UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-22591
Apollo Tactical Income Fund Inc.
(Exact name of registrant as specified in charter)
9 West 57th Street
New York, New York 10019
(Address of principal executive offices) (Zip code)
Joseph Moroney, President
9 West 57th Street
New York, New York 10019
(Name and address of agent for service)
Registrants telephone number, including area code: (212) 515-3200
Date of fiscal year end: December 31
Date of reporting period: December 31, 2013
Item 1. Reports to Stockholders.
The Report to Shareholders is attached herewith.
Apollo Senior Floating Rate Fund Inc. (NYSE: AFT)
Apollo Tactical Income Fund Inc. (NYSE: AIF)
Annual Report
December 31, 2013
3 | ||
Financial Data |
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5 | ||
6 | ||
Schedule of Investments |
||
7 | ||
13 | ||
18 | ||
19 | ||
Statements of Changes in Net Assets |
||
20 | ||
21 | ||
Statements of Cash Flows |
||
22 | ||
23 | ||
Financial Highlights |
||
24 | ||
25 | ||
26 | ||
40 | ||
41 | ||
42 | ||
44 |
Economic and market conditions change frequently.
There is no assurance that the trends described in this report will continue or commence.
This report, including the financial information herein, is transmitted to shareholders of the Funds for their information. It is not a prospectus. Past performance results shown in this report should not be considered a representation of future performance. Statements and other information herein are as dated and are subject to change.
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Manager Commentary (unaudited)
As of December 31, 2013
Dear Shareholders,
We would like to start by saying thank you for your interest in the Apollo Senior Floating Rate Fund Inc. and the Apollo Tactical Income Fund Inc. (the Funds). We appreciate the trust and confidence you have placed with us through your investment in the Funds.
In 2013, we saw several records broken and witnessed several improbabilities become realities. In terms of the records broken, total leveraged loan issuance hit $605.0 billion and institutional issuance hit $454.9 billion for the year, exceeding prior records of $535.2 billion and $386.6 billion, respectively, in 2007. The driver for the significant issuance was primarily refinancings, which were 47% of issuance for the year. Issuers took advantage of robust capital markets and low rates to address upcoming maturities or opportunistically remove covenants and reprice their loans. The next record broken was retail inflows, which were $70 billion for the year. Demand for floating rate income-oriented investments by retail investors grew as the possibility of a higher rate environment became evident amid talks of a less accommodative central bank. The demand from retail investors was met with a nominal increase in new supply into the market during the first half of 2013, but became more balanced in the second half of the year. The supply, primarily in the second half of 2013, resulted in the loan market growing from $551.8 billion to $680.9 billion during the year. The other notable development was the resurgence in the collateralized loan obligation (CLO) market where issuance hit $81.8 billion for the year, the most since $97.0 billion in 2006. The CLO market was wide open for most of the year as issuers executed a total of 172 deals, which helped absorb new issue supply and drove spreads tighter.
Fundamentally, we saw a benign environment during 2013. Default rates for the year ended at 2.11% by principal amount and 1.61% by number of loans. This compares to a long-term average of 3.24% and 3.07% over the last 15 years. While use of leverage increased during the year, fixed charge coverage, which represents a companys ability to service their interest expense and capital expenditures, remained strong, largely due to low interest expense. Structures were weaker during the year with a majority of loan issuers executing covenant-lite financings, although history suggests covenant-lite issuers do not exhibit worse default characteristics than loans with covenants.
Based on historical trends, we did not anticipate that 2013 would be a coupon-clipping year. However, it appears that 2013 was an exception where the market earned 5.29% versus a beginning-of-2013 yield of 5.59%. This is the first time in 7 years that this has happened. As we break down the year, we did see significant spread compression during the first quarter of 2013 as supply was insufficient to meet demand, resulting in a wave of repricings. As the year progressed, we saw more stability in supply and demand dynamics, and spreads stabilized. We ended 2013 with spreads on the leveraged loan index of 4.66%, compared to the beginning of the year at 5.29%.
As we head into 2014, market strategists generally are forecasting, in classic fashion, more of the same. Default rates are expected to remain muted, loan issuance is expected to be robust, and new issue CLO and retail demand are expected to be strong. Loans are expected to have another coupon year. While we could offer a safe outlook with many of the same thoughts as the strategists, a tenet of Apollo is to always look for a contrarian view. Some of our views are as follows:
Our key contrarian prediction is that loans have the potential to see much more technical volatility in 2014 than 2013, creating opportunities for investors that are patient and capital-rich. The open-ended mutual fund investor was primarily responsible for driving demand for loans and causing spreads to tighten significantly in 2013, as noted above. We believe that retail demand will be more erratic in 2014 as the debate over quantitative easing continues. Loans have seen 81 consecutive weeks of positive inflows, and we believe that we are due for a pause or a temporary reversal that could cause a rise in spreads (and a reduction in prices). We look at 2011 to see the impact of a reversal in loan retail flows on prices. During a 5-week period in the summer of 2011, the loan market declined by 5.02% as retail outflows hit $5.5 billion. At that time, retail investors were $80.7 billion, or 15.6%, of the market. Today, retail investors are $161.0 billion, or 23.7%, of the market. Our view is that a reversal in loan mutual fund flows, even a modest one, could result in a relatively large decline in prices. Notably, we believe this decline in prices will be temporary but may result in loans underachieving their coupons for the year.
Annual Report | 3
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Manager Commentary (unaudited) (continued)
As of December 31, 2013
While we expect that defaults in 2014 should remain low, we also believe defaults may rise to a level closer to long-term averages over the next few years. We saw an increase in the amount of weak third quarter earnings reports compared to previous quarters, resulting in price declines for underperformers. While there were few themes across earnings, it is clearly becoming a credit pickers market, as companies across a variety of sectors missed numbers due to poor execution and a lack of cost-cutting opportunities. We do not currently foresee any significant catalysts to cause a broad pick-up in defaults in 2014, given lack of maturities, lack of covenants and low rates, but we do think the shadow interest rate will pick-up in 2014 and result in more defaults in 2015 and 2016.
