MidCap Financial Investment (MFIC) - 2020 Q4 - Annual Report

PART I Business Apollo Investment Corporation is an externally managed BDC and RIC, investing primarily in secured debt of private middle-market companies for income and capital appreciation - The company's investment objective is to generate current income and capital appreciation, primarily through debt and equity investments in private middle-market companies[13] Portfolio Composition by Fair Value (as of March 31) | Investment Type | 2020 | 2019 | | :--- | :--- | :--- | | Secured Debt | 94% | 89% | | Unsecured Debt | 0% | 0% | | Structured Products & Other | 0% | 2% | | Preferred Equity | 0% | 1% | | Common Equity/Interests & Warrants | 6% | 8% | Investment Activity (Year Ended March 31) | Activity (in billions) | 2020 | 2019 | | :--- | :--- | :--- | | Investments Made | $1.9 | $1.3 | | Investments Sold or Repaid | $1.3 | $1.1 | Portfolio Yields at Cost (as of March 31) | Portfolio | 2020 | 2019 | | :--- | :--- | :--- | | Secured Debt Portfolio | 8.7% | 10.2% | | Total Debt Portfolio | 8.7% | 10.2% | | Total Portfolio | 8.0% | 9.6% | Top Ten Industries by Fair Value (as of March 31, 2020) | Industry | % of Portfolio | | :--- | :--- | | Healthcare & Pharmaceuticals | 16.7% | | Business Services | 12.9% | | Aviation and Consumer Transport | 12.5% | | High Tech Industries | 12.3% | | Transportation – Cargo, Distribution | 6.1% | | Consumer Services | 4.4% | | Beverage, Food & Tobacco | 3.5% | | Consumer Goods – Non-durable | 3.2% | | Consumer Goods – Durable | 2.7% | | Diversified Investment Vehicles, Banking, Finance, Real Estate | 2.6% | - The company is externally managed by Apollo Investment Management, L.P. (AIM), which determines portfolio composition and monitors investments, with administrative services from Apollo Investment Administration, LLC (AIA)[19][21][51] Advisory Fees (Year Ended March 31) | Fee Type (in millions) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Base Management Fees | $40.36 | $35.73 | $47.94 | | Performance-based Incentive Fees | $1.98 | $21.19 | $28.71 | Risk Factors The company faces multiple risks in its operations, investments, and structure, including COVID-19 impacts, interest rate fluctuations, and increased leverage Risks Relating to the Current Environment This section details macroeconomic and external risks, including COVID-19 impacts on portfolio valuations, interest rate fluctuations, and LIBOR phase-out uncertainty - The COVID-19 pandemic has had, and is expected to continue to have, an adverse impact on the company's business, financial condition, and portfolio valuations, including increased credit risk and potential impairments[86][87][89] - Changes in interest rates may adversely affect the value of portfolio investments and net interest income, with increases decreasing fixed-rate asset values and raising borrowing costs[91][92] - The planned phase-out of LIBOR by the end of 2021 creates uncertainty, potentially requiring renegotiation of credit agreements and adversely affecting financial results[117] - Global market volatility from events like the Eurozone crisis, Chinese market turbulence, and Brexit could negatively impact the U.S economy and the company's investments[99][101][103] Risks Relating to our Business and Structure This section details risks from dependence on the Investment Adviser, BDC/RIC regulatory requirements, increased leverage, conflicts of interest, and illiquid investment valuation uncertainty - The company is dependent on the diligence, skill, and network of AIM's key personnel, and their access to AGM's broader resources, with senior management departures posing a material harm risk[123] - Failure to maintain RIC status would subject the company to corporate-level income tax, substantially reducing net assets and income available for distribution[130] - Effective April 4, 2019, the asset coverage requirement was reduced from 200% to 150%, permitting increased debt and magnifying the potential for both gains and losses, thereby increasing investment risk[135][144][151] - Significant potential conflicts of interest exist due to the relationship with AIM and its affiliates, particularly in investment opportunity allocation and management of overlapping objectives[165][169] - A large percentage of the portfolio consists of illiquid, non-publicly traded investments, whose fair value is determined by the Board, creating uncertainty and risk of