Table of Contents
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)
Registrant’s telephone number, including area code: (212) 515-3200
Date of fiscal year end: December 31
Date of reporting period: December 31, 2014
Table of Contents
Item 1. Reports to Stockholders.
The Report to Shareholders is attached herewith.
Table of Contents
Apollo Senior Floating Rate Fund Inc. (NYSE: AFT)
Apollo Tactical Income Fund Inc. (NYSE: AIF)
Annual Report
December 31, 2014
Table of Contents
| 4 | ||
| Financial Data |
||
| 5 | ||
| 6 | ||
| Schedule of Investments |
||
| 7 | ||
| 13 | ||
| 19 | ||
| 20 | ||
| Statements of Changes in Net Assets |
||
| 21 | ||
| 22 | ||
| Statement of Cash Flows |
||
| 23 | ||
| 24 | ||
| Financial Highlights |
||
| 25 | ||
| 26 | ||
| 27 | ||
| 42 | ||
| 43 | ||
| 44 | ||
| 46 |
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.
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Manager Commentary (unaudited)
As of December 31, 2014
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.
The year 2014 was highlighted by a significant disparity between global credit and equity markets, though the path for each was different and tortuous. Equities started the year under pressure due to weakness in global economies, growing geopolitical concerns and a near unanimous view that U.S. interest rates were headed higher. Credit on the other hand started the year strong as many of these same factors (or ultimate lack thereof in the case of higher rates) created demand for certain credit assets including investment grade bonds, high-yield bonds and leveraged loans. Technical conditions in the loan and high-yield markets helped increase demand with strong inflows via retail funds and collateralized loan obligations (“CLOs”) and relatively light new issuance.
Despite fund flows for leveraged loan mutual funds turning negative for the first time in several years in April 2014, equity and fixed income markets were able to sustain solid returns through the first half of the year, shrugging off increasing tensions between Ukraine and Russia and ongoing debate over the timing of Federal Reserve action on interest rates. Through the second quarter, high-yield bonds and loans returned 5.8% (as measured by the J.P. Morgan High-Yield Default Monitor) and 2.4% (as measured by the J.P. Morgan Leveraged Loan Index), respectively, while equities returned 7.1% (as measured by the S&P 500 Index), emerging market bonds gained 9.1% (as measured by the J.P. Morgan EMBIG Index) and investment-grade bonds gained 5.8% (as measured by the J.P. Morgan JULI Index). As a reference point, high-yield bonds hit their lowest yield of the year on June 23, 2014 at 5.12% (as measured by the J.P. Morgan High-Yield Default Monitor) resulting in part from the combination of spread compression and low U.S. Treasury yields.
The second half of the year began with a sharp reversal of conditions in the credit markets. Negative news, concerns about valuations and ongoing fears regarding the impact rising rates could have on fixed income products initiated a series of weekly outflows from high-yield bond funds that lasted several weeks and totaled nearly $5.4 billion, representing a material portion of the $7.9 billion that had flowed into the asset class during the year up to that point. Thus began a see-saw pattern of rallies and selloffs in high-yield bonds and leveraged loans that would last through the end of year, fueled by varying combinations of supply and demand technicals, strength in equities, rate concerns, falling oil and commodity prices and overall weaker risk appetite. High-yield bonds and leveraged loans ended the year with gains of just 2.2% (as measured by the J.P. Morgan High-Yield Default Monitor) and 2.0% (as measured by the J.P. Morgan Leveraged Loan Index), respectively, relying on their attractive income components to produce positive total returns, while the S&P 500 Index mostly shrugged off many of the same concerns to gain an impressive 13.7% return on the year, including dividends. Given the strong bid for U.S. Treasuries, investment grade bonds and emerging market bonds finished the year with gains of 7.8% (as measured by the J.P. Morgan JULI Index) and 5.5% (as measured by the J.P. Morgan EMBIG Index), respectively.