We appreciate your interest and support in the Funds and hope you have a happy and prosperous new year. If you have any questions about the Funds, please call 1-888-301-3838, or go to our website at www.agmfunds.com.
Sincerely,
Apollo Credit Management, LLC
4 | Annual Report
Apollo Senior Floating Rate Fund Inc.
As of December 31, 2013 (unaudited)
(a) | Averages based on par value of investment securities, except for the weighted average modified duration, which is based on market value. |
(b) | Credit quality is calculated as a percentage of fair value of investment securities at December 31, 2013. The quality ratings reflected were issued by Standard & Poors Ratings Group (Standard & Poors), a nationally recognized statistical rating organization. Credit quality ratings reflect the rating agencys opinion of the credit quality of the underlying positions in the Funds portfolio and not that of the Fund itself. Credit quality ratings are subject to change. |
(c) | The industry classifications reported are from widely recognized market indexes or rating group indexes, and/or as defined by Fund management, with the primary source being Moodys Investors Service (Moodys), a nationally recognized statistical rating organization. |
(d) | Holdings are subject to change and are provided for informational purposes only. |
(e) | Performance reflects total return assuming all distributions were reinvested at the dividend reinvestment rate. Past performance does not necessarily indicate how the Fund will perform in the future. The performance information provided does not reflect the deduction of taxes that a shareholder would pay on distributions received from the Fund. |
(f) | Annualized. |
Annual Report | 5
Apollo Tactical Income Fund Inc.
Financial Data
As of December 31, 2013 (unaudited)
(a) | Averages based on par value of investment securities, except for the weighted average modified duration, which is based on market value. |
(b) | Credit quality is calculated as a percentage of fair value of investment securities at December 31, 2013. The quality ratings reflected were issued by Standard & Poors, a nationally recognized statistical rating organization. Credit quality ratings reflect the rating agencys opinion of the credit quality of the underlying positions in the Funds portfolio and not that of the Fund itself. Credit quality ratings are subject to change. |
(c) | The industry classifications reported are from widely recognized market indexes or rating group indexes, and/or as defined by Fund management, with the primary source being Moodys, a nationally recognized statistical rating organization. |
(d) | Holdings are subject to change and are provided for informational purposes only. |
(e) | Performance reflects total return assuming all distributions were reinvested at the dividend reinvestment rate. Past performance does not necessarily indicate how the Fund will perform in the future. The performance information provided does not reflect the deduction of taxes that a shareholder would pay on distributions received from the Fund. |
(f) | Not annualized. |
6 | Annual Report
Apollo Senior Floating Rate Fund Inc.
Schedule of Investments
December 31, 2013
See accompanying Notes to Financial Statements. | 7
Apollo Senior Floating Rate Fund Inc.
Schedule of Investments (continued)
December 31, 2013
8 | See accompanying Notes to Financial Statements.
Apollo Senior Floating Rate Fund Inc.
Schedule of Investments (continued)
December 31, 2013
See accompanying Notes to Financial Statements. | 9
Apollo Senior Floating Rate Fund Inc.
Schedule of Investments (continued)
December 31, 2013
10 | See accompanying Notes to Financial Statements.
Apollo Senior Floating Rate Fund Inc.
Schedule of Investments (continued)
December 31, 2013
See accompanying Notes to Financial Statements. | 11
Apollo Senior Floating Rate Fund Inc.
Schedule of Investments (continued)
December 31, 2013
(a) | Senior Loans are senior, secured loans made to companies whose debt is rated below investment grade and investments with similar characteristics. Senior Loans typically hold a first lien priority and pay interest at rates that are determined periodically on the basis of a floating base lending rate plus a spread. Unless otherwise identified, all Senior Loans carry a variable rate of interest. These base lending rates are primarily the London Interbank Offered Rate (LIBOR) and secondarily the prime rate offered by one or more major U.S. banks and the certificate of deposit rate used by commercial lenders. The rates shown represent the weighted average rate at December 31, 2013. Senior Loans are generally not registered under the Securities Act of 1933 (the 1933 Act) and often contain certain restrictions on resale and cannot be sold publicly. Senior Loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual maturity may be substantially less than the stated maturity shown. |
(b) | Fair Value Level 3 security. All remaining securities are categorized as Level 2. |
(c) | Foreign issuer traded in U.S. dollars. |
(d) | All or a portion of this position has not settled. Full contract rates do not take effect until settlement date. |
(e) | Senior Loan assets have additional unfunded loan commitments. As of December 31, 2013, the Fund had unfunded loan commitments, which could be extended at the option of the borrower, pursuant to the following loan agreements: |
Borrower |
Unfunded Loan Commitment |
|||
Power Buyer, LLC |
$ | 64,505 | ||
|
|
(f) | Securities exempt from registration pursuant to Rule 144A under the 1933 Act. These securities may only be resold in transactions exempt from registration to qualified institutional buyers. At December 31, 2013, these securities amounted to $18,422,872, or 6.2% of net assets. |
12 | See accompanying Notes to Financial Statements.
Apollo Tactical Income Fund Inc.
Schedule of Investments
December 31, 2013
See accompanying Notes to Financial Statements. | 13
Apollo Tactical Income Fund Inc.
Schedule of Investments (continued)
December 31, 2013
14 | See accompanying Notes to Financial Statements.
Apollo Tactical Income Fund Inc.
Schedule of Investments (continued)
December 31, 2013
See accompanying Notes to Financial Statements. | 15
Apollo Tactical Income Fund Inc.
Schedule of Investments (continued)
December 31, 2013
16 | See accompanying Notes to Financial Statements.
Apollo Tactical Income Fund Inc.
