Apollo Investment Corporation (AINV) is a BDC (Business Development Company) that had its initial public offering in May of 2004 at $13.50. The dividend for its first full quarter was $0.045/share -- and quarterly dividend growth was huge in the early years. By 2008 the quarterly dividend had reached $0.52/share. The hard times of the credit crisis resulted in the dividend being cut by half in 2009 -- and cut again to the current $0.20/share in 2012. AINV closed on Thursday at $8.66. Apollo Investment Corporation is managed by Apollo Investment Management -- an affiliate of Apollo Global Management, LLC ("AGM"). Founded in 1990, AGM is a leader in private equity and debt financing.
In this article, I will present data from the AINV calendar Q1-13 earnings release from May 23, 2013. I will show how I produce a Q2-13 NII (net investment income) projection. A BDC's EPS projection that one finds at the financial web sites is a NII projection. I will show how I produce a short-term dividend growth projection and a risk assessment. I will produce two spreadsheets that show the current BDC sector valuations. And I will tell if I perceive AINV to be a buy, sell or hold.
AINV Reports NII of $0.2073 compared to a dividend of $0.20
What They Earned: Apollo Investment Corporation reported for Q1-13 Total investment income of $84.617 million ($0.4171/share) and Net investment income of $42.066 million ($0.2073/share). AINV is perceived as having better than sector average earnings quality due to TII having a below 10% PIK (payment-in-kind) component. For the fiscal year ended March 31, 2013, accrued PIK totaled $20.3 million, on total investment income of $332.0 million. PIK income "received in cash" for the year was $5.196 million. The Net increase in net assets from operations (the metric that is GAAP EPS) was $65.821 million ($0.3244/share). The net asset value per share was $8.27 compared with $8.14 in Q4-12; $8.45 in Q3-12; and $8.30 in Q2-12.
For the last twelve months, AINV's ratio of operating expenses to average net assets was 6.28%; AINV's ratio of total expenses (operating + credit expense) to average net assets was 9.87%; and the ratio of net investment income to average net assets was 9.87%. AINV's portfolio turnover was 49.9%.
|AINV's historical Total Investment Income by component|
|From non-controlled/non-affiliated investments:|
|From non-controlled/affiliated investments:|
|From controlled investments:|
My top-down net investment income projection for calendar Q2-13: A rising CLO (collateralized loan obligation) equity investment component has the potential to create greater volatility in all AINV earnings projections. CLO income from investments of $186 million that generated a 12% return last quarter should produce approximately $5.580 million per quarter. With dividend income coming from equity investments that have been high in Q1 and Q3 and low in Q2 and Q4, I will add $2.5 million to income for that source. "Other income" has a current run rate of $4 million -- but historically this line has also been volatile. With approximately 87.0% of a portfolio of $2.850 billion having an average yield of 11.9% -- forward interest from debt investments per quarter would be $73.765 million. This generates a run rate for TII of $85.845 million. The TII average for the last three quarters has been [84.617, 83.212, 83.832] 83.887 million. This compares to the analyst estimate of "revenue" (taken from Yahoo Finance) for Q2-13 of $83.190 million with a range of $69.970 million to $92.300 million.
With approximately 50.5% of that TII falling to NII -- the quarterly NII run rate estimate would be (50.5% of $85.845 million) $43.352 million. Ending shares of 203 million shares plus 6/13th of a mid-May secondary offering of 19 million to 21.85 shares results in a weighted average share projection of approximately 212.5 million for Q2-13. Dividing the NII projection by that share count produces a $0.2040/share NII projection. Calendar Q2-13 will be fiscal Q1-14. The current fiscal 2014 EPS estimate is $0.85 or $0.2125/quarter. The calendar Q2-13 projection rounds to $0.21/share. No adjustment was done for portfolio growth in my projection. The portfolio has tended to be flat for the last ten quarters. On the other hand, AINV has issued new shares and issued new debt late last year. Portfolio growth would make my projection too conservative. I am comfortable with using the slightly higher analyst consensus projection for my valuation assessments.
