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: June 30, 2013
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)
Semi-Annual Report
June 30, 2013
Table of Contents
Table of Contents
| 4 | ||
| Financial Data |
||
| 6 | ||
| 7 | ||
| Schedule of Investments |
||
| 8 | ||
| 14 | ||
| 19 | ||
| 20 | ||
| Statements of Changes in Net Assets |
||
| 21 | ||
| 22 | ||
| Statements of Cash Flows |
||
| 23 | ||
| 24 | ||
| Financial Highlights |
||
| 25 | ||
| 26 | ||
| 27 | ||
| 40 | ||
| 45 |
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 June 30, 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.
The first four and a half months of 2013 were characterized by a “risk on” equity market and aggressive “yield grab” across the fixed income markets, while the last month and a half of the second quarter was characterized by a “rush for the exits” in fixed income prompted by a move higher in U.S. Treasury rates on speculation regarding the Fed’s plan to taper its asset purchase program. Unlike previous years, in which strong starts gave way to weakness initiated by macroeconomic concerns, such as those surrounding credit conditions in Europe, such concerns had largely been moved to the backburner in 2013 in the wake of the European Central Bank’s aggressive steps to backstop continental sovereigns and banks. Strong technicals combined with solid credit fundamentals fueled a rally in the U.S. fixed income markets that drove yields to all time lows for many asset classes.
From the beginning of the year through mid-May 2013, the leveraged loan market returned 3.23% (as measured by the S&P/LSTA Leveraged Loan Index). Over the same period, the high-yield market returned 5.49% (as measured by the BofA Merrill Lynch High-Yield Master II Index) while the investment-grade bond market returned 0.47% (as measured by the BofA Merrill Lynch U.S. Corporate Master Index). Both loans and bonds enjoyed strong demand from both retail and institutional investors during the period. Retail loan funds enjoyed historic inflows with $25.0 billion pouring in through mid-May 2013, easily topping 2010’s previous full year record of $17.9 billion. In addition, the resurgence in collateralized loan obligations (“CLOs”) issuance continued with $36.3 billion of volume through the same date. High-yield bonds experienced more moderate retail inflows with approximately $2.6 billion through mid-May 2013, but this was supplemented from cash balances generated by inflows from 2012, which totaled $22.6 billion. This seemingly unrelenting quest for yield drove investment grade and high-yield bonds down to 2.66% and 5.03%, as measured by the BofA Merrill Lynch U.S. Corporate Master Index & JPMorgan U.S. High-Yield Bond Index, respectively, at their respective late April / early May lows. In the loan market, the excess demand led to an unprecedented amount of repricing transactions, which resulted in a 25 basis point reduction in the average coupon of the JP Morgan Leveraged Loan Index from 5.02% to 4.77% over the period. Despite these repricings, the average loan in the index continued to trade above par, demonstrating the strength of demand for loans.