Schedule of Investments (continued)
December 31, 2013
(a) | Senior Loans are senior, secured loans made to companies whose debt is rated below investment grade and investments with similar characteristics. Senior Loans typically hold a first lien priority and pay interest at rates that are determined periodically on the basis of a floating base lending rate plus a spread. Unless otherwise identified, all Senior Loans carry a variable rate of interest. These base lending rates are primarily the London Interbank Offered Rate (LIBOR) and secondarily the prime rate offered by one or more major U.S. banks and the certificate of deposit rate used by commercial lenders. The rates shown represent the weighted average rate at December 31, 2013. Senior Loans are generally not registered under the Securities Act of 1933 (the 1933 Act) and often contain certain restrictions on resale and cannot be sold publicly. Senior Loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual maturity may be substantially less than the stated maturity shown. |
(b) | All or a portion of this position has not settled. Full contract rates do not take effect until settlement date. |
(c) | Fair Value Level 3 security. All remaining securities are categorized as Level 2. |
(d) | Foreign issuer traded in U.S. dollars. |
(e) | Securities exempt from registration pursuant to Rule 144A under the 1933 Act. These securities may only be resold in transactions exempt from registration to qualified institutional buyers. At December 31, 2013, these securities amounted to $132,580,446, or 47.0% of net assets. |
(f) | Asset-backed securities include collateralized loan obligations (CLOs). A CLO typically takes the form of a financing company (generally called a special purpose vehicle or SPV), created to reapportion the risk and return characteristics of a pool of assets. While the assets underlying CLOs are often Senior Loans or corporate notes and bonds, the assets may also include (i) subordinated loans; (ii) debt tranches of other CLOs; and (iii) equity securities incidental to investments in Senior Loans. The Fund may invest in lower tranches of CLOs, which typically experience a lower recovery, greater risk of loss or deferral or non-payment of interest than more senior tranches of the CLO. A key feature of the CLO structure is the prioritization of the cash flows from a pool of debt securities among the several classes of the CLO. The SPV is a company founded for the purpose of securitizing payment claims arising out of this asset pool. On this basis, marketable securities are issued by the SPV which, due to the diversification of the underlying risk, generally represent a lower level of risk than the original assets. The redemption of the securities issued by the SPV typically takes place at maturity out of the cash flow generated by the collected claims. |
(g) | Floating rate asset. The interest rate shown reflects the rate in effect at December 31, 2013. |
See accompanying Notes to Financial Statements. | 17
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Statements of Assets and Liabilities
December 31, 2013
Apollo Senior |
Apollo Tactical Income Fund Inc. |
|||||||
Assets: |
||||||||
Investment securities at fair value (cost $429,971,089 and $400,650,040, respectively) |
$ | 434,459,009 | $ | 405,669,541 | ||||
Cash and cash equivalents |
21,698,530 | 19,484,678 | ||||||
Interest receivable |
2,879,408 | 4,711,831 | ||||||
Receivable for investment securities sold |
7,416,647 | 7,723,116 | ||||||
Deferred financing costs |
433,556 | 141,959 | ||||||
Prepaid expenses |
55,055 | 55,055 | ||||||
|
|
|
|
|||||
Total Assets |
$ | 466,942,205 | $ | 437,786,180 | ||||
|
|
|
|
|||||
Liabilities: |
||||||||
Borrowings under credit facility (Note 8) |
$ | 122,704,615 | $ | 138,000,000 | ||||
Payable for investment securities purchased |
14,024,801 | 16,006,339 | ||||||
Interest payable |
516,887 | 220,841 | ||||||
Unrealized depreciation on unfunded transactions (Note 9) |
381 | | ||||||
Distributions payable to common shareholders |
114,242 | 140,754 | ||||||
Investment advisory fee payable |
383,179 | 356,509 | ||||||
Accumulated distribution payable to preferred shareholders |
168,440 | | ||||||
Other payables and accrued expenses due to affiliates |
273,185 | 578,231 | ||||||
Other payables and accrued expenses (Note 9) |
345,602 | 306,577 | ||||||
|
|
|
|
|||||
Total Liabilities |
138,531,332 | 155,609,251 | ||||||
|
|
|
|
|||||
Net Assets including Series A Preferred Shares |
$ | 328,410,873 | $ | 282,176,929 | ||||
|
|
|
|
|||||
Series A Preferred Shares |
||||||||
($0.001 par value, 1,534 authorized and issued with liquidation preference of $20,000 per share) |
$ | 30,680,000 | $ | | ||||
|
|
|
|
|||||
Net Assets (Applicable to Common Shareholders) |
$ | 297,730,873 | $ | 282,176,929 | ||||
|
|
|
|
|||||
Net Assets Consist of: |
||||||||
Par value of common shares ($0.001 par value, 999,998,466 and 1,000,000,000 shares authorized, respectively, and 15,573,061 and 14,464,026 issued and outstanding, respectively) (Note 6) |
$ | 15,573 | $ | 14,464 | ||||
Paid-in capital in excess of par value of common shares |
296,698,465 | 275,641,114 | ||||||
Undistributed net investment income |
1,543,192 | 1,106,712 | ||||||
Accumulated net realized (loss)/gain from investments |
(5,013,896 | ) | 395,138 | |||||
Net unrealized appreciation on investments and unfunded transactions |
4,487,539 | 5,019,501 | ||||||
|
|
|
|
|||||
Net Assets (Applicable to Common Shareholders) |
$ | 297,730,873 | $ | 282,176,929 | ||||
|
|
|
|
|||||
Number of Common Shares outstanding |
15,573,061 | 14,464,026 | ||||||
Net Asset Value, per Common Share |
$ | 19.12 | $ | 19.51 |
18 | See accompanying Notes to Financial Statements.
