Please note - in light of the company's recent press release, this article has been altered slightly to reflect the benefit of Apollo Global Management (AGM)'s purchase of stock at about $8.45/share in a private placement.
Overview
Apollo Investment Management (AINV) is one of the older Business Development Companies. As per the firm's website, they have invested over $8.6 billion since it first IPO'd in April 2004. During the financial crisis and up until Ares Capital Corp (ARCC) completed its merger with Allied Capital, it was the largest BDC by market cap. Starting with the Innkeepers bankruptcy in July of 2010, AINV has been struggling to adjust and reclaim their status as a top tier firm.
With the recent news that AINV is changing their focus from large investments to a more traditional middle market approach in the BDC world, a dividend cut to 20 cents as well as a possible dilutive $200m equity raise, the firm's stock has taken another tumble. One year ago, AINV was trading above book value at a price around $12 and now they are trading at 85% of book value. For a BDC, trading equal to or at a premium to book value is how the firm taps the secondary market to increase its equity base (outside of shareholder-approved exceptions). This article will review AINV's current 10-Q in comparison to previous filings and point out any potential problems.
Financial Data
A look at both the income statement and the balance sheets for the company show a downward trend for the company. On the income statement side (in millions), investment income has declined by 10% since the calendar Q1 2011 from $94,714 to $83,815 as of the end of 12/31/2011. The main factors in this drop have been a decline in the interest income from non-controlled non-affiliated (NCNA) investments (83,017 to 77,220) as well as major decline in dividends from controlling investments (6,303 to 652). The management discussion section of the 12/31/2011 10-Q mentions this decrease is a result of "due to a decrease in the receipt of prepayment premiums and other deal related income". At the same time, expenses rose.
The balance sheet shows the decline in investments in NCNA but the controlled investments has actually increased. But as you can see by the numbers, the firm was not able to replace the assets that were changed. The realized loss dropped by over $300 million during the year. This is due to the exit of the investment in Grand Prix Holdings (Innkeepers), but also from Playpower Holdings, TL Acquisitions and FSC Holdings. The result of these actions is a decrease in book value down to $8.16 from a starting point of 10.03.
Investment Activity
The firm had a slower Q4 this year versus last year (9 total investments for $95m vs. 11 investments for $384m), but some of that is expected due to the tighter environment. The main concern going forward is that Apollo is able to make more investments in the $10m-$20m range versus the previous large investments it was making the year before. A key component of a BDC that is looking to make more investments is the fee structuring income.
As an example, Ares Capital Corp covered about 15% of its total investment income with capital structuring fees in 2011 (97.4m out of 634.5m). Apollo in Q4 2011, if I add all of the "Other" Investment Incomes together only made about $3.5m of its $83m in capital structuring fees. If this number is able to meaningfully grow, they will be able to add in a significant source of investment income.
Looking Forward
AINV's closing share price was $7.44 as of April 2nd, 2012. The closing book value as of 12/31/2011 was $8.16. This represents a 9% discount to the NAV. Given the purchase price paid by AGM's NAV placement, the book value is at $8.45. This means Apollo is trading at a 13% discount to the book value. Apollo has been trading within a 10% to 20% discount to NAV (see book value link above) for most of the past year so this number is not surprising. It will be interesting to see Apollo's 10-Q for this quarter to see if the book value did increase that much and which income statement lines generated that increase. An increase in the investment values would be a bit disappointing versus an increase in the income and fee structuring values.
Disclosure: I am long ARCC, AINV, PSEC.
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