Generally, credit fundamentals in 2014 were strong by historical standards. The default rate for the year ended at 0.34% for loans (as measured by the S&P Capital IQ LCD) (excluding Energy Future Holdings Corp., formerly known as TXU Corp.), and 2.04% for high-yield bonds (as measured by the BofA Merrill Lynch High-Yield Master II Index), which was the lowest level for loans since December 2007, driven by a combination of low interest rates, “open” capital markets and solid overall economic growth. We currently expect that default rates in 2015 will begin to inch higher as the credit cycle matures and the impact of lower oil and commodity prices takes its toll on issuers in those industries. However, the silver lining of all of the volatility experienced during the second half of 2014 is that as we enter 2015, spreads and terms across loans and high-yield bonds are more attractive now than they were during most of 2014, creating a better relative value trading environment and potentially interesting total return opportunities amongst issuers caught up in the commodity related sell-off. We currently expect continued volatility in 2015 as the credit markets deal with the debate over and potential impact of rising rates (maybe), geopolitical concerns (again) and ongoing concerns about growth outside of the U.S. (again).
We appreciate your interest and support in the Funds. 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
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Financial Data
As of December 31, 2014 (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, 2014. The quality ratings reflected were issued by Standard & Poor’s Ratings Group (“S&P”), a nationally recognized statistical rating organization. Credit quality ratings reflect the rating agency’s opinion of the credit quality of the underlying positions in the Fund’s 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 Moody’s Investors Service (“Moody’s”), 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. |
| (g) | The S&P/LSTA Leveraged Loan Index is a broad index designed to reflect the performance of the U.S. Dollar facilities in the leveraged loan market. |
Annual Report | 5
Table of Contents
Apollo Tactical Income Fund Inc.
Financial Data
As of December 31, 2014 (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, 2014. The quality ratings reflected were issued by S&P, a nationally recognized statistical rating organization. Credit quality ratings reflect the rating agency’s opinion of the credit quality of the underlying positions in the Fund’s 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 Moody’s, a nationally recognized statistical rating organization. The Top 5 Industries table above excludes Structured Products which represent 10.0% of the portfolio as of December 31, 2014. |
| (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. |
| (g) | The S&P/LSTA Leveraged Loan Index is a broad index designed to reflect the performance of the U.S. Dollar facilities in the leveraged loan market. |
6 | Annual Report
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Schedule of Investments
December 31, 2014
See accompanying Notes to Financial Statements. | 7
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Schedule of Investments (continued)
December 31, 2014
8 | See accompanying Notes to Financial Statements.
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Schedule of Investments (continued)
December 31, 2014
See accompanying Notes to Financial Statements. | 9
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Schedule of Investments (continued)
December 31, 2014
10 | See accompanying Notes to Financial Statements.
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Schedule of Investments (continued)
December 31, 2014
See accompanying Notes to Financial Statements. | 11
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Schedule of Investments (continued)
December 31, 2014
| (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, 2014. 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) | All or a portion of this position has not settled. Full contract rates do not take effect until settlement date. |
| (d) | Fixed rate asset. |
| (e) | Foreign issuer traded in U.S. dollars. |
| (f) | Represents a payment-in-kind security which may pay interest in additional principal amount. |
| (g) | 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, 2014, these securities amounted to $12,126,313, or 4.3% of net assets. |
| (h) | Non income-producing asset. |
| (i) | Senior Loan assets have additional unfunded loan commitments. As of December 31, 2014, the Fund had unfunded loan commitments, which could be extended at the option of the borrower, pursuant to the following loan agreements: |
12 | See accompanying Notes to Financial Statements.
Table of Contents
Apollo Tactical Income Fund Inc.
Schedule of Investments
December 31, 2014
See accompanying Notes to Financial Statements. | 13
Table of Contents
Apollo Tactical Income Fund Inc.
Schedule of Investments (continued)
December 31, 2014
14 | See accompanying Notes to Financial Statements.
Table of Contents
Apollo Tactical Income Fund Inc.
Schedule of Investments (continued)
December 31, 2014
See accompanying Notes to Financial Statements. | 15
Table of Contents
Apollo Tactical Income Fund Inc.
Schedule of Investments (continued)
December 31, 2014
16 | See accompanying Notes to Financial Statements.