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Statements of Operations
For the Year or Period Ended December 31, 2013
Apollo Senior |
Apollo Tactical Income Fund Inc.* |
|||||||||||
Investment Income: |
||||||||||||
Interest |
$ | 29,687,494 | $ | 20,821,740 | ||||||||
|
|
|
|
|
|
|||||||
Total Investment Income |
29,687,494 | 20,821,740 | ||||||||||
|
|
|
|
|
|
|||||||
Expenses: |
||||||||||||
Investment advisory fee (Note 3) |
4,493,778 | 3,178,782 | ||||||||||
Interest and commitment fee expense (Note 8) |
2,087,659 | 1,273,485 | ||||||||||
Audit and legal fees |
470,371 | 337,420 | ||||||||||
Administrative services of the Adviser (Note 3) |
560,969 | 407,768 | ||||||||||
Insurance expense |
386,906 | 303,784 | ||||||||||
Amortization of deferred financing costs (Note 8) |
349,561 | 73,937 | ||||||||||
Board of Directors fees (Note 3) |
90,604 | 103,736 | ||||||||||
Other operating expenses (Note 3) |
451,058 | 326,722 | ||||||||||
|
|
|
|
|
|
|||||||
Total Expenses |
8,890,906 | 6,005,634 | ||||||||||
Expense reimbursement waived by Adviser (Note 3) |
| (59,351 | ) | |||||||||
|
|
|
|
|
|
|||||||
Net Expenses |
8,890,906 | 5,946,283 | ||||||||||
|
|
|
|
|
|
|||||||
Net Investment Income |
20,796,588 | 14,875,457 | ||||||||||
|
|
|
|
|
|
|||||||
Net Realized and Unrealized Gain/(Loss) on Investments |
||||||||||||
Net realized (loss)/gain on investments |
(3,951,563 | ) | 569,675 | |||||||||
Net change in unrealized appreciation/(depreciation) on investments and on unfunded transactions (Note 9) |
9,536,604 | 5,019,501 | ||||||||||
|
|
|
|
|
|
|||||||
Net realized and unrealized gain on investments |
5,585,041 | 5,589,176 | ||||||||||
|
|
|
|
|
|
|||||||
Distributions to Preferred Shareholders: |
||||||||||||
From net investment income |
(677,510 | ) | | |||||||||
|
|
|
|
|
|
|||||||
Net increase in net assets, available to common shareholders, resulting from operations |
$ | 25,704,119 | $ | 20,464,633 | ||||||||
|
|
|
|
|
|
* | For the period from February 25, 2013 (commencement of operations) to December 31, 2013. |
See accompanying Notes to Financial Statements. | 19
Apollo Senior Floating Rate Fund Inc.
Statements of Changes in Net Assets
Year Ended |
Year Ended | |||||||||||||||
Increase in Net Assets: |
||||||||||||||||
From Operations |
||||||||||||||||
Net investment income |
$ | 20,796,588 | $21,470,829 | |||||||||||||
Net realized loss on investments |
(3,951,563 | ) | (1,019,683 | ) | ||||||||||||
Net change in unrealized appreciation/(depreciation) on investments and unfundedtransactions |
9,536,604 | 17,887,503 | ||||||||||||||
Distributions to preferred shareholders |
(677,510 | ) | (738,358 | ) | ||||||||||||
|
|
|
|
|||||||||||||
Net increase in net assets from operations |
25,704,119 | 37,600,291 | ||||||||||||||
|
|
|
|
|||||||||||||
Distributions to Common Shareholders |
||||||||||||||||
From net investment income |
(19,606,326 | ) | (21,312,205 | ) | ||||||||||||
From realized gain on investments |
| (137,220 | )* | |||||||||||||
|
|
|
|
|||||||||||||
Total distributions to common shareholders |
(19,606,326 | ) | (21,449,425 | ) | ||||||||||||
|
|
|
|
|||||||||||||
Capital Transactions from Common Shares |
||||||||||||||||
Reinvestment of dividends |
811,136 | 1,021,185 | ||||||||||||||
|
|
|
|
|||||||||||||
Net increase in net assets from share transactions |
811,136 | 1,021,185 | ||||||||||||||
|
|
|
|
|||||||||||||
Total increase in net assets |
$ | 6,908,929 | $17,172,051 | |||||||||||||
Net Assets Applicable to Common Shares |
||||||||||||||||
Beginning of year |
290,821,944 | 273,649,893 | ||||||||||||||
|
|
|
|
|||||||||||||
End of year |
$ | 297,730,873 | $290,821,944 | |||||||||||||
|
|
|
|
|||||||||||||
Undistributed net investment income |
$ | 1,543,192 | $999,427 | |||||||||||||
|
|
|
|
* | Amount stated reflects the nature of the underlying short-term investment transactions. |
20 | See accompanying Notes to Financial Statements.
Apollo Tactical Income Fund Inc.
Statement of Changes in Net Assets
Period Ended |
||||||
Increase in Net Assets: |
||||||
From Operations |
||||||
Net investment income |
$ | 14,875,457 | ||||
Net realized gain on investments |
569,675 | |||||
Net change in unrealized appreciation/(depreciation) on investments |
5,019,501 | |||||
|
|
|||||
Net increase in net assets from operations |
20,464,633 | |||||
|
|
|||||
Distributions to Common Shareholders |
||||||
From net investment income |
(13,797,712 | ) | ||||
From realized gain on investments |
(174,537 | ) | ||||
|
|
|||||
Total distributions to common shareholders |
(13,972,249 | ) | ||||
|
|
|||||
Capital Transactions from Common Shares |
||||||
Proceeds from sale of common shares |
276,162,889 | |||||
Offering costs (Note 6) |
(578,352 | ) | ||||
|
|
|||||
Net increase in net assets from share transactions |
275,584,537 | |||||
|
|
|||||
Total increase in net assets |
$ | 282,076,921 | ||||
Net Assets Applicable to Common Shares |
||||||
Beginning of period** |
100,008 | |||||
|
|
|||||
End of period |
$ | 282,176,929 | ||||
|
|
|||||
Undistributed net investment income |
$ | 1,106,712 | ||||
|
|
* | For the period from February 25, 2013 (commencement of operations) to December 31, 2013. |
** | Represents initial seed capital invested by Apollo Credit Management, LLC. |
See accompanying Notes to Financial Statements. | 21
Apollo Senior Floating Rate Fund Inc.
