MidCap Financial Investment (MFIC) - 2021 Q4 - Annual Report

PART I Business Apollo Investment Corporation (AIC) is an externally managed BDC and RIC, aiming for income and capital appreciation through debt and equity investments in private middle-market companies - The company's investment objective is to generate current income and capital appreciation, primarily through debt investments in private middle-market companies with annual revenues between $50 million and $2 billion[14][15] - Portfolio Composition and Yields (as of March 31, 2021) | Metric | Value | | :--- | :--- | | Portfolio Composition (Fair Value) | | | Secured Debt | 88% | | Unsecured Debt | 1% | | Preferred Equity | 1% | | Common Equity/Interests & Warrants | 10% | | Weighted Average Yields (Cost Basis) | | | Total Debt Portfolio | 8.0% | | Total Portfolio | 6.5% | - Investment Activity (Year Ended March 31, 2021) | Activity | Amount | | :--- | :--- | | Investments Made | $0.6 billion | | Investments Sold or Repaid | $1.0 billion | | New Portfolio Companies | 14 | | Existing Portfolio Companies Invested In | 75 | - The company is externally managed by Apollo Investment Management, L.P. (AIM) for investment advisory services and Apollo Investment Administration, LLC (AIA) for administrative services, both affiliates of Apollo Global Management (AGM)[20][22] - A multi-step valuation process is used for investments without readily available market quotes, involving the Investment Adviser, senior management, independent valuation firms, and the Audit Committee, with final determination by the Board of Directors[41][46] - The company uses a 1-to-5 investment rating system to monitor the credit risk of its portfolio investments, where a grade of 1 represents the least risk and 5 indicates the most significant risk with expected loss of principal[46][47] Risk Factors The company faces significant risks across environmental, business, structural, investment, and market categories Risks Relating to the Current Environment Operations and financial condition are exposed to macroeconomic and market risks, including COVID-19, interest rate fluctuations, and regulatory changes - The COVID-19 pandemic has adversely impacted the company's investment portfolio valuations and the financial health of its portfolio companies, creating increased credit and liquidity risk[95][96][98] - The phase-out of LIBOR, expected by the end of 2021, presents a significant risk as a material amount of the company's debt investments and borrowings are linked to LIBOR, potentially requiring costly amendments and creating market instability[124][125] - On April 4, 2018, the Board of Directors approved reducing the company's required asset coverage ratio from 200% to 150%, effective April 4, 2019, which allows for increased leverage but also increases associated risks[118][158] - Changes in interest rates pose a risk to the company's net investment income, as it depends on the spread between the rate at which it borrows funds and the rate its investments yield[100][101][102] Risks Relating to our Business and Structure The company's business model and structure are subject to inherent risks, including dependence on key personnel, market competition, and leverage - The company is highly dependent on the key personnel of its Investment Adviser (AIM) and their access to the deal flow and professionals of the broader Apollo Global Management (AGM) platform[132] - Failure to maintain RIC status would subject the company to corporate-level income tax, substantially reducing net assets and income available for distribution, requiring distribution of at least 90% of its taxable income annually[139][140] - The company's use of leverage magnifies the potential for both gains and losses, with the asset coverage requirement reduced from 200% to 150% as of April 4, 2019, permitting increased leverage and risk[144][152][158] - Significant potential conflicts of interest exist with the Investment Adviser and its affiliates concerning the allocation of investment opportunities, management of time, and allocation of expenses, which could adversely affect investment returns[170][174][175] - A large portion of the portfolio is valued in good faith by the Board of Directors, as market quotations are not readily available, creating uncertainty as these valuations may differ materially from realized values[165] Risks Relating to our Investments Investments in private middle-market companies are speculative, involving high credit loss risk, economic vulnerability, and sector-specific challenges - Investments in middle-market companies are speculative and carry a high degree of risk, as these companies often have limited financial resources, are vulnerable to economic downturns, and may be highly leveraged[200][206][208] - The portfolio's limited number of companies subjects the company to a greater risk of significant loss if one or