strains, such as the new Delta strain, have continued to be identified in additional countries, many countries have reacted by instituting quarantines and restrictions on travel, closing financial markets and/or restricting trading, and limiting operations of non-essential businesses. Such actions created disruption in global supply chains, and adversely impacted many industries. Even though vaccines have been distributed nationally inthe United States and restrictions inthe United States and several other countries are being lifted, the outbreak has had and could continue to have an adverse impact on economic and market conditions and some economists, investment banks andThe World Bank have indicated that current indicators point to a global recession that started inFebruary 2020 . While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic, containment measures, and the availability of effective vaccines, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations, as well as that of our portfolio companies, for an indefinite period of time. Depending on the duration and extent of the disruption to the operations of our portfolio companies, we expect that certain portfolio companies will experience financial distress and possibly default on their financial obligations to us and their other capital providers. We also expect that some of our portfolio companies may significantly curtail business operations, furlough or lay off employees and terminate service providers, and defer capital expenditures if subjected to prolonged and severe financial distress, which would likely impair their business on a permanent basis. These developments would likely result in a decrease in the value of our investment in any such portfolio company. The COVID-19 pandemic and the related disruption and financial distress experienced by our portfolio companies may have material adverse effects on our investment income, particularly our interest income, received from our investments. In connection with the adverse effects of the COVID-19 pandemic, we may need to restructure our investments in some of our portfolio companies, which could result in reduced interest payments, an increase in the amount of PIK interest we receive, or result in permanent impairments on our investments. Our investment valuations are inherently less certain than they would be absent the current and potential impacts of COVID-19 and the values assigned as of this date may materially differ from the values that may ultimately be realized. The downturn in the aviation industry from COVID-19 has resulted inMerx Aviation recording impairment losses related to aircraft leasing and impacted its financial condition. This may result in the further unrealized depreciation in value on the Company's investments in Merx. Further, any additional write downs in the value of our investments may reduce our net asset value. These events may also limit our investment origination pipeline and may increase our future funding costs. A significant reduction in our net change in unrealized gains/losses may result due to decreases in the fair value of some of our portfolio company investments due to the immediate adverse economic effects of the COVID-19 pandemic and the continuing uncertainty surrounding its long-term impact. We believe that the COVID-19 pandemic represents an extraordinary circumstance that could materially impact the fair value of our investments. As a result, the fair value of our portfolio investments may be further negatively impacted afterJune 30, 2021 by continued duration of the adverse market, as well as circumstances and events that are not yet known. We are also subject to financial risks, including changes in market interest rates. As ofJune 30, 2021 , all of our debt portfolio investments bore interest at variable rates, which generally are LIBOR-based (or based on an equivalent applicable currency rate), and many of which are subject to certain floors. In connection with the COVID-19 pandemic, theU.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased. A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such decreases in LIBOR are not offset by a corresponding increase in the spread over LIBOR that we earn on any portfolio investments, a decrease in in our operating expenses, including with respect to our income incentive fee, or a decrease in the interest rate of our floating interest rate liabilities tied to LIBOR. See "Item 3. Quantitative and Qualitative Disclosures About Market Risk" for an analysis of the impact of hypothetical base rate changes in interest rates. 95 -------------------------------------------------------------------------------- Table of Contents LIBOR Developments OnJuly 27, 2017 , theU.K. Financial Conduct Authority ("FCA") announced that it would phase out the London Interbank Offered Rate ("LIBOR") as a benchmark by the end of 2021 and theFCA has indicated that market participants should not rely on LIBOR being available after 2021. On March 5 2021, the FCA and ICE Benchmark Administration formally announced the dates after which the LIBOR rates will no longer be representative and subsequently cease publication. The Alternative Reference Rates Committee ("ARRC"), aU.S. -based group convened by theU.S. Federal Reserve Board and theFederal Reserve Bank of New York to identify a successor rate forU.S. dollar LIBOR, confirmed that this announcement constitutes a "Benchmark Transition Event". 