Table of Contents
Apollo Tactical Income Fund Inc.
Schedule of Investments (continued)
December 31, 2014
See accompanying Notes to Financial Statements. | 17
Table of Contents
Apollo Tactical Income Fund Inc.
Schedule of Investments (continued)
December 31, 2014
| (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 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, 2014. Senior Loans are generally not registered under 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) | All or a portion of this position has not settled. Full contract rates do not take effect until settlement date. |
| (d) | Fixed rate asset. |
| (e) | Foreign issuer traded in U.S. dollars. |
| (f) | Represents a payment-in-kind security which may pay interest in additional principal amount. |
| (g) | 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, 2014, these securities amounted to $95,642,660, or 36.3% of net assets. |
| (h) | Structured Products 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. |
| (i) | Floating rate asset. The interest rate shown reflects the rate in effect at December 31, 2014. |
| (j) | Non income-producing asset. |
| (k) | Senior Loan assets have additional unfunded loan commitments. As of December 31, 2014, the Fund had unfunded loan commitments, which could be extended at the option of the borrower, pursuant to the following loan agreements: |
| * | The loan commitment for AmWINS Group, LLC was subsequently terminated on January 30, 2015. |
18 | See accompanying Notes to Financial Statements.
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Statements of Assets and Liabilities
December 31, 2014
| Apollo Senior |
Apollo Fund Inc. |
|||||||
| Assets: |
||||||||
| Investment securities at fair value (cost $429,903,985 and $402,871,561, respectively) |
$ | 421,198,437 | $ | 389,347,785 | ||||
| Cash and cash equivalents |
31,407,248 | 17,389,420 | ||||||
| Interest and dividends receivable |
2,384,040 | 3,550,274 | ||||||
| Receivable for investment securities sold |
13,864,651 | 14,950,891 | ||||||
| Deferred financing costs |
143,354 | 34,011 | ||||||
| Prepaid expenses |
81,938 | 81,938 | ||||||
|
|
|
|
|
|||||
| Total Assets |
$ | 469,079,668 | $ | 425,354,319 | ||||
|
|
|
|
|
|||||
| Liabilities: |
||||||||
| Borrowings under credit facility (Note 8) |
$ | 149,269,000 | $ | 138,000,000 | ||||
| Payable for investment securities purchased |
33,567,874 | 22,691,892 | ||||||
| Interest payable |
286,596 | 220,497 | ||||||
| Unrealized depreciation on unfunded transactions (Note 9) |
37,594 | 35,307 | ||||||
| Distributions payable to common shareholders |
133,118 | 197,148 | ||||||
| Investment advisory fee payable |
370,684 | 345,967 | ||||||
| Other payables and accrued expenses due to affiliates |
198,272 | 197,902 | ||||||
| Other payables and accrued expenses |
224,366 | 237,730 | ||||||
|
|
|
|
|
|||||
| Total Liabilities |
184,087,504 | 161,926,443 | ||||||
|
|
|
|
|
|||||
| Net Assets (Applicable to Common Shareholders) |
$ | 284,992,164 | $ | 263,427,876 | ||||
|
|
|
|
|
|||||
| Net Assets Consist of: |
||||||||
| Paid-in capital ($0.001 par value, 999,998,466 and 1,000,000,000 common shares authorized, respectively, and 15,573,061 and 14,464,026 issued and outstanding, respectively) (Note 6) |
$ | 296,705,488 | $ | 275,625,794 | ||||
| Undistributed net investment income |
534,942 | 1,160,978 | ||||||
| Accumulated net realized gain/(loss) from investments |
(3,505,124 | ) | 200,187 | |||||
| Net unrealized depreciation on investments and unfunded transactions |
(8,743,142 | ) | (13,559,083 | ) | ||||
|
|
|
|
|
|||||
| Net Assets (Applicable to Common Shareholders) |
$ | 284,992,164 | $ | 263,427,876 | ||||
|
|
|
|
|
|||||
| Number of Common Shares outstanding |
15,573,061 | 14,464,026 | ||||||
| Net Asset Value, per Common Share |
$ | 18.30 | $ | 18.21 | ||||
See accompanying Notes to Financial Statements. | 19