more of these investments perform poorly or default[212] - The incentive fee structure, based on both net investment income and realized capital gains, may create an incentive for the Investment Adviser (AIM) to make riskier or more speculative investments to increase returns[220][221] - The company has investments in sectors with specific risks, including the energy sector (commodity price volatility), aviation (environmental regulations, economic downturns), and healthcare/pharmaceuticals (extensive government regulation and policy changes)[201][236][240] Risks Relating to our Debt Instruments The company faces risks related to its debt financing, including maturity, liquidity, and market fluctuations of its publicly issued debt - The senior secured credit facility matures in December 2025 and the 2025 Notes mature in March 2025, with failure to renew, extend, or replace this debt potentially impacting liquidity, investment funding, and distributions[241][244][245] - The trading market and value of the company's debt securities are subject to fluctuation based on interest rates, economic conditions, and credit ratings, and a liquid trading market may not be available[246][247][249] Risks Relating to an Investment in our Common Stock Investing in the company's common stock is highly speculative, with no guarantee of distributions, potential trading at a discount to NAV, and dilution risks - Investing in the company's securities is highly speculative and involves a high degree of risk, including the potential for loss of principal[250] - Shares of BDCs like Apollo Investment 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[253] - Stockholders who do not participate in the dividend reinvestment plan may experience dilution over time, as cash distributions to other stockholders are automatically reinvested into additional shares[257] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[262] Properties The company does not own any real estate or other material physical properties, with its principal executive offices in New York, NY - The company does not own any material physical properties and its principal executive offices are located at 9 West 57th Street, New York, NY 10019[263] Legal Proceedings The company is a defendant in a lawsuit alleging fraudulent conveyance, with a global settlement agreement pending Bankruptcy Court approval - The company is a defendant in a complaint by the bankruptcy trustee of DSI Renal Holdings, alleging "fraudulent conveyance" and seeking damages, of which the company's potential share is approximately $41 million plus interest[266] - On April 8, 2021, the parties reached a global settlement agreement to resolve all claims in the litigation, which is currently awaiting approval from the Bankruptcy Court[269] Mine Safety Disclosures This item is not applicable to the company - Not applicable[270] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ, often at a discount to NAV, with quarterly distributions and an active share repurchase program - Quarterly Stock Performance (Fiscal Year 2021) | Quarter Ended | NAV Per Share | High Sales Price | Low Sales Price | High Price to NAV | Low Price to NAV | Distributions Declared | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Mar 31, 2021 | $15.88 | $14.94 | $10.40 | (5.9)% | (34.5)% | $0.36 | | Dec 31, 2020 | $15.59 | $11.98 | $7.33 | (23.2)% | (53.0)% | $0.36 | | Sep 30, 2020 | $15.44 | $10.40 | $7.95 | (32.6)% | (48.5)% | $0.36 | | Jun 30, 2020 | $15.29 | $11.94 | $5.25 | (21.9)% | (65.7)% | $0.45 | - The company maintains an "opt out" dividend reinvestment plan, where cash distributions are automatically reinvested in additional shares unless stockholders elect to receive cash[277] - Share Repurchase Plan Status (as of March 31, 2021) | Metric | Amount (in millions) | | :--- | :--- | | Total Authorized | $250.0 | | Total Repurchased | $223.1 | | Remaining Authorization | $26.9 | - During fiscal year 2020, the company repurchased 1,286,565 shares in March 2020 at an average price of $11.62 per share[287] Selected Financial Data This section is no longer required as the company has early adopted a relevant SEC rule change - The company has elected to early adopt the SEC's rule change eliminating the requirement for selected financial data[310] Management's Discussion and Analysis of Financial Condition and Results of Operations Total investment income decreased to $216.7 million in FY2021, while net assets increased by $111.9 million due to positive unrealized gains Results of Operations FY2021 saw a $60.2 million decrease in investment income and a $24.9 million decrease in net expenses, leading to a $111.9 million net increase in net assets - Operating Results Comparison (in millions) | Metric | FY 2021 | FY 2020 | Change | | :--- | :--- | :--- | :--- | | Total Investment Income | $216.7 | $276.9 | $(60.2) | | Net Expenses | $106.7 | $131.6 | $(24.9) | | Net