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 US dollar LIBOR settings will cease afterDecember 31, 2021 . 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.New 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, at this time, it is not possible 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 expected discontinuation of LIBOR could have a significant impact on our business. The dollar amount of our outstanding debt investments and borrowings that are linked to LIBOR with maturity dates after the anticipated discontinuation date ofDecember 31, 2021 is material. 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 will need to be identified and evaluated by us. 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. 96 -------------------------------------------------------------------------------- Table of Contents 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, more recently, 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 ofJune 30, 2021 , non-qualifying assets represented approximately 15.5% of the total assets of the Company. 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 London Interbank Offered Rate ("LIBOR"), the Euro Interbank Offered Rate ("EURIBOR"), 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. 97 -------------------------------------------------------------------------------- Table of Contents 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. Portfolio and Investment Activity Our portfolio and investment activity during the three months endedJune 30, 2021 and 2020 was as follows: Three Months Ended June 30, (in millions)* 2021 2020 Investments made in portfolio companies$ 295.2 $ 137.9 Investments sold - (69.1) Net activity before repaid investments 295.2 68.8 Investments repaid (266.1) (163.8) Net investment activity $
29.1
Portfolio companies at beginning of period 135 152 Number of new portfolio companies 11 1 Number of exited portfolio companies (6) (4) Portfolio companies at end of period 140 149 Number of investments made in existing portfolio companies 37 35
____________________
*Totals may not foot due to rounding.
98
--------------------------------------------------------------------------------
Table of Contents
Our portfolio composition and weighted average yields as of June 30, 2021 and
March 31, 2021 were as follows:
June 30, 2021 March 31, 2021
Portfolio composition, at fair value:
First lien secured debt 81 % 78 %
Second lien secured debt 7 % 10 %
Total secured debt 88 % 88 %
Unsecured debt 1 % 1 %
Structured products and other 0 % 0 %
Preferred equity 1 % 1 %
Common equity/interests and warrants 10 % 10 %
Weighted average yields, at amortized cost (1):
First lien secured debt (2) 7.7 % 7.8 %
Second lien secured debt (2) 10.0 % 9.9 %
Secured debt portfolio (2) 7.9 % 8.0 %
Unsecured debt portfolio (2) 5.2 % 5.3 %
Total debt portfolio (2) 7.9 % 8.0 %
Total portfolio (3) 6.4 % 6.5 %
Interest rate type, at fair value (4):
Fixed rate amount - -
Floating rate amount $1.9 billion $1.9 billion
Fixed rate, as percentage of total - -
Floating rate, as percentage of total 100 % 100 %
Interest rate type, at amortized cost (4):
Fixed rate amount - -
Floating rate amount $1.9 billion $1.9 billion
Fixed rate, as percentage of total - -
Floating rate, as percentage of total 100 % 100 %
____________________
(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 throughJune 30, 2021 , invested capital totaled$22.2 billion in 563 portfolio companies. Over the same period,Apollo Investment completed transactions with more than 100 different financial sponsors. 99 -------------------------------------------------------------------------------- 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 accounting principles generally accepted inthe United States of America ("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 ofJune 30, 2021 ,$2.48 billion or 99.6% 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. 100 -------------------------------------------------------------------------------- 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 Adviserwho 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. 101 -------------------------------------------------------------------------------- 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 three months endedJune 30, 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. 102 -------------------------------------------------------------------------------- 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 months endedJune 30, 2021 and 2020 were as follows: Three Months Ended June 30, (in millions)* 2021 2020 Investment Income Interest income (excluding Payment-in-kind ("PIK") interest income) $ 47.5$ 53.6 Dividend income 0.4 1.1 PIK interest income 1.5 1.5 Other income 1.2 0.4 Total investment income $ 50.6$ 56.7 Expenses Management and performance-based incentive fees, net of amounts waived $ 8.8$ 9.5 Interest and other debt expenses, net of reimbursements 12.7 15.4 Administrative services expense, net of reimbursements 1.2 1.1 Other general and administrative expenses 2.5 2.4 Net Expenses $ 25.2$ 28.4 Net Investment Income $
25.3
$ 0.1 $ (8.4)
Net change in unrealized gains (losses) 6.7 (16.8)
Net Realized and Change in Unrealized Gains (Losses) 6.8 (25.2)
Net Increase in Net Assets Resulting from Operations $
32.1
Net Investment Income on Per Average Share Basis (1) $ 0.39$ 0.43 Earnings per share - basic (1) $
0.49
____________________
*Totals may not foot due to rounding.