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Statements of Operations
For the Year Ended December 31, 2014
| Apollo Senior Floating Rate Fund Inc. |
Apollo Tactical Fund Inc. |
|||||||||||
| Investment Income: |
||||||||||||
| Interest |
$ | 27,226,360 | $ | 29,576,734 | ||||||||
| Dividends |
255,000 | 255,000 | ||||||||||
|
|
|
|
|
|
|
|||||||
| Total Investment Income |
27,481,360 | 29,831,734 | ||||||||||
|
|
|
|
|
|
|
|||||||
| Expenses: |
||||||||||||
| Investment advisory fee (Note 3) |
4,468,610 | 4,212,585 | ||||||||||
| Interest and commitment fee expense (Note 8) |
2,125,540 | 2,009,972 | ||||||||||
| Audit and legal fees |
487,420 | 420,420 | ||||||||||
| Administrative services of the Adviser (Note 3) |
642,000 | 595,000 | ||||||||||
| Insurance expense |
355,885 | 355,885 | ||||||||||
| Amortization of deferred financing costs (Note 8) |
499,499 | 107,948 | ||||||||||
| Board of Directors fees (Note 3) |
108,157 | 108,157 | ||||||||||
| Other operating expenses (Note 3) |
389,741 | 403,796 | ||||||||||
|
|
|
|
|
|
|
|||||||
| Total Expenses |
9,076,852 | 8,213,763 | ||||||||||
|
|
|
|
|
|
|
|||||||
| Net Investment Income |
18,404,508 | 21,617,971 | ||||||||||
|
|
|
|
|
|
|
|||||||
| Net Realized and Unrealized Gain/(Loss) on Investments |
||||||||||||
| Net realized gain on investments |
1,508,772 | 2,163,995 | ||||||||||
| Net change in unrealized appreciation/(depreciation) on investments and unfunded transactions (Note 9) |
(13,230,681 | ) | (18,578,584 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Net realized and unrealized loss on investments |
(11,721,909 | ) | (16,414,589 | ) | ||||||||
|
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|
|
|
|
|
|||||||
| Distributions to Preferred Shareholders: |
||||||||||||
| From net investment income |
(244,641 | ) | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Net Increase in Net Assets, Applicable to Common Shareholders, Resulting From Operations |
$ | 6,437,958 | $ | 5,203,382 | ||||||||
|
|
|
|
|
|
|
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20 | See accompanying Notes to Financial Statements.
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Statements of Changes in Net Assets
| Year Ended December 31, 2014 |
Year Ended 2013 | |||||||||||||||
| Increase/(Decrease) in Net Assets: |
||||||||||||||||
| From Operations |
||||||||||||||||
| Net investment income |
$ | 18,404,508 | $20,796,588 | |||||||||||||
| Net realized gain/(loss) on investments |
1,508,772 | (3,951,563 | ) | |||||||||||||
| Net change in unrealized appreciation/(depreciation) on investments and unfunded transactions |
(13,230,681 | ) | 9,536,604 | |||||||||||||
| Distributions to preferred shareholders |
(244,641 | ) | (677,510 | ) | ||||||||||||
|
|
|
|
|
|||||||||||||
| Net increase in net assets from operations |
6,437,958 | 25,704,119 | ||||||||||||||
|
|
|
|
|
|||||||||||||
| Distributions to Common Shareholders |
||||||||||||||||
| From net investment income |
(19,176,667 | ) | (19,606,326 | ) | ||||||||||||
|
|
|
|
|
|||||||||||||
| Total distributions to common shareholders |
(19,176,667 | ) | (19,606,326 | ) | ||||||||||||
|
|
|
|
|
|||||||||||||
| Capital Transactions from Common Shares |
||||||||||||||||
| Reinvestment of dividends |
— | 811,136 | ||||||||||||||
|
|
|
|
|
|||||||||||||
| Net increase in net assets from share transactions |
— | 811,136 | ||||||||||||||
|
|
|
|
|
|||||||||||||
| Total increase/(decrease) in net assets |
$ | (12,738,709 | ) | $6,908,929 | ||||||||||||
| Net Assets Applicable to Common Shares |
||||||||||||||||
| Beginning of year |
297,730,873 | 290,821,944 | ||||||||||||||
|
|
|
|
|
|||||||||||||
| End of year |
$ | 284,992,164 | $297,730,873 | |||||||||||||
|
|
|
|
|
|||||||||||||
| Undistributed net investment income |
$ | 534,942 | $1,543,192 | |||||||||||||
|
|
|
|
|
|||||||||||||
See accompanying Notes to Financial Statements. | 21
Table of Contents
Apollo Tactical Income Fund Inc.