For the Year Ended December 31, 2013
|
||||
Cash Flows From Operating Activities |
||||
Net increase in net assets from operations excluding distributions to preferred shareholders |
$ | 26,381,629 | ||
Adjustments to Reconcile Net Increase in Net Assets from Operations Excluding Distributions to Preferred Shareholders to Net Cash Flows Provided by Operating Activities |
||||
Net realized loss on investments |
3,951,563 | |||
Net change in unrealized (appreciation)/depreciation on investments and on unfunded transactions |
(9,536,604 | ) | ||
Net amortization/(accretion) of premium/(discount) |
(849,056 | ) | ||
Purchase of investment securities |
(334,865,170 | ) | ||
Proceeds from disposition of investment securities |
326,291,753 | |||
Amortization of deferred financing costs |
349,561 | |||
Changes in operating assets and liabilities |
||||
Decrease in interest receivable |
242,909 | |||
Increase in prepaid expenses |
(15,794 | ) | ||
Decrease in interest payable |
(35,089 | ) | ||
Increase in investment advisory fee payable |
7,132 | |||
Decrease in other payables and accrued expenses due to affiliates |
(74,445 | ) | ||
Decrease in directors fees payable |
(22,750 | ) | ||
Increase in other payables and accrued expenses |
81,608 | |||
|
|
|||
Net cash flows provided by operating activities |
11,907,247 | |||
|
|
|||
Cash Flows From Financing Activities |
||||
Distributions paid to common shareholders |
(18,680,948 | ) | ||
Distributions paid to preferred shareholders |
(686,284 | ) | ||
|
|
|||
Net cash flows used in financing activities |
(19,367,232 | ) | ||
|
|
|||
Net decrease in cash and cash equivalents |
(7,459,985 | ) | ||
Cash and cash equivalents, beginning of year |
29,158,515 | |||
|
|
|||
Cash and cash equivalents, end of year |
$ | 21,698,530 | ||
|
|
|||
Supplemental Disclosure of Cash Flow Information |
||||
Cash paid during the period for interest |
$ | 2,122,748 | ||
|
|
|||
Supplemental Disclosure of Non-Cash Financing Activity |
||||
Value of common shares issued as reinvestment of dividends to common shareholders |
$ | 811,136 | ||
|
|
22 | See accompanying Notes to Financial Statements.
Apollo Tactical Income Fund Inc.
Statement of Cash Flows
For the Period from February 25, 2013 (commencement of operations) to December 31, 2013
|
||||
Cash Flows From Operating Activities |
||||
Net increase in net assets from operations |
$ | 20,464,633 | ||
Adjustments to Reconcile Net Increase in Net Assets from Operations to Net Cash Flows Used in Operating Activities |
||||
Net realized gain on investments |
(569,675 | ) | ||
Net change in unrealized (appreciation)/depreciation on investments |
(5,019,501 | ) | ||
Net amortization/(accretion) of premium/(discount) |
(191,885 | ) | ||
Purchase of investment securities |
(653,484,085 | ) | ||
Proceeds from disposition of investment securities |
261,878,828 | |||
Amortization of deferred financing costs |
73,937 | |||
Changes in operating assets and liabilities |
||||
Increase in interest receivable |
(4,711,831 | ) | ||
Increase in prepaid expenses |
(55,055 | ) | ||
Increase in interest payable |
220,841 | |||
Increase in investment advisory fee payable |
356,509 | |||
Increase in other payables and accrued expenses due to affiliates |
578,231 | |||
Increase in other payables and accrued expenses |
306,577 | |||
|
|
|||
Net cash flows used in operating activities |
(380,152,476 | ) | ||
|
|
|||
Cash Flows From Financing Activities |
||||
Proceeds from borrowings under the credit facility |
138,000,000 | |||
Deferred financing costs |
(215,896 | ) | ||
Proceeds from capital stock issued |
276,262,897 | |||
Offering costs |
(578,352 | ) | ||
Distributions paid to common shareholders |
(13,831,495 | ) | ||
|
|
|||
Net cash flows provided by financing activities |
399,637,154 | |||
|
|
|||
Net increase in cash and cash equivalents |
19,484,678 | |||
Cash and cash equivalents, beginning of period |
| |||
|
|
|||
Cash and cash equivalents, end of period |
$ | 19,484,678 | ||
|
|
|||
Supplemental Disclosure of Cash Flow Information |
||||
Cash paid during the period for interest |
$ | 1,052,645 | ||
|
|
See accompanying Notes to Financial Statements. | 23
Apollo Senior Floating Rate Fund Inc.
Financial Highlights
For a Common Share outstanding throughout the period
Common Shares Per Share Operating Performance: | For the Year Ended |
For the Year Ended |
For the Ended |
|||||||||
Net Asset Value, Beginning of Period |
$ | 18.73 | $ | 17.68 | $ | 19.10 | (b) | |||||
Income from Investment Operations: |
||||||||||||
Net investment income |
1.34 | 1.39 | 1.00 | |||||||||
Net realized and unrealized gain/(loss) on investments |
0.35 | 1.10 | (1.46 | ) | ||||||||
Distributions from net investment income to Series A Preferred Shareholders |
(0.04 | ) | (0.05 | ) | (0.02 | ) | ||||||
|
|
|
|
|
|
|||||||
Total from investment operations |
1.65 | 2.44 | (0.48 | ) | ||||||||
Less Distributions Paid to Common Shareholders from: |
||||||||||||
Net investment income |
(1.26 | ) | (1.38 | ) | (0.88 | ) | ||||||
Net realized gain on investments |
| (0.01 | ) | (0.02 | ) | |||||||
|
|
|
|
|
|
|||||||
Total distributions paid to Common Shareholders |
(1.26 | ) | (1.39 | ) | (0.90 | ) | ||||||
Common Share offering charges to paid-in capital |
| | (0.04 | ) | ||||||||
Net Asset Value, End of Period |
$ | 19.12 | $ | 18.73 | $ | 17.68 | ||||||
Market Value, End of Period |
$ | 18.10 | $ | 18.77 | $ | 16.01 | ||||||
Total return based on net asset value(c) |
9.19 | % | 14.23 | % | (2.43 | )%(d) | ||||||
Total return based on market value(c) |
3.14 | % | 26.41 | % | (15.62 | )%(d) | ||||||
Ratios to Average Net Assets available to Common Shareholders: |
||||||||||||
Ratio of total expenses to average net assets |
3.00 | % | 3.21 | % | 2.99 | %(e) | ||||||
Ratio of net expenses to average net assets |
3.00 | % | 3.18 | % | 2.88 | %(e) | ||||||
Ratio of net investment income to average net assets(f) |
7.03 | % | 7.51 | % | 6.49 | %(e) | ||||||
Ratio of net investment income to average net assets net of distributions to Series A Preferred Shareholders |
6.80 | % | 7.25 | % | 6.33 | %(e) | ||||||
Supplemental Data: |
||||||||||||
Portfolio turnover rate |
72.0 | % | 66.6 | % | 41.5 | %(d) | ||||||
Net assets at end of period (000s) |