(1)Based on the weighted average number of shares outstanding for the period
presented.
103
--------------------------------------------------------------------------------
Table of Contents
Total Investment Income
The decrease in total investment income for the three months ended June 30, 2021
compared to the three months ended June 30, 2020 was primarily driven by the
decrease in total interest income (including PIK) of $6.2 million . The decrease
in total interest income (including PIK) was due to a lower income-bearing
investment portfolio and a decrease in the average yield for the total debt
portfolio, from 8.1% for the three months ended June 30, 2020 to 7.9% for the
three months ended June 30, 2021 . 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 $0.3 million for
the three months ended June 30, 2020 and $4.0 million for the three months ended
June 30, 2021 . Furthermore, the decrease in dividend income of $0.7 million was
due to an decrease in dividends received from MSEA Tankers LLC . There was also
an increase in other income of $0.8 million due to higher amendment fees.
Net Expenses
The decrease in net expenses for the three months ended June 30, 2021 compared
to the three months ended June 30, 2020 was primarily driven by the decrease in
interest and other debt expenses of $2.7 million . The decrease in interest and
other debt expenses was attributed to a decrease in average debt outstanding and
net leverage, from $1.79 billion and 1.66x, respectively during the three months
ended June 30, 2020 , to $1.46 billion and 1.39x, respectively during the three
months ended June 30, 2021 . Furthermore, the decrease of $0.7 million in
management and performance-based incentive fees (net of amounts waived) was due
to a decrease in the investment portfolio.
104
--------------------------------------------------------------------------------
Table of Contents
Net Realized Gains (Losses)
During the three months ended June 30, 2021 , we recognized gross realized gains
of $0.3 million and gross realized losses of $0.2 million , resulting in net
realized gains of $0.1 million .
During the three months ended June 30, 2020 , we recognized gross realized gains
of $0.4 million and gross realized losses of $8.8 million , resulting in net
realized losses of $8.4 million . Significant realized gains (losses) for the
three months ended June 30, 2020 are summarized below:
(in millions) Net Realized Gain (Loss)
ZPower, LLC $ (6.1) *
* ZPower, LLC was written down during the quarter and the realized loss was
previously recorded as an unrealized loss.
Net Change in Unrealized Gains (Losses)
During the three months ended June 30, 2021 , we recognized gross unrealized
gains of $25.2 million and gross unrealized losses of $18.5 million , including
the impact of transferring unrealized to realized gains (losses), resulting in
net change in unrealized gains of $6.7 million . Significant changes in
unrealized gains (losses) for the three months ended June 30, 2021 are
summarized below:
Net Change in
Unrealized Gain
(in millions) (Loss)$ 9.8 Paper Source 3.0 Spotted Hawk 1.2 Dynamic Product Tankers (Prime), LLC (5.4) Glacier Oil & Gas Corp. (f/k/a Miller Energy Resources, Inc.) (4.0) Ambrosia Buyer Corp. (3.0) Merx Aviation Finance, LLC (1.2) During the three months endedJune 30, 2020 , we recognized gross unrealized gains of$26.0 million and gross unrealized losses of$42.8 million , including the impact of transferring unrealized to realized gains (losses), resulting in net change in unrealized losses of$16.8 million . Significant changes in unrealized gains (losses) for the three months endedJune 30, 2020 are summarized below: Net Change in Unrealized Gain (in millions) (Loss) ZPower, LLC $ 4.8 PAE Holding Corporation 1.1
(10.0)
Dynamic Product Tankers (Prime), LLC (9.2)
Merx Aviation Finance, LLC (4.3)
Glacier Oil & Gas Corp. (f/k/a Miller Energy Resources, Inc. ) (3.2)
Garden Fresh (2.4)
ChyronHego Corporation (2.4)
Solarplicity Group Limited (f/k/a AMP Solar UK ) (1.2)
105-------------------------------------------------------------------------------- Table of Contents 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 purchaseU.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 ofJune 30, 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)$ 1,142.4 $ - $ -$ 1,142.4 $ - 2025 Notes 350.0 - - 350.0 - Total Debt Obligations$ 1,492.4 $ - $ -$ 1,492.4 $ - ____________________ (1)As ofJune 30, 2021 , aggregate lender commitments under the Senior Secured Facility totaled$1.81 billion and$667.5 million of unused capacity. As ofJune 30, 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. Distributions Distributions paid to stockholders during the three months endedJune 30, 2021 and 2020 totaled$23.5 million ($0.36 per share) and$29.4 million ($0.45 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 throughJune 30, 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 endedMarch 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. 