Statements of Changes in Net Assets
| Year Ended |
Period Ended |
|||||||
| Increase/(Decrease) in Net Assets: |
||||||||
| From Operations |
||||||||
| Net investment income |
$ | 21,617,971 | $ | 14,875,457 | ||||
| Net realized gain on investments |
2,163,995 | 569,675 | ||||||
| Net change in unrealized appreciation/(depreciation) on investments and unfunded transactions |
(18,578,584 | ) | 5,019,501 | |||||
|
|
|
|
|
|||||
| Net increase in net assets from operations |
5,203,382 | 20,464,633 | ||||||
|
|
|
|
|
|||||
| Distributions to Common Shareholders |
||||||||
| From net investment income |
(21,593,489 | ) | (13,797,712 | ) | ||||
| From realized gains on investments |
(2,358,946 | ) | (174,537 | ) | ||||
|
|
|
|
|
|||||
| Total distributions to common shareholders |
(23,952,435 | ) | (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/(decrease) in net assets |
$ | (18,749,053 | ) | $ | 282,076,921 | |||
| Net Assets Applicable to Common Shares |
||||||||
| Beginning of period |
282,176,929 | 100,008 | ** | |||||
|
|
|
|
|
|||||
| End of period |
$ | 263,427,876 | $ | 282,176,929 | ||||
|
|
|
|
|
|||||
| Undistributed net investment income |
$ | 1,160,978 | $ | 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. |
22 | See accompanying Notes to Financial Statements.
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Statement of Cash Flows
For the Year Ended December 31, 2014
|
|
||||
| Cash Flows From Operating Activities |
||||
| Net increase in net assets from operations excluding distributions to preferred shareholders |
$ | 6,682,599 | ||
| 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 gain on investments |
(1,508,772 | ) | ||
| Net change in unrealized (appreciation)/depreciation on investments and unfunded transactions |
13,230,681 | |||
| Net amortization/(accretion) of premium/(discount) |
(798,375 | ) | ||
| Purchase of investment securities |
(327,600,630 | ) | ||
| Proceeds from disposition of investment securities |
343,069,950 | |||
| Amortization of deferred financing costs |
499,499 | |||
| Changes in Operating Assets and Liabilities |
||||
| Decrease in interest and dividends receivable |
495,368 | |||
| Increase in prepaid expenses |
(26,883 | ) | ||
| Decrease in interest payable |
(230,291 | ) | ||
| Decrease in investment advisory fee payable |
(12,495 | ) | ||
| Decrease in other payables and accrued expenses due to affiliates |
(74,913 | ) | ||
| Decrease in other payables and accrued expenses |
(121,236 | ) | ||
|
|
|
|||
| Net cash flows provided by operating activities |
33,604,502 | |||
|
|
|
|||
| Cash Flows From Financing Activities |
||||
| Proceeds from borrowing under the credit facility |
149,269,000 | |||
| Repayment of the credit facility |
(122,704,615 | ) | ||
| Deferred financing costs |
(209,297 | ) | ||
| Repurchase of Series A Preferred Shares |
(30,680,000 | ) | ||
| Distributions paid to common shareholders |
(19,157,791 | ) | ||
| Distributions paid to preferred shareholders |
(413,081 | ) | ||
|
|
|
|||
| Net cash flows used in financing activities |
(23,895,784 | ) | ||
|
|
|
|||
| Net Increase in Cash and Cash Equivalents |
9,708,718 | |||
| Cash and cash equivalents, beginning of year |
21,698,530 | |||
|
|
|
|||
| Cash and cash equivalents, end of year |
$ | 31,407,248 | ||
|
|
|
|||
| Supplemental Disclosure of Cash Flow Information |
||||
| Cash paid during the year for interest and commitment fees |
$ | 2,355,831 | ||
|
|
|
|||
See accompanying Notes to Financial Statements. | 23
Table of Contents
Apollo Tactical Income Fund Inc.