Putting the NII projection into a spreadsheet format would look like this:
|Metric||CLO Income||Other Income||Dividend Income||Interest Income||Totals|
|Formula||portfolio times yield / 4||LTM average||average for "even" quarters||portfolio times yield / 4||sum of components|
|Numbers||186 million times .120 / 4||4.000||2.500||2.480 million times .119 / 4||85.845|
|Formula||historical average||TII times NII/TII||NII/ share count|
|Numbers||50.5%||.505 times 85.845||43.352 / 212.5||$0.2040/share|
What They Own At 3-31-13, AINV's net portfolio consisted of 81 portfolio companies and was invested 44.2% in senior secured loans ($1,260.881 million); 42.8% in subordinated debt ($1,220.120 million); 6.5% in CLOs or structured products ($185.995 million); 0.4% in preferred equity ($11.550 million); 5.7% in common equity ($162.580 million); and 0.3% ($9.273 million) in warrants at fair value. The weighted average yields on AINV's senior secured loan portfolio was 11.2%, subordinated or unsecured debt portfolio was 12.7% and total debt portfolio was 11.9% at cost and excluding non-accrual loans.
Originations: During Q1-13 AINV invested $428 million across 10 new and 9 existing portfolio companies compared to investing $515 million across 16 new and 13 existing portfolio companies in Q4-12; investing $395 million in 12 new and 11existing portfolio companies in Q3-12. Investments sold or prepaid during Q1-13 totaled $229 compared to $511 in Q4-12; $343 million for Q3-12.
Portfolio Quality Metrics: The weighted average cash interest coverage for the companies in the AINV portfolio was 2x. AINV had three non-accruals that were 4.9% of the portfolio at cost and 0.8% at fair value. One new investment was placed on non-accrual status in the March quarter. The non-accrual details are provided below.
|ATI Acquisition Company||54.358 million||0.500 million|
|Gryphon College Corp||34.548 million||7.208 million|
|Cengage Learnings||59.918 million||15.659 million|
Interest rate volatility risk: Assuming no changes to the balance sheet as of March 31, 2013, a hypothetical one percent increase in LIBOR on their floating rate assets and liabilities would decrease AINV's earnings by approximately two cents per average share over the next twelve months. Assuming no changes to our balance sheet as of March 31, 2013, a hypothetical two percent increase in LIBOR on AINV's floating rate assets and liabilities would increase their earnings by three cents per average share over the next twelve months. Assuming no changes to their balance sheet as of March 31, 2013, a hypothetical three percent increase in LIBOR on our floating rate assets and liabilities would increase AINV's earnings by approximately five cents per average share over the next twelve months.
What They Owe: With a "debt" of $1.156.067 million and 202.891 million share outstanding, debt used to finance portfolio holdings was $5.6980/share and the Debt/NAV ratio was 68.90%. Credit facility debt was $536 million and had a cost of LIBOR + 225 bps. The rest of the debt was in notes. The weighted average annual interest cost for the fiscal year ended March 31, 2013 was 4.75%, exclusive of 0.86% for amortization of debt issuance costs.
AINV's per share stats
Total Investment Income $84.617 million (divided by 202.891 million average shares* = $0.4171/share)
Interest Expenses = - $15.443 million (- $0.0761/share)
Management fees = - $13.769 million (- $0.0679/share)
Incentive Fees = - $10.042 million (- $0.0495/share)
Total Investment Expenses = - $42.551 million (- $0.2097/share)
Net Investment Income = $42.066 million ($0.2073/share basic and $0.1935/share diluted)
Realized appreciation = - $5.961 million (- $0.0294/share)
Unrealized appreciation = $29.716 million ($0.1465/share)
Net Increase in Net Assets Resulting from Operations = $65.821 million ($0.3244/share basic and $0.3027/share diluted)
* an adjustment for the dilutive effect of convertible notes uses 217.423 million shares
My short-term CAGR (Compound Annual Growth Rate) projection for the dividend: Q2-13 over Q2-12 dividend growth was zero. The Q2-11 dividend was $0.28/share compared to the current $0.20/share. The quarterly NII/share has been very stable for the last six quarters. EPS is projected to fall [0.83/0.88] 5.7% in 2013; and is projected to grow [0.85/0.83] 2.4% in 2014. There is no room in the current dividend/NII ratio [0.80/0.83] for dividend growth in 2013. For NAV, growth for the last twelve months was [8.27/8.55] a negative 3.3%. And the last twelve months has been a BDC friendly environment. I also use the dividend discount model to solve for a price implied CAGR. That calculation is currently a little below 1%. For the years where I have visibility, I see no chance of dividend growth.