$ | 297,731 | $ | 290,822 | $ | 273,650 | ||||||
Senior Securities: |
||||||||||||
Total Series A Preferred Shares outstanding |
1,534 | 1,534 | 1,534 | |||||||||
Liquidation and market value per Series A Preferred Shares |
$ | 20,000 | $ | 20,000 | $ | 20,000 | ||||||
Asset coverage per share(g) |
$ | 294,078 | $ | 289,574 | $ | 278,380 | ||||||
Loan outstanding (in 000s) |
$ | 122,705 | $ | 122,705 | $ | 122,705 | ||||||
Asset coverage per $1,000 of loan outstanding(h) |
$ | 3,676 | $ | 3,620 | $ | 3,480 |
(a) | From February 23, 2011 (commencement of operations) to December 31, 2011. |
(b) | Net of sales load of $0.90 per share of initial offering. |
(c) | Total return based on net asset value and total return based on market value assuming all distributions reinvested at reinvestment rate. |
(d) | Not annualized. |
(e) | Annualized. |
(f) | Net investment income ratio does not reflect payment to preferred shareholders. |
(g) | Calculated by subtracting the Funds total liabilities (not including the Series A Preferred Shares and borrowings outstanding) from the Funds total assets, and dividing this by the number of Series A Preferred Shares outstanding. |
(h) | Calculated by subtracting the Funds total liabilities (not including the Series A Preferred Shares and borrowings outstanding) from the Funds total assets, and dividing this by the amount of borrowings outstanding. |
24 | See accompanying Notes to Financial Statements.
Apollo Tactical Income Fund Inc.
Financial Highlights
For a Common Share outstanding throughout the period
Common Shares Per Share Operating Performance: | For the Period Ended | |||||
Net Asset Value, Beginning of Period |
$19.10(b) | |||||
Income from Investment Operations: |
||||||
Net investment income |
1.03 | |||||
Net realized and unrealized gain on investments |
0.39 | |||||
|
||||||
Total from investment operations |
1.42 | |||||
Less Distributions Paid to Common Shareholders from: |
||||||
Net investment income |
(0.96) | |||||
Net realized gain on investments |
(0.01) | |||||
|
||||||
Total distributions paid to Common Shareholders |
(0.97) | |||||
|
||||||
Common share offering charges to paid-in capital |
(0.04) | |||||
|
||||||
Net Asset Value, End of Period |
$19.51 | |||||
Market Value, End of Period |
$18.00 | |||||
Total return based on net asset value(c) |
7.94%(d) | |||||
Total return based on market value(c) |
(4.90)%(d) | |||||
Ratios to Average Net Assets available to Common Shareholders: |
||||||
Ratio of total expenses to average net assets |
2.58%(e) | |||||
Ratio of net expenses to average net assets |
2.55%(e) | |||||
Ratio of net investment income to average net assets |
6.38%(e) | |||||
Supplemental Data: |
||||||
Portfolio turnover rate |
72.4%(d) | |||||
Net assets at end of period (000s) |
$282,177 | |||||
Senior Securities: |
||||||
Loan outstanding (in 000s) |
$138,000 | |||||
Asset coverage per $1,000 of loan outstanding(f) |
$3,045 |
(a) | From February 25, 2013 (commencement of operations) to December 31, 2013. |
(b) | Net of sales load of $0.90 per share of initial offering. |
(c) | Total return based on net asset value and total return based on market value assuming all distributions reinvested at reinvestment rate. |
(d) | Not annualized. |
(e) | Annualized. |
(f) | Calculated by subtracting the Funds total liabilities (not including the borrowings outstanding) from the Funds total assets, and dividing this by the amount of borrowings outstanding. |
See accompanying Notes to Financial Statements. | 25
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
December 31, 2013
Note 1. Organization and Operations
Apollo Senior Floating Rate Fund Inc. (AFT) and Apollo Tactical Income Fund Inc. (AIF) (individually, a Fund or, collectively, the Funds) are corporations organized under the laws of the State of Maryland and registered with the U.S. Securities and Exchange Commission (the SEC) under the Investment Company Act of 1940 (the Investment Company Act) as non-diversified, closed-end management investment companies. AFT and AIF commenced operations on Febru-ary 23, 2011 and February 25, 2013, respectively. Prior to that, the Funds had no operations other than matters relating to the organization and the sale and issuance of 5,236 shares of common stock in each Fund to Apollo Credit Management, LLC (the Adviser) at a price of $19.10 per share. The Adviser serves as the Funds investment adviser and is an affiliate of Apollo Global Management, LLC (AGM). The Funds common shares are listed on the New York Stock Exchange (NYSE) and trade under the symbols AFT and AIF, respectively.
Investment Objective
AFTs investment objective is to seek current income and preservation of capital. AFT will seek to achieve its investment objective by investing primarily in senior, secured loans made to companies whose debt is rated below investment grade (Senior Loans) and investments with similar characteristics. Senior Loans typically hold a first lien priority and pay interest at rates that are determined periodically on the basis of a floating base lending rate plus a spread. These base lending rates are primarily the London Interbank Offered Rate (LIBOR), and secondarily the prime rate offered by one or more major United States banks and the certificate of deposit rate used by commercial lenders. Senior Loans are typically made to U.S. and, to a limited extent, non-U.S. corporations, partnerships and other business entities (Borrower(s)) that operate in various industries and geographical regions. AFT seeks to generate current income and preservation of capital through a disciplined approach to credit selection and under normal market conditions will invest at least 80% of its managed assets in floating rate Senior Loans and investments with similar economic characteristics. This policy and AFTs investment objective are not fundamental and may be changed by the board of directors of AFT with at least 60 days prior written notice provided to shareholders. Part of AFTs investment objective is to seek preservation of capital. AFTs ability to achieve capital preservation may be limited by its investment in credit instruments that have speculative characteristics. There can be no assurance that AFT will achieve its investment objective.