Statement of Cash Flows
For the Year Ended December 31, 2014
|
|
||||
| Cash Flows From Operating Activities |
||||
| Net increase in net assets from operations |
$ | 5,203,382 | ||
| Adjustments to Reconcile Net Increase in Net Assets from Operations to Net Cash Flows Provided by Operating Activities |
||||
| Net realized gain on investments |
(2,163,995 | ) | ||
| Net change in unrealized (appreciation)/depreciation on investments and unfunded transactions |
18,578,584 | |||
| Net amortization/(accretion) of premium/(discount) |
(571,837 | ) | ||
| Purchase of investment securities |
(314,710,472 | ) | ||
| Proceeds from disposition of investment securities |
314,682,561 | |||
| Amortization of deferred financing costs |
107,948 | |||
| Changes in Operating Assets and Liabilities |
||||
| Decrease in interest and dividends receivable |
1,161,557 | |||
| Increase in prepaid expenses |
(26,883 | ) | ||
| Decrease in interest payable |
(344 | ) | ||
| Decrease in investment advisory fee payable |
(10,542 | ) | ||
| Decrease in other payables and accrued expenses due to affiliates |
(380,329 | ) | ||
| Decrease in other expenses and liabilities |
(68,847 | ) | ||
|
|
|
|||
| Net cash flows provided by operating activities |
21,800,783 | |||
|
|
|
|||
| Cash Flows From Financing Activities |
||||
| Distributions paid to common shareholders |
(23,896,041 | ) | ||
|
|
|
|||
| Net cash flows used in financing activities |
(23,896,041 | ) | ||
|
|
|
|||
| Net Decrease in Cash and Cash Equivalents |
(2,095,258 | ) | ||
| Cash and cash equivalents, beginning of year |
19,484,678 | |||
|
|
|
|||
| Cash and cash equivalents, end of year |
$ | 17,389,420 | ||
|
|
|
|||
| Supplemental Disclosure of Cash Flow Information |
||||
| Cash paid during the year for interest |
$ | 2,010,316 | ||
|
|
|
|||
24 | See accompanying Notes to Financial Statements.
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Financial Highlights
For a Common Share outstanding throughout the period
| Per Common Share Operating Performance: | For the Year Ended |
For the Year Ended |
For the Year Ended |
For the Ended |
||||||||||||
| Net Asset Value, Beginning of Period |
$ | 19.12 | $ | 18.73 | $ | 17.68 | $ | 19.10 | (b) | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Income from Investment Operations: |
||||||||||||||||
| Net investment income(c) |
1.18 | 1.34 | 1.39 | 1.00 | ||||||||||||
| Net realized and unrealized gain/(loss) on investments |
(0.75 | ) | 0.35 | 1.10 | (1.46 | ) | ||||||||||
| Distributions from net investment income to Series A Preferred Shareholders |
(0.02 | ) | (0.04 | ) | (0.05 | ) | (0.02 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total from investment operations |
0.41 | 1.65 | 2.44 | (0.48 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Less Distributions Paid to Common Shareholders from: |
||||||||||||||||
| Net investment income |
(1.23 | ) | (1.26 | ) | (1.38 | ) | (0.88 | ) | ||||||||
| Net realized gain on investments |