Investment Income | $110.0 | $145.3 | $(35.3) | | Net Realized Gains (Losses) | $(21.5) | $(6.3) | $(15.2) | | Net Change in Unrealized Gains (Losses) | $23.3 | $(255.0) | $278.3 | | Net Increase (Decrease) in Net Assets | $111.9 | $(116.0) | $227.9 | - The decrease in investment income was primarily driven by a lower average yield on the total debt portfolio (8.4% in FY2021 vs. 9.4% in FY2020) and a smaller income-bearing investment portfolio[357] - The decrease in net expenses was mainly due to lower interest and debt expenses, resulting from a reduction in net leverage (1.36x vs. 1.71x) and a lower weighted average interest cost (3.04% vs. 4.42%)[358] - Significant net realized losses in FY2021 included KLO Holdings, LLC ($8.5 million) and ZPower, LLC ($6.1 million)[360] - Significant net changes in unrealized gains/(losses) in FY2021 included gains from KLO Holdings, LLC ($11.9 million) and losses from Spotted Hawk ($(11.6) million) and Dynamic Product Tankers ($(11.1) million)[361] Liquidity and Capital Resources Liquidity is supported by cash, the Senior Secured Facility, and operating cash flows, with total debt obligations of $1.47 billion as of March 31, 2021 - The company believes its current cash, available borrowing capacity, and anticipated cash flows are adequate to meet its needs for at least the next twelve months[364] - Contractual Debt Maturities (as of March 31, 2021) | Obligation | Total (in millions) | Due in 3 to 5 Years | | :--- | :--- | :--- | | Senior Secured Facility | $1,119.2 | $1,119.2 | | 2025 Notes | $350.0 | $350.0 | | Total Debt Obligations | $1,469.2 | $1,469.2 | - As of March 31, 2021, the Senior Secured Facility had $690.6 million of unused capacity[367] - Distributions paid to stockholders during the fiscal year ended March 31, 2021, totaled $105.7 million, or $1.62 per share[369] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to investment valuation and interest rate risks, with a hypothetical 100 basis point LIBOR increase decreasing net investment income by $5.0 million - The company faces significant investment valuation risk because a majority of its portfolio investments do not have readily available market values and are valued in good faith by the board of directors[378] - As of March 31, 2021, all of the company's debt portfolio investments bore interest at variable rates, making its net investment income sensitive to changes in interest rates like LIBOR[380] - Interest Rate Sensitivity Analysis (as of March 31, 2021) | Basis Point Change | Estimated Annual Impact on Net Investment Income (in millions) | Estimated Annual Impact Per Share | | :--- | :--- | :--- | | Up 200 bps | $0.8 | $0.012 | | Up 100 bps | $(5.0) | $(0.077) | | Up 50 bps | $(3.9) | $(0.059) | | Down 25 bps | $0.4 | $0.006 | Financial Statements and Supplementary Data This section includes audited financial statements for FY2021, with an unqualified auditor opinion and detailed schedules of investments - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the financial statements and on the effectiveness of internal control over financial reporting as of March 31, 2021[394] - The auditor identified the valuation of Level 3 investments as a critical audit matter due to the significant management judgment involved in determining their fair value using unobservable inputs[401][402][403] - Key Financial Statement Balances (as of March 31, 2021) | Account | Amount (in thousands) | | :--- | :--- | | Total Investments at Fair Value | $2,449,151 | | Total Assets | $2,544,489 | | Total Liabilities | $1,508,159 | | Net Assets | $1,036,330 | | Net Asset Value Per Share | $15.88 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[777] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2021, with no material changes in internal controls - Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2021[778] - 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[781] Other Information The company reports no other information for this item - None[782] PART III Directors, Executive Officers, Corporate Governance, Compensation, and Related Matters Information for Items 10-14 is incorporated by reference from the company's 2021 Proxy Statement - Information regarding directors, executive officers, corporate governance, executive compensation, security ownership, related transactions, and principal accounting fees is incorporated by reference from the company's 2021 Proxy Statement[785][786][787] PART IV Exhibits and Financial Statement Schedules This section lists documents filed as part of the Form 10-K, including financial statements, corporate documents, and certifications - The financial statements are referenced under Item 8, and no separate financial statement schedules are filed[793] - Exhibits filed with the report include key corporate governance and operational documents, debt agreements, and required CEO/CFO certifications[793]