AIFs primary investment objective is to seek current income with a secondary objective of preservation of capital. AIF will seek to achieve its investment objectives primarily by allocating its assets among different types of credit instruments based on absolute and relative value considerations and its analysis of the credit markets. This ability to dynamically allocate AIFs assets may result in AIFs portfolio becoming concentrated in a particular type of credit instrument (such as Senior Loans or high-yield corporate bonds) and substantially less invested in other types of credit instruments. Under normal market conditions, at least 80% of AIFs managed assets will be invested in credit instruments and investments with similar economic characteristics. For purposes of this policy, credit instruments will include Senior Loans, subordinated loans, high yield corporate bonds, notes, bills, debentures, distressed securities, mezzanine securities, structured products (including, without limitation, collateralized debt obligations, collateralized loan obligations and asset-backed securities), bank loans, corporate loans, convertible and preferred securities, government and municipal obligations, mortgage-backed securities, repurchase agreements, and other fixed-income instruments of a similar nature that may be represented by derivatives such as options, forwards, futures contracts or swap agreements. This policy and AIFs investment objectives are not fundamental and may be changed by the board of directors of AIF (together with the board of directors of AFT, the Board of Directors or Board) with at least 60 days prior written notice provided to shareholders. AIF will seek to preserve capital to the extent consistent with its primary investment objective. AIFs ability to achieve capital preservation may be limited by its investment in credit instruments that have speculative characteristics. There can be no assurance that AIF will achieve its investment objectives.
The Funds are classified as non-diversified under the Investment Company Act. As a result, each Fund can invest a greater portion of its assets in obligations of a single issuer than a diversified fund. Each Fund may therefore be more susceptible than a diversified fund to being adversely affected by any single corporate, economic, political or regulatory occurrence.
Note 2. Significant Accounting Policies
The Funds financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP), which require management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results may differ from those estimates and these differences could be material.
26 | Annual Report
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Notes to Financial Statements (continued)
December 31, 2013
Fund Valuation
The Funds net asset value (NAV) per share will be determined daily generally as of 4:00 pm on each day that the NYSE is open for trading, or at other times as determined by the Board. The NAV of each Funds common shares is total assets of the Fund (including all securities, cash and other assets) minus the sum of the Funds total liabilities (including accrued expenses, dividends payable, borrowings and the liquidation value of any preferred stock) divided by the total number of common shares of the Fund outstanding.
Security Valuation
The Funds value their investments primarily using the mean price provided by a nationally recognized security pricing service or broker. Senior Loans, corporate notes and bonds and collateralized loan obligations are priced based on valuations provided by an approved independent third-party pricing service or broker, if available. If market or broker quotations are not available or a price is not available from an independent third-party pricing service or broker, or if the price provided by the independent third-party pricing service or broker is believed to be unreliable, the security will be fair valued pursuant to procedures adopted by the Board. In general, the fair value of a security is the amount that the Funds might reasonably expect to receive upon the sale of an asset or pay to transfer a liability in an orderly transaction between willing market participants at the reporting date. Fair value procedures can, but are not obligated to, take into account any factors deemed relevant, which may include, among others, (i) the nature and pricing history of the security, (ii) the liquidity or illiquidity of the market for the particular security, (iii) recent purchases or sales transactions for the particular security or similar securities, (iv) whether any dealer quotations for the security are available and considered reliable and (v) press releases and other information published about the issuer. In these cases, a Funds NAV will reflect the affected portfolio securities fair value as determined in the judgment of the Board or its designee instead of being determined by the market. Using a fair value pricing methodology to value securities may result in a value that is different from a securitys most recent sale price and from the prices used by other investment companies to calculate their NAV. Determination of fair value is uncertain because it involves subjective judgments and estimates. There can be no assurance that a Funds valuation of a security will not differ from the amount that it realizes upon the sale of such security.
Fair Value Measurements
Each Fund has performed an analysis of all existing investments to determine the significance and character of all inputs to their fair value determination. The levels of fair value inputs used to measure the Funds investments are characterized into a fair value hierarchy. The three levels of the fair value hierarchy are described below:
Level 1 Quoted unadjusted prices for identical instruments in active markets to which the Funds have access at the date of measurement;
Level 2 Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, but are valued based on executed trades, broker quotations that constitute an executable price, and alternative pricing sources supported by observable inputs which, in each case, are either directly or indirectly observable for the asset in connection with market data at the measurement date; and
Level 3 Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. In certain cases, investments classified within Level 3 may include securities for which the Funds have obtained indicative quotes from broker-dealers that do not necessarily represent prices the broker may be willing to trade on, as such quotes can be subject to material management judgment. Unobservable inputs are those inputs that reflect the Funds own assumptions that market participants would use to price the asset or liability based on the best available information.
At the end of each reporting period, management evaluates the Level 2 and Level 3 assets, if any, for changes in liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market.
