One of the largest Business Development Companies (“BDCs”) is Apollo Investment (ticker: AINV) and it is reporting its earnings on November 4th, with a Conference Call to discuss the next day. Details here. We thought it would be interesting to provide a preview of what investors and prospective investors might want to look for in ten days.
There are 14 analysts who follow AINV and the average projected Net Investment Income Per Share (“NIIPS”) for the quarter ended September 30 is $0.25, compared to the $0.22 earned in the last quarter. Recent revisions have trended downwards.
Looking forward to June 2011, the analysts don’t foresee much growth. The projected earnings for the quarter ended June 30 2011 are predicted at $0.26 (by 9 analysts).
Further down the road earnings per share are expected to increase more noticeably. As of the current fiscal year, which ends in March 2011, projected earnings are $0.99. A year away (March 2012), earnings are up to $1.11, a double digit increase.
The BDC Reporter does not have the resources of the investment banks which provide these projections, but our own estimates are more modest than the numbers given above. Because of the recent equity raised which took total shares issued to nearly 194mn, and the difficulty of substantially increasing net investment assets in the portfolio due to robust refinancings and repayments of the existing portfolio we’re sceptical that Apollo could achieve the $48.5mn in Net Investment Income that would be required to achieve a $0.25 Net Investment Income Per Share this quarter. Last quarter NIIPS was $0.22 on a lower average share count. We’re expecting NIIPS in the $0.20-$0.22 range.
One of the wild cards is whether Apollo will book earnings from AINV’s wholly owned but not consolidated subsidiary called the AIC Credit Opportunity Fund. We don’t hear much from management about how the three big bets made in the subsidiary are playing out, but the 10-Q reveals a confusing pattern. Remember the debt at the Credit Opportunity Fund is non-recourse but margin calls can be made if the underlying assets drop in value , which AINV has to honor to avoid defaults. In the FY ended March 31 2009 AINV injected $19mn into the Fund. In the FY ended March 2010 $9.3mn was returned from the Fund. However, in the June 2010 quarter ended AINV put another $1.7mn back into the Fund. In the quarter ended March 2010 Apollo recorded $11.3mn in dividend income from the Fund and none in the June quarter. Sorry about all the numbers but here’s one more. The Fund dropped in value in the latest quarter from $74mn to $60mn. So it’s anybody’s guess what dividends and fair market value of the Credit Fund might look like. Maybe management is guiding the analysts towards a possible outcome in the quarter which explains the projected growth in NIIPS. We shall see.
Sticking with the category of anybody’s guess: unrealized and realized losses. Because of the write-down of Apollo’s investment in Innkeepers last quarter and other problems, Unrealized Depreciation was up in the June quarter. This at a time when most BDCs were seeing an improvement in overall asset values. This has been a better quarter in the markets and on the last Conference Call management suggested (without making a rash firm statement) that problem assets had all been addressed. To Apollo’s credit the Company has taken very sharp reductions on its non-performing and under-performing loans and investments. As for Realized Gains or Losses, the only gain last quarter was due to currency fluctuations. In the intervening months since the last Conference Call no news releases have been made about either Realized Gains or Losses.
We expect a lift in Unrealized Gains, and nothing much in the Realized category, which will increase Net Asset Value, which might move up from the $9.51 in June, but with 90% of its investment assets in debt securities the upside is limited.
We’ve written recently about the $225mn 5 year debt raised by Apollo, which has strengthened an already strong balance sheet, where debt to equity was at just under 0.5:1. Management has indicated that its leverage goal is 0.75-0.8:1.0 (too high for the BDC Reporter but that’s another blog). Theoretically that would ultimately take debt outstanding to nearly $1.4bn from $1.0bn at June 30th. On paper Apollo has $1.5bn in pledged commitments under its Revolver but some lenders will be pulling out next year when the line expires. Committed Revolving debt (including $50mn added recently) is $1.228bn. Add the $225mn in Term Debt, and you have $1.45bn in potential debt. Apollo has the ability to get the line increased to $2.0bn, but it’s unlikely to do that with its current capital structure. It won’t want to pay unused line fees unecessarily before new capital is raised, but it does give an idea of the Company’s medium term ambitions.
We’ll be seeking to determine how long it will take Apollo to use up the current capital available. That takes us to new loans booked and loan pay-offs. We know that Apollo invested $130mn in Senior Notes of Altegrity and $15.5mn of equity on August3, 2010, but there have presumably been other deals. On the last Conference Call management suggested that new deal activity was heating up, and that the Company was well situated to offer up one stop shopping for larger transactions. It does not take many transactions to ramp up assets, especially with Apollo’s stated strategy of booking fewer, bigger deals. However, loan pay-offs are unpredictable and anything can have happened during the quarter.
Apollo has been paying a $0.28 dividend, but earning less than that. Whether the earnings are at $0.25 or $0.20 that should continue in the quarter. Obviously the analysts are not bullish about earnings exceeding the dividend any time soon as the FY 2012 earnings projection is for $1.11, and the dividend liability $1.12.(We should point out that we believe Taxable Income may be higher as long as new deals are being booked which add to earnings for tax in the year incurred but are taken into GAAP over several years).
We’ll be looking to see if Apollo addresses the dividend issue or shuffles around the subject, in the hope that earnings will eventually catch up with its distribution. The Company has the benefit of undistributed net investment income to serve as a piggy bank for multiple quarters.
Here we’re going to be controversial and indicate that in the long run we don’t see how Apollo is going to bring recurring earnings (as opposed to an occasional pop from the Credit Fund) back to the $0.28 a quarter level. Yes the Company will be adding new assets. However, yields will eventually be under pressure and AINV may have a problem maintaining its blended yield of 11.7% from its debt investments. (That’s another item worth noticing on the upcoming earnings report). On the expense side, management fees and other expenses will continue to run over 3% of assets. Interest expense will increase with the expiry of LIBOR +1% borrowing, and the impact of paying twice as much for $225mn of Term Debt. Then there’s Apollo’s strategy of putting 10% or more of their investments into equity, which hurts current earnings. Also, Apollo has 5 non-performing companies which impacts earnings and 1 of those was just added to the non accrual list.
Investors may have to do with a well capitalized company (with a mixture of Revolving and Term debt) , with a moderate to high leverage (up to 0.8:1.0 debt to equity says the CEO) and a concentrated portfolio of 65-75 companies in the upper middle market, but with a dicey credit underwriting record; a history of making unsuccessful big equity bets (i.e. Innkeepers) and a somewhat lower dividend level. The November 4th earnings release will begin to give us all an insight of where Apollo is headed.
Disclosure: Long AINV