material differences from realized values[160] - The company and its portfolio companies are subject to cybersecurity risks, including hacking and data breaches, which could result in operational disruptions, financial losses, and reputational damage[186][188] Risks Relating to our Investments This section outlines risks from speculative middle-market investments, high credit loss risk, sector concentrations, subordinated debt, and illiquidity of private holdings - Investments in middle-market companies are speculative and involve a high degree of credit loss risk, as these companies often have limited financial resources and are vulnerable to economic downturns[195] - The company has investments in the energy sector, which are subject to risks from volatile crude oil and natural gas prices, potentially affecting credit quality and performance[196][197][199] - The portfolio contains a limited number of companies, subjecting it to a greater risk of significant loss if one or more key investments perform poorly[207] - The company's debt investments may be subordinated to claims of other creditors, meaning senior debt holders would be paid in full before the company receives any distribution in an insolvency event[213] - The incentive fee structure may induce the Investment Adviser to make riskier or more speculative investments, including those with deferred interest (PIK), to increase its compensation[215][216] Risks Relating to our Debt Instruments This section details risks from the company's debt obligations, including refinancing challenges for its credit facility and unsecured notes, and market value fluctuations - The company's senior secured credit facility matures in November 2023, and an inability to renew, extend, or replace it on favorable terms could adversely impact liquidity, new investments, and stockholder distributions[237][238] - The company's $350 million of 5.250% senior unsecured notes mature in March 2025, and failure to replace or repay them at maturity could materially harm liquidity and operations[239][240] - The market value of the company's debt securities may fluctuate due to various factors, including interest rate changes, economic conditions, and the company's creditworthiness, with potentially limited buyers[242] Risks Relating to an Investment in our Common Stock This section outlines risks for common stockholders, including shares trading at a discount to NAV, uncertainty of distributions, and market price volatility - Shares of BDCs may trade at a market price that is less than the net asset value (NAV) per share, a risk separate from the risk of NAV decline[250] - There is no assurance that the company will achieve investment results allowing for specified levels or increases in cash distributions, which are also limited by the BDC asset coverage test and credit facility covenants[248] - The market price of the company's securities can fluctuate significantly due to numerous factors, including market volatility, regulatory changes, loss of RIC status, and changes in investment portfolio value[251] Unresolved Staff Comments The company reported that it has no unresolved comments from the staff of the Securities and Exchange Commission - None[261] Properties The company does not own any material real estate or other physical properties; its principal executive offices are leased - The company does not own any real estate or other physical properties material to its operations, with its principal executive offices located at 9 West 57th Street, New York, NY 10019[262] Legal Proceedings The company is a defendant in a legal proceeding alleging "fraudulent conveyance" related to DSI Renal Holdings, with a potential $41 million liability - The company is a defendant in a complaint filed by the bankruptcy trustee of DSI Renal Holdings, alleging "fraudulent conveyance," seeking approximately $425 million in damages, with the company's potential share being approximately $41 million, which it intends to vigorously defend against[264] Mine Safety Disclosures This item is not applicable to the company's business operations - Not applicable[265] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section details common stock market data, including historical prices, NAV, distributions, and the status of the company's stock repurchase program Quarterly Stock Price and NAV Per Share | Quarter Ended | NAV Per Share | High Sales Price | Low Sales Price | | :--- | :--- | :--- | :--- | | FY 2020 | | | | | Mar 31, 2020 | $15.70 | $17.74 | $5.20 | | Dec 31, 2019 | $18.27 | $18.33 | $15.18 | | Sep 30, 2019 | $18.69 | $17.00 | $15.61 | | Jun 30, 2019 | $19.00 | $16.52 | $15.12 | | FY 2019 | | | | | Mar 31, 2019 | $19.06 | $15.98 | $12.26 | Quarterly Distributions Declared Per Share | Fiscal Year | Quarter | Distribution | | :--- | :--- | :--- | | 2020 | Q1-Q4 | $0.45 | | 2019 | Q1-Q4 | $0.45 | Stock Repurchase Program Summary (as of March 31, 2020) | Metric | Amount (in millions) | | :--- | :--- | | Total Authorized | $250.0 | | Total Repurchased | $223.1 | | Remaining Authorization | $26.9 | Selected Financial Data This section provides a five-year summary of key financial data, including investment income, net assets, and NAV per share, noting the FY2020 NAV decline Selected Financial Data (Year Ended March 31, in thousands except per share data) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total investment income | $276,916 | $255,076 | $259,287 | | Net investment income | $145,274 | $127,749 | $133,387 | | Net increase (decrease) in net assets | $(116,064) | $71,946 | $87,029 | | Net asset value per share | $15.70 | $19.06 | $19.67 | | Total assets | $2,871,058 | $2,497,797 | $2,311,810 | | Total debt outstanding | $1,794,617 | $1,128,686 | $789,846 | | Distributions declared per share | $1.80 | $1.80 | $1.80 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses FY2020 financial performance, highlighting COVID-19's impact on portfolio valuations, increased unrealized losses, higher expenses, and a shift towards secured debt COVID-19 Developments Management addresses the COVID-19 pandemic's significant adverse impact on portfolio company operations and valuations, leading to increased unrealized depreciation and potential defaults - The COVID-19 pandemic has caused financial distress for portfolio companies, which may lead to defaults, restructurings, and permanent impairments on the company's investments[299] - The company recorded a significant increase in unrealized depreciation as of March 31, 2020, primarily due to the adverse economic effects of the pandemic and the re-pricing of credit risk in the market[301] Portfolio and Investment Activity Net investment activity significantly increased in FY2020, with portfolio growth, a shift to 94% secured debt, and a decrease in weighted average yield Portfolio and Investment Activity (Year Ended March 31, in millions) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Investments made | $1,866.3 | $1,278.1 | | Investments sold/repaid | $(1,265.6) | $(1,086.8) | | Net investment activity | $600.6 | $191.3 | | Portfolio companies at end of period | 152 | 113 | Portfolio Composition and Yields (as of March 31) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Composition (Fair Value) | | | | First lien secured debt | 81% | 66% | | Second lien secured debt | 13% | 23% | | Total secured debt | 94% | 89% | | Yields (Amortized Cost) | | | | Total debt portfolio | 8.7% | 10.2% | | Total portfolio | 8.0% | 9.6% | Results of Operations FY2020 saw a net decrease in net assets due to increased unrealized losses from COVID-19, despite higher investment income, while net expenses rose from increased interest costs Operating Results (Year Ended March 31, in millions) | Line Item | 2020 | 2019 | | :--- | :--- | :--- | | Total investment income | $276.9 | $255.1 | | Net Expenses | $131.6 | $127.3 | | Net Investment Income | $145.3 | $127.8 | | Net Realized and Change in Unrealized Gains (Losses) | $(261.3) | $(55.8) | | Net Increase (Decrease) in Net Assets | $(116.0) | $72.0 | - The net change in unrealized losses was $255.0 million for FY2020, a significant increase from $5.8 million in FY2019, primarily due to the adverse economic effects of the COVID-19 pandemic and re-pricing of credit risk[338] - Net expenses increased by $4.3 million year-over-year, driven by a $15.2 million increase in interest and debt expenses due to higher average debt outstanding ($1.53 billion in FY2020 vs $0.99 billion in FY2019)[334] Liquidity and Capital Resources The company's liquidity sources include its Senior Secured Facility and debt offerings, with $1.8 billion total debt and $354.4 million unused capacity, deemed adequate for the next twelve months Contractual Debt Maturities (as of March 31, 2020, in millions) | Obligation | Total | Less than 1 Year | 1 to 3 Years | 3 to 5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Senior