— | — | (0.01 | ) | (0.02 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total distributions paid to Common Shareholders |
(1.23 | ) | (1.26 | ) | (1.39 | ) | (0.90 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Common Share offering charges to paid-in capital |
— | — | — | (0.04 | ) | |||||||||||
| Net Asset Value, End of Period |
$ | 18.30 | $ | 19.12 | $ | 18.73 | $ | 17.68 | ||||||||
| Market Value, End of Period |
$ | 16.63 | $ | 18.10 | $ | 18.77 | $ | 16.01 | ||||||||
| Total return based on net asset value(d) |
2.63 | % | 9.19 | % | 14.23 | % | (2.43 | )%(e) | ||||||||
| Total return based on market value(d) |
(1.48 | )% | 3.14 | % | 26.41 | % | (15.62 | )%(e) | ||||||||
| Ratios to Average Net Assets Applicable to Common Shareholders: |
||||||||||||||||
| Ratio of total expenses to average net assets |
3.07 | % | 3.00 | % | 3.21 | % | 2.99 | %(f) | ||||||||
| Ratio of net expenses to average net assets |
3.07 | % | 3.00 | % | 3.18 | % | 2.88 | %(f) | ||||||||
| Ratio of net investment income to average net assets(g) |
6.22 | % | 7.03 | % | 7.51 | % | 6.49 | %(f) | ||||||||
| Ratio of net investment income to average net assets net of distributions to Series A Preferred Shareholders |
6.13 | % | 6.80 | % | 7.25 | % | 6.33 | %(f) | ||||||||
| Supplemental Data: |
||||||||||||||||
| Portfolio turnover rate |
80.0 | % | 72.0 | % | 66.6 | % | 41.5 | %(e) | ||||||||
| Net assets at end of period (000’s) |
$ | 284,992 | $ | 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(h) |
— | $ | 294,078 | $ | 289,574 | $ | 278,380 | |||||||||
| Loan outstanding (in 000’s) |
$ | 149,269 | $ | 122,705 | $ | 122,705 | $ | 122,705 | ||||||||
| Asset coverage per $1,000 of loan outstanding |
$ | 2,909 | (i) | $ | 3,676 | (j) | $ | 3,620 | (j) | $ | 3,480 | (j) | ||||
| (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) | Based on weighted average outstanding shares. |
| (d) | Total return based on net asset value and total return based on market value assuming all distributions reinvested at reinvestment rate. |
| (e) | Not annualized. |
| (f) | Annualized. |
| (g) | Net investment income ratio does not reflect payment to preferred shareholders. |
| (h) | Calculated by subtracting the Fund’s total liabilities (not including the Series A Preferred Shares and borrowings outstanding) from the Fund’s total assets, and dividing this by the number of Series A Preferred Shares outstanding. |
| (i) | Calculated by subtracting the Fund’s total liabilities (not including the borrowings outstanding) from the Fund’s total assets, and dividing this by the amount of borrowings outstanding. |
| (j) | Calculated by subtracting the Fund’s total liabilities (not including the Series A Preferred Shares and borrowings outstanding) from the Fund’s total assets, and dividing this by the amount of borrowings outstanding. |
See accompanying Notes to Financial Statements. | 25
Table of Contents
Apollo Tactical Income Fund Inc.