The valuation techniques used by the Funds to measure fair value at December 31, 2013 maximized the use of observable inputs and minimized the use of unobservable inputs. All investments at December 31, 2013 were valued using prices provided by an approved third party pricing service and/or broker quotations or model derived valuations. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Transfers in and out of the levels are recognized at the value at the end of the period. Summaries of the Funds investments categorized in the fair value hierarchy as of December 31, 2013 are as follows:
Annual Report | 27
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Notes to Financial Statements (continued)
December 31, 2013
Apollo Senior Floating Rate Fund Inc. | ||||||||||||||||||||
Assets in Fair Value Hierarchy: | Total Value at December 31, 2013 |
Level 1 Quoted Price |
Level 2 Significant Observable Inputs |
Level
3 | ||||||||||||||||
Cash and Cash Equivalents |
$ | 21,698,530 | $ | 21,698,530 | $ | | $ | | ||||||||||||
Senior Loans |
402,181,790 | | 330,467,336 | 71,714,454 | ||||||||||||||||
Corporate Notes and Bonds |
30,210,372 | | 28,447,520 | 1,762,852 | ||||||||||||||||
Common Stocks |
2,058,610 | | | 2,058,610 | ||||||||||||||||
Warrants |
8,237 | | | 8,237 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total Assets |
$ | 456,157,539 | $ | 21,698,530 | $ | 358,914,856 | $ | 75,544,153 | ||||||||||||
|
|
|
|
|
|
|
|
AFT did not have any liabilities that were measured at fair value at December 31, 2013. The following is a reconciliation of Level 3 holdings for which significant unobservable inputs were used in determining fair value as of December 31, 2013:
Apollo Senior Floating Rate Fund Inc. | ||||||||||||||||||||||||||||
|
Total Fair Value |
|
Senior Loans | |
Corporate Notes and Bonds |
|
|
Common Stocks |
|
Warrants | ||||||||||||||||||
Fair Value, beginning of period |
$ | 56,173,954 | $ | 50,723,074 | $5,450,880 | $ | | $ | | |||||||||||||||||||
Purchases |
44,666,401 | 37,786,543 | 1,667,000 | 5,212,858 | | |||||||||||||||||||||||
Sales |
(23,251,233 | ) | (20,791,233 | ) | (2,460,000 | ) | | | ||||||||||||||||||||
Accrued discounts/(premiums) |
149,495 | 146,206 | 3,289 | | | |||||||||||||||||||||||
Total net realized (loss)/gain |
(344,987 | ) | 195,013 | (540,000 | ) | | | |||||||||||||||||||||
Change in net unrealized appreciation/(depreciation) |
(2,835,956 | ) | 103,431 | 206,624 | (3,154,248 | ) | 8,237 | |||||||||||||||||||||
Transfers into Level 3 |
19,104,783 | 19,104,783 | | | | |||||||||||||||||||||||
Transfers out of Level 3 |
(18,118,304 | ) | (15,553,363 | ) | (2,564,941 | ) | | | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Fair Value, end of period |
$ | 75,544,153 | $ | 71,714,454 | $1,762,852 | $ | 2,058,610 | $ | 8,237 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Investments were transferred in and out of Level 3 and in and out of Level 2 during the year ended December 31, 2013 due to changes in the quantity and quality of information obtained to support the fair value of each investment as assessed by the Adviser. The net change in unrealized appreciation/(depreciation) attributable to Level 3 investments still held at Decem-ber 31, 2013 was $(2,686,675) for AFT.
The following table provides quantitative measures used to determine the fair values of the Level 3 investments as of December 31, 2013:
Apollo Senior Floating Rate Fund Inc. | ||||||||||||
Assets | Total Value at December 31, 2013 |
Valuation Technique(s) | Unobservable Input(s) | Multiple | Weighted Average or Range | |||||||
Senior Loans |
$ | 71,714,454 | Third party pricing and / or | Vendor / or broker | N/A | N/A | ||||||
broker quotations | quotations | |||||||||||
Corporate Notes & Bonds |
$ | 1,762,852 | Third party pricing and / or | Vendor / or broker | N/A | N/A | ||||||
broker quotations | quotations | |||||||||||
Common Stocks |
$ | 2,058,610 | Third party pricing and / or | Vendor / or broker | N/A | N/A | ||||||
broker quotations | quotations | |||||||||||
Warrants |
$ | 8,237 | Third party pricing and / or | Vendor / or broker | N/A | N/A | ||||||
broker quotations | quotations |
28 | Annual Report
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Notes to Financial Statements (continued)
December 31, 2013
Apollo Tactical Income Fund Inc. | ||||||||||||||||
Assets in Fair Value Hierarchy: | Total Value at December 31, 2013 |
Level 1 Quoted Price |
Level 2 Significant Observable Inputs |
Level 3 Significant Unobservable inputs |
||||||||||||
Cash and Cash Equivalents |
$ | 19,484,678 | $ | 19,484,678 | $ | | $ | | ||||||||
Senior Loans |
231,860,578 | | 189,920,909 | 41,939,669 | ||||||||||||
Corporate Notes and Bonds |
137,106,146 | | 106,208,183 | 30,897,963 | ||||||||||||
Asset-Backed Securities |
36,695,214 | | 18,781,414 | 17,913,800 | ||||||||||||
Warrants |
7,603 | | | 7,603 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Assets |
$ | 425,154,219 | $ | 19,484,678 | $ | 314,910,506 | $ | 90,759,035 | ||||||||
|
|
|
|
|
|
|
|
AIF did not have any liabilities that were measured at fair value at December 31, 2013. The following is a reconciliation of Level 3 holdings for which significant unobservable inputs were used in determining fair value as of December 31, 2013:
Apollo Tactical Income Fund Inc. | ||||||||||||||||||||||||||||
|
Total Fair Value |
|
Senior Loans |
|
Corporate Notes and Bonds |
|
|
Asset-Backed Securities |
|
Warrants | ||||||||||||||||||
Fair Value, beginning of period |
$ | | $ | | $ | $ | | $ | | |||||||||||||||||||
Purchases |
92,167,198 | 43,071,456 | 31,326,992 | 17,768,750 | | |||||||||||||||||||||||
Sales |
(1,205,968 | ) | (1,205,968 | ) | | | | |||||||||||||||||||||
Accrued discounts/(premiums) |
82,040 | 49,759 | 17,705 | 14,576 | | |||||||||||||||||||||||
Total net realized loss |
(70,117 | ) | (70,117 | ) | | | | |||||||||||||||||||||
Change in net unrealized appreciation/(depreciation) |
(214,118 | ) | 94,539 | (446,734 | ) | 130,474 | 7,603 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Fair Value, end of period |
$ | 90,759,035 | $ | 41,939,669 | $30,897,963 | $ | 17,913,800 |