My risk assessment of AINV: The dividend cuts since 2009 have been relatively large. Most retail investors place a high emotional component on that metric. They shouldn't. The past is history. AINV has had sector average to above average EPS projection accuracy since 2008. On the other hand, the projection changes have strongly tended to be in the negative direction. With a spread of 2013 EPS projections [high estimate minus low, with that result divided by the consensus estimate] at 7.23%, the spread indicates slightly below average risk. For AINV's portfolio of investments, the weighted average interest coverage ratio is 2x. I require more numeric precision in that metric to make good comparisons to other BDCs. AINV fails to provide Debt/EBITDA metrics. The portfolio weighted average yield is 11.9% -- and this important metric suggests average portfolio risk. With AINV's debt/NAV at 68.90%, its leverage at quarter's end was higher than average. But AINV has done a secondary offering this quarter. Current leverage suggests average risk. The AINV portfolio is 44.2% in secured debt and 42.8% in subordinated debt -- which indicates average risk. ANIV has 4.9% of its loans at cost on non-accrual. That indicates above average risk. With investments in 81 portfolio companies, the AINV portfolio is better than average based on granularity or diversification. The yield-to-maturity number for AINV's 2042 maturing publicly traded debt (AIB) indicates slightly below average risk. The AINV debt rating of BBB- gives it a small advantage for being rated. BDCs ARCC and PSEC had BBB rated debt. FSC and PNNT also have BBB- rated debt. AINV's cost on its credit facility at LIBOR plus 225 bps suggests sector average risk. This picture has some inconsistencies -- but the majority of metrics are indicators of average to slightly below average risk. The risk qualities of AINV should result in a sector average "yield plus CAGR" valuation.
For a different method of risk assessment, check out the current series on BDCs being done by BDC Buzz.
Current BDC Valuations
Yield in the spreadsheet below is based on the Q2-13 dividend. Spreadsheet header abbreviations: Div = dividend; EPS = earnings per share; LTM = last twelve months; YTD = year to date. The dividend to EPS ratio is a measure of dividend safety. The dividend to NAV ratio is a measure of safety and efficiency. The last four columns measure the percentage change in the 2013 EPS projection and the change in the price target since the beginning of the year; the change in the Q2-13 dividend from the Q2-12 dividend; and the change in the Q1-13 NAV from the Q1-12 NAV. Some BDCs have already started declaring Q3-13 dividends. KED, HTGC, MAIN and TCRD are the only BDCs to declare an increase in their Q2-13 dividend.
|Share Price||Div/||Div/||Q1-13||Price||YTD Percent Change||LTM||LTM|
|With the 10 Treasury at 1.67% and sector average yield (on Q2 dividends) at 9.04% - the spread is 737 bps.|
|The cap weighted ETF BDCS is up 3.86% year to date - with dividends its total return is 7.58%.|
|Sector yield, Dividend/NAV and Dividend/EPS ratio filter out the zero payout ACAS and SAR.|
|Weeding out ACAS and SAR, the average share price gain is 5.56%.|
BDC Earnings Growth & P/E Ratios 05-23
Fiscal and calendar years are not in sync. BDCs than began fiscal 2013 on or before calendar Q3-12 include AINV, FULL, GAIN, GBDC, GLAD, MCC, PSEC, PFLT, and PNNT. The range metric is the high estimate minus the low estimate, with that result dividend by the consensus estimate -- and serves as one of several measurements for assessing risk. That average is currently inflated by almost 300 bps due to atypical spreads in the projections for ACAS and GAIN. With the exception of KED, all EPS projections are from Yahoo Finance.
|Earnings / Share||Earn. Growth||P/E Ratios||13 EPS Range|
My valuation assessment of AINV: A dividend that is regularly covered by NII, and has a 9.24% yield compared to the BDC sector average yield is 9.04%, makes AINV attractive. To paraphrase Charlton Heston, I can see why some investor will only be willing to depart with their shares of AINV when it is pried from their cold dead fingers. A 1.05 price to NAV while the sector average is 1.10 is justified given the low dividend growth prospects. Using the calendar 2013 EPS and the 2013 P/E, AINV has a 10.43 ratio while the sector average is 11.37. Due to a low growth assessment, that difference is justified. AINV's has a slightly worse than average NII/TII ratio. On the other hand, what that ratio lacks in attractiveness it partially makes up in consistency. Because the prospects for dividend growth are very slim, AINV has a "yield plus dividend CAGR projection" of 9.24%. That is not attractive. AINV is not a buy. But given the relative security of the dividend in a world that is starving for yield, AINV is not a sell.
I also believe that the ability to do a reasonable NII projection should be a component in finding your correct BDC allocation or weighting. I have demonstrated how that is done in this and other updates. If you are not working on that skill -- then you will be in the dark when trouble comes. If you lack that skill, then your weighting in BDCs should be well under 5%. This task is not rocket science. This task is not labor intensive. Given AINV's prior history of dividend cuts, your comfort in doing NII projections should be an important factor in deciding whether AINV is a good fit for you.