Secured Facility | $1,449.4 | $— | $— | $1,449.4 | $— | | 2025 Notes | $350.0 | $— | $— | $350.0 | $— | | Total Debt | $1,799.4 | $— | $— | $1,799.4 | $— | - As of March 31, 2020, the company had $354.4 million of unused capacity under its Senior Secured Facility[343] - Distributions paid to stockholders totaled $121.8 million ($1.80 per share) for the year ended March 31, 2020, consistent with the prior year[345] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk due to floating-rate loans and its Senior Secured Facility, with a sensitivity analysis detailing the impact on net investment income Interest Rate Sensitivity Analysis (as of March 31, 2020) | Basis Point Change | Estimated Annual Impact on Net Investment Income (in millions) | Estimated Annual Impact on NII Per Share | | :--- | :--- | :--- | | Up 200 bps | $12.4 | $0.190 | | Up 100 bps | $6.0 | $0.092 | | Down 100 bps | $2.7 | $0.042 | | Down 200 bps | $1.9 | $0.030 | Financial Statements and Supplementary Data This section presents audited financial statements and the unqualified auditor's report, highlighting Level 3 investment valuation as a critical audit matter, with a portfolio fair value of $2.79 billion - The independent registered public accounting firm, PricewaterhouseCoopers LLP, issued an unqualified opinion on the Company's financial statements and its internal control over financial reporting as of March 31, 2020[363] - The auditor identified the valuation of Level 3 investments as a critical audit matter due to the significant management judgment and use of unobservable inputs required to determine their fair value[370][371] Summary of Assets and Liabilities (as of March 31, 2020, in thousands) | Account | Amount | | :--- | :--- | | Total Investments at Fair Value | $2,785,433 | | Total Assets | $2,871,058 | | Total Debt | $1,794,617 | | Total Liabilities | $1,846,743 | | Net Assets | $1,024,315 | | Net Asset Value Per Share | $15.70 | Summary of Operations (Year Ended March 31, 2020, in thousands) | Account | Amount | | :--- | :--- | | Total Investment Income | $276,916 | | Net Expenses | $131,642 | | Net Investment Income | $145,274 | | Net Realized and Change in Unrealized Gains (Losses) | $(261,338) | | Net (Decrease) in Net Assets from Operations | $(116,064) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants on accounting and financial disclosure - Not applicable[694] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2020[695] - No changes in internal control over financial reporting occurred during the fourth fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[698] Other Information The company reported no other information for this item - None[699] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2020 Proxy Statement - Information required by this item will be contained in the Company's definitive Proxy Statement for its 2020 Annual Stockholder Meeting and is incorporated by reference[702] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2020 Proxy Statement - Information required by this item will be contained in the Company's definitive Proxy Statement for its 2020 Annual Stockholder Meeting and is incorporated by reference[703] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and related stockholder matters is incorporated by reference from the 2020 Proxy Statement - Information required by this item will be contained in the Company's definitive Proxy Statement for its 2020 Annual Stockholder Meeting and is incorporated by reference[704] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2020 Proxy Statement - Information required by this item will be contained in the Company's definitive Proxy Statement for its 2020 Annual Stockholder Meeting and is incorporated by reference[705] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2020 Proxy Statement - Information required by this item will be contained in the Company's definitive Proxy Statement for its 2020 Annual Stockholder Meeting and is incorporated by reference[706] PART IV Exhibits and Financial Statement Schedules This section lists all exhibits filed as part of the report, including governance documents, material contracts, and required certifications - This section lists all exhibits filed as part of the report, including the Articles of Amendment, Bylaws, Investment Advisory Management Agreement, Administration Agreement, Senior Secured Revolving Credit Agreement, and CEO/CFO certifications[710]