106 -------------------------------------------------------------------------------- Table of Contents 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 months endedJune 30, 2021 and 2020, PIK income totaled$1.5 million and$1.5 million on total investment income of$50.6 million and$56.7 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are subject to financial market risks, including changes in interest rates and the valuations of our investment portfolio. Uncertainty with respect to the economic effects of the COVID-19 outbreak has introduced significant volatility in the financial markets, and the effects of this volatility could materially impact our market risks, including those listed below. For additional information concerning the COVID-19 pandemic and its potential impact on our business and our operating results, see Part II - Other information, Item 1A. Risk Factors. 107 -------------------------------------------------------------------------------- Table of Contents Investment valuation risk Because there is not a readily available market value for most of the investments in our portfolio, we value all of our portfolio investments at fair value as determined in good faith by our board of directors based on, among other things, the input of our management and audit committee and independent valuation firms that have been engaged at the direction of our board of directors to assist in the valuation of each portfolio investment without a readily available market quotation (with certain de minimis exceptions). Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected in the valuations currently assigned. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" and "-Fair Value Measurements" as well as Notes 2 and 5 to our financial statements for the three months endedJune 30, 2021 for more information relating to our investment valuation. Interest Rate Risk Interest rate sensitivity refers to the change in our earnings that may result from changes in the level of interest rates. Because we fund a portion of our investments with borrowings, our net investment income is affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. As ofJune 30, 2021 , all of our debt portfolio investments bore interest at variable rates, which generally are LIBOR-based (or based on an equivalent applicable currency rate) and typically have durations of one to six months after which they reset to current market interest rates, and many of which are subject to certain floors. Further, our Senior Secured Facility bears interest at LIBOR rates with no interest rate floors, while the 2025 Notes bears interest at a fixed rate. OnJuly 27, 2017 , theUnited Kingdom's Financial Conduct Authority , which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. Potential changes, or uncertainty related to such potential changes, may adversely affect the market for LIBOR-based securities, including our portfolio of LIBOR-indexed, floating-rate debt securities, or the cost of our borrowings. Please see Part 1 of our annual report on Form 10-k for the year endedMarch 31, 2021 , "Item 1A. Risk Factors-Risks Relating to the Current Environment-Uncertainty relating to the LIBOR calculation process may adversely affect the value of our portfolio of the LIBOR-indexed, floating-rate debt securities in our portfolio or the cost of our borrowings." We regularly measure our exposure to interest rate risk. We assess interest rate risk and manage our interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities. Based on that review, we determine whether or not any hedging transactions are necessary to mitigate exposure to changes in interest rates. The following table shows the estimated annual impact on net investment income of base rate changes in interest rates (considering interest rate flows for variable rate instruments) to our loan portfolio and outstanding debt as ofJune 30, 2021 , assuming no changes in our investment and borrowing structure: Basis Point Change Net Investment Income Net Investment Income Per Share Up 200 basis points$ 0.2 million $ 0.003 Up 100 basis points (5.7) million (0.088) Up 50 basis points (4.0) million (0.061) Down 25 basis points 1.0 million 0.015 We may hedge against interest rate fluctuations from time-to-time by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act and applicable commodities laws. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. 108
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