Financial Highlights
For a Common Share outstanding throughout the period
| Per Common Share Operating Performance: | For the Year Ended 2014 |
For the Period Ended 2013(a) |
||||||
| Net Asset Value, Beginning of Period |
$19.51 | $19.10(b) | ||||||
|
|
|
|
|
|||||
| Income from Investment Operations: |
||||||||
| Net investment income(c) |
1.50 | 1.03 | ||||||
| Net realized and unrealized gain/(loss) on investments |
(1.14) | 0.39 | ||||||
|
|
|
|
|
|||||
| Total from investment operations |
0.36 | 1.42 | ||||||
|
|
|
|
|
|||||
| Less Distributions Paid to Common Shareholders from: |
||||||||
| Net investment income |
(1.50) | (0.96) | ||||||
| Net realized gain on investments |
(0.16) | (0.01) | ||||||
|
|
|
|
|
|||||
| Total distributions paid to Common Shareholders |
(1.66) | (0.97) | ||||||
|
|
|
|
|
|||||
| Common share offering charges to paid-in capital |
— | (0.04) | ||||||
|
|
|
|
|
|||||
| Net Asset Value, End of Period |
$18.21 | $19.51 | ||||||
| Market Value, End of Period |
$15.96 | $18.00 | ||||||
| Total return based on net asset value(d) |
2.63% | 7.94%(e) | ||||||
| Total return based on market value(d) |
(2.51)% | (4.90)%(e) | ||||||
| Ratios to Average Net Assets Applicable to Common Shareholders: |
||||||||
| Ratio of total expenses to average net assets |
2.90% | 2.58%(f) | ||||||
| Ratio of net expenses to average net assets |
2.90% | 2.55%(f) | ||||||
| Ratio of net investment income to average net assets |
7.63% | 6.38%(f) | ||||||
| Supplemental Data: |
||||||||
| Portfolio turnover rate |
78.7% | 72.4%(e) | ||||||
| Net assets at end of period (000’s) |
$263,428 | $282,177 | ||||||
| Senior Securities: |
||||||||
| Loan outstanding (in 000’s) |
$138,000 | $138,000 | ||||||
| Asset coverage per $1,000 of loan outstanding(g) |
$2,909 | $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) | Based on weighted average outstanding shares. |
| (d) | Total return based on net asset value and total return based on market value assuming all distributions reinvested at reinvestment rate. |
| (e) | Not annualized. |
| (f) | Annualized. |
| (g) | Calculated by subtracting the Fund’s total liabilities (not including the borrowings outstanding) from the Fund’s total assets, and dividing this by the amount of borrowings outstanding. |
26 | See accompanying Notes to Financial Statements.
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Notes to Financial Statements
December 31, 2014
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 February 23, 2011 and February 25, 2013, respectively. Prior to that, the Funds had no operations other than matters relating to their 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
AFT’s 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 AFT’s 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 AFT’s investment objective is to seek preservation of capital. AFT’s 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.
AIF’s 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 AIF’s assets may result in AIF’s 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 AIF’s 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 (“CDOs”) , collateralized loan obligations (“CLOs”) 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 AIF’s 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. AIF’s 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 are investment companies that follow the accounting and reporting guidance of Accounting Standards Codification Topic 946 applicable to investment companies. 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.
Annual Report | 27
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Notes to Financial Statements (continued)
December 31, 2014
Fund Valuation
Each Fund’s 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 Fund’s common shares is the total assets of the Fund (including all securities, cash and other assets) minus the sum of the Fund’s 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 of the bid and ask prices provided by a nationally recognized security pricing service or broker. Senior Loans, corporate notes and bonds, common stock, preferred stock, warrants and structured products are priced based on valuations provided by an approved independent pricing service or broker, if available. If market or broker quotations are not available, or a price is not available from an independent pricing service or broker, or if the price provided by the independent 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 generally 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 and (iv) press releases and other information published about the issuer. In these cases, a Fund’s 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 security’s 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 Fund’s 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 assets and liabilities in active markets to which the Funds have access at the date of measurement;
Level 2 — Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities 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 independent pricing services, and the existence of contemporaneous, observable trades in the market.
28 | Annual Report
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Notes to Financial Statements (continued)
December 31, 2014
The valuation techniques used by the Funds to measure fair value at December 31, 2014 maximized the use of observable inputs and minimized the use of unobservable inputs. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Transfers into 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, 2014 are as follows:
| Apollo Senior Floating Rate Fund Inc. | ||||||||||||||||||||
| Total Fair Value at December 31, 2014 |
Level 1 Price |
Level 2 Significant Observable Inputs |
Level 3 Significant Inputs | |||||||||||||||||
| Assets: |
||||||||||||||||||||
| Cash and Cash Equivalents |
$ | 31,407,248 | $ | 31,407,248 | $ | — | $ | — | ||||||||||||
| Senior Loans |
391,993,854 | — | 309,342,408 | 82,651,446 | ||||||||||||||||
| Corporate Notes and Bonds |
24,026,313 | — | 24,026,313 | — | ||||||||||||||||
| Common Stock |
1,255,250 | — | — | 1,255,250 | ||||||||||||||||
| Preferred Stock |
3,920,000 | — | — | |||||||||||||||||