Note: Information from the conference call is provided in regular font while my comments are in italics.
From the conference call: "the Board approved the $0.15 dividend to shareholders of record as of September 21, 2016." I would give Apollo a demerit for failing to announce this important news item in a press release.
Prior to this data, there had been SEC restrictions on AINV owning investments that were creating in other parts of the larger Apollo organization. AINV received some relief from those restrictions from the SEC. Also, AINV expects to (also from the conference call) have a shift towards a safer portfolio. "We expect to focus even more on loans with lower loss given default characteristics primarily floating rate with a substantial portion in first lien loans. We are emphasizing portfolio diversification and avoiding outside single name or industry concentrations. We are right sizing our portfolio segmentation by reducing several of our existing specialty verticals, as well as lowering commodity dependent and highly cyclical credit exposures."
At Friday's close of $5.64, the yield on AINV is (60/564) 10.64%. If the new run rate NII is close to the Q2 NII of $0.1596/share per quarter - the dividend is covered by NII.
"MidCap (another non-publicly traded Apollo fund - and former home of the new AINV president) has focused on the direct origination of asset based loans, leverage loans, real estate loans, life sciences loans and lender finance. While MidCap is largely a complimentary platform to AINV, there are opportunities were mandates to overlap particularly an asset-based life sciences and lender finance."
"We expect to diversify your portfolio by ramping each of these areas over the next two to three years. By the end of fiscal year 2019 we currently believe that these three asset categories should represent approximately 15% to 25% of the portfolio with yields of around 10% to 10.5%."
For comparison, the AINV portfolio has had a portfolio weighted average yield around 11% for the last three years.
AINV ended Q2 with an 11.6% weighting in energy. Since the end of the quarter, one of the existing loans has been paid. AINV's energy exposure is now under 10%. "We continued to closely monitor our investments in this space and we will continue to seek to reduce our existing exposure when possible, and we will be patient with our more challenged names." Three oil and gas positions remain on non-accrual.
During Q2, AINV exited investments in two CLOs (I hate CLOs).
Credit quality metrics: "The current weighted average net leverage of our investments was 5.4 times, unchanged quarter-over-quarter and the current weighted average interest coverage improved to 2.8 times, up from 2.7 times." (For comparison: Those numbers are similar to the numbers from ARCC for their investments outside the two JV Senior Secured portfolios.)
I was glad to see this line in the conference call: "Fee and prepayment income was $6.9 million in the quarter" - because I combine those two lines in the spreadsheets I produce - to show the need of what I call "churn related income" to be strong for the quarter to be strong.
I knew that expenses had to have some correlation to the due diligence being done - but this next item caught me by surprise: "Expenses for the quarter on a comparative basis totaled $37.7 million versus $40.7 million last quarter, the June comparative expenses excluded approximately $2.7 million of non-recurring expenses related to a strategic transaction that was considered, but did not incur." I am left to wonder what kind of diligence costs $2.7 million - and can I get into that kind of work (grin).
"Net investment income was $38.8 million or $0.17 per share for the quarter excluding the previously mentioned non-recurring expenses." So that is a penny I can add to run rate NII.
"For the quarter the net loss on the portfolio totaled $78 million or $0.35 per share compared to a net loss to $68 million or $0.30 per share for the March quarter. Approximately $63 million of the net loss for the quarter related to three legacy investments Garden Fresh, Square Two and Delta Education." I had the gut feeling that the losses would be energy related. My gut was wrong. Due to that gut feeling - I had thoughts of selling PNNT before their earnings release. My gut now feels better about PNNT - but less good about AINV.
Disclosure: I am/we are long AINV.