However, market tone began to shift over the course of May amid increasing speculation that the Fed would begin to cut back on the extent of its quantitative easing programs. The 10-year U.S. Treasury traded from a yield of 1.63% at the beginning of May to 2.13% on May 31, 2013. As bond prices move in the opposite direction of yields, this led to price declines across many fixed income asset classes as yields moved higher in tandem. Investors, worrying about a decline in bond prices in a rising interest rate environment and perhaps simply taking a warranted pause from a market that had reached historic heights, pulled money out of investment-grade and high-yield bond funds at a record pace. In the 6 weeks leading up to the end of the second quarter of 2013, redemptions from high-yield funds totaled $12.3 billion, or nearly 7.4% of total asset under management (“AUM”) according to S&P/LCD News. In order to meet these redemption requests, managers were forced to sell assets into the market, pushing prices down and yields up. After bottoming at 5.03% on May 7, 2013, high-yield bonds hit a year to date high of 6.95% on June 25, 2013 before stabilizing. Loans traded off in sympathy with high-yield due to relative value considerations and the fact that loans were also being sold by funds in order to meet their redemptions. After hitting 4.78% on May 16, 2013, the yield to maturity on the JPMorgan Split-BB Leveraged Loan Index widened to 5.47% before settling in at 5.41% on June 28, 2013. However, despite trading off slightly, demand for loans continued to be strong as inflows into retail loan funds continued unabated in the midst of the outflows from high-yield funds, averaging $1.2 billion per week over the same time period that high-yield lost 7.4% of their AUM to outflows. In addition, CLO issuance totaled approximately $18.6 billion during the second quarter of 2013. This led loans to outperform high-yield bonds for the first time in a while. As a comparison, high-yield bonds (as per the JPMorgan Liquid High-Yield Index) traded down $6.37 on average while loans (as per the JPM Liquid Leveraged Loan Index) only traded down $1.37, or about one-fifth the volatility seen in high-yield. From the middle of May through the end of the second quarter of 2013, high-yield bonds lost 3.53% while loans declined 0.80% before ending the second quarter of 2013 with year to date gains of 1.79% and 2.31%, respectively.
As one could expect given market conditions through mid-May, the first half of 2013 saw a modest erosion in credit fundamentals. Year-over-year revenue and EBITDA growth continued to be moderate, growing 2.2% and 0.1%, respectively, which should not be surprising given the stagnant overall global economy. Given the amount of debt issued during the first half of 2013, in particular for uses such as leveraged recapitalizations, overall leverage metrics for high-yield issuers
4 | Semi-Annual Report
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Manager Commentary (unaudited) (continued)
as of June 30, 2013
increased slightly, from approximately 4.1x at the end of 2012 to approximately 4.2x at the end of the first quarter of 2013. This compares to a post-credit crisis high of around 5.2x in 2009. While it is possible we may see some further erosion in credit metrics as the year goes on, we believe the overall fundamental health of the credit markets continues to be fairly good and defaults (by number of issuers) are expected to remain below their historical averages. Assuming additional interest rate increases are driven by a strengthening economy, we believe that the high-yield and loan markets should be poised to perform well. However, as we have seen during previous periods of volatility and as we were reminded of during the last few weeks of May and into June, as the market adjusts to the inevitability of Fed tapering and absorbs a variety of different reports on the health of the U.S. and global economies, there are likely to be periods of volatility that can create opportunities for investors to put money to work at advantageous levels.
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
Semi-Annual Report | 5
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Financial Data
as of June 30, 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 June 30, 2013. The quality ratings reflected were issued by Standard & Poor’s Ratings Group (“Standard & Poor’s”), 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. |
6 | Semi-Annual Report
Table of Contents
Apollo Tactical Income Fund Inc.
Financial Data
as of June 30, 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 June 30, 2013. The quality ratings reflected were issued by Standard & Poor’s. 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. |
| (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. |
Semi-Annual Report | 7
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Schedule of Investments
June 30, 2013 (unaudited)
8 | See accompanying Notes to Financial Statements.
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Schedule of Investments (continued)
June 30, 2013 (unaudited)
See accompanying Notes to Financial Statements. | 9
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Schedule of Investments (continued)
June 30, 2013 (unaudited)
10 | See accompanying Notes to Financial Statements.
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Schedule of Investments (continued)
June 30, 2013 (unaudited)
See accompanying Notes to Financial Statements. | 11
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Schedule of Investments (continued)
June 30, 2013 (unaudited)
12 | See accompanying Notes to Financial Statements.
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Schedule of Investments (continued)
June 30, 2013 (unaudited)
| (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 June 30, 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 under Rule 144A under the 1933 Act. These securities may only be resold in transactions exempt from registration to qualified institutional buyers. At June 30, 2013, these securities amounted to $14,872,765 or 5.1% of net assets. |
| (f) | Non-accrual status. |
| (g) | Floating rate asset. The interest rate shown reflects the rate in effect at June 30, 2013. |
See accompanying Notes to Financial Statements. | 13
Table of Contents
Apollo Tactical Income Fund Inc.
Schedule of Investments
June 30, 2013 (unaudited)
14 | See accompanying Notes to Financial Statements.
Table of Contents
Apollo Tactical Income Fund Inc.
Schedule of Investments (continued)
June 30, 2013 (unaudited)
See accompanying Notes to Financial Statements. | 15
Table of Contents
Apollo Tactical Income Fund Inc.
Schedule of Investments (continued)
June 30, 2013 (unaudited)
16 | See accompanying Notes to Financial Statements.
Table of Contents
Apollo Tactical Income Fund Inc.
Schedule of Investments (continued)
June 30, 2013 (unaudited)
| (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 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 June 30, 2013. 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. |
See accompanying Notes to Financial Statements. | 17
Table of Contents
Apollo Tactical Income Fund Inc.
Schedule of Investments (continued)
June 30, 2013 (unaudited)
| (b) | Foreign issuer traded in U.S. dollars. |
| (c) | All or a portion of this position has not settled. Full contract rates do not take effect until settlement date. |
| (d) | Fair Value Level 3 security. All remaining securities are categorized as Level 2. |
| (e) | Securities exempt from registration under Rule 144A under the 1933 Act. These securities may only be resold in transactions exempt from registration to qualified institutional buyers. At June 30, 2013, these securities amounted to $146,945,389 or 53.9% of net assets. |
| (f) | Asset-backed securities include 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 June 30, 2013. |
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
June 30, 2013 (unaudited)
| Apollo Senior Floating Rate Fund Inc. |
Apollo Fund Inc. |
|||||||
| Assets: |
||||||||
| Investment securities at fair value (cost $429,810,049 and $389,055,731, respectively) |
$430,688,558 | $ | 385,746,075 | |||||
| Cash and cash equivalents |
20,533,469 | 26,366,286 | ||||||
| Interest receivable |
2,192,703 | 4,483,293 | ||||||
| Receivable for investment securities sold |
42,048,784 | 54,840,733 | ||||||
| Deferred financing costs |
612,022 | 113,440 | ||||||
| Prepaid expenses |
234,148 | 221,802 | ||||||
|
|
|
|
|
|||||
| Total Assets |
$496,309,684 | $ | 471,771,629 | |||||
|
|
|
|
|
|||||
| Liabilities: |
||||||||
| Borrowings under credit facility (Note 8) |
$122,704,615 | $ | 138,000,000 | |||||
| Payable for investment securities purchased |
47,928,571 | 59,783,386 | ||||||
| Interest payable |
521,892 | 227,468 | ||||||
| Distributions payable to common shareholders |
16 | 105,636 | ||||||
| Investment advisory fee payable |
368,227 | 332,674 | ||||||
| Accumulated distribution payable to preferred shareholders |
169,266 | — | ||||||
| Other payables and accrued expenses due to affiliates |
243,699 | 59,219 | ||||||
| Other payables and accrued expenses |
316,037 | 399,132 | ||||||
|
|
|
|
|
|||||
| Total Liabilities |
172,252,323 | 198,907,515 | ||||||
|
|
|
|
|
|||||
| Net Assets including Series A Preferred Shares |
$324,057,361 | $ | 272,864,114 | |||||
|
|
|
|
|
|||||
| 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) |
$293,377,361 | $ | 272,864,114 | |||||
|
|
|
|
|
|||||
| 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 15,567,291 and 14,464,026 issued and outstanding, respectively) (Note 6) |
$ 15,567 | $ | 14,464 | |||||
| Paid-in capital in excess of par value of common shares |
296,619,739 | 275,670,081 | ||||||
| Undistributed net investment income |
1,717,230 | 772,068 | ||||||
| Accumulated net realized loss from investments |
(5,853,684 | ) | (282,843 | ) | ||||
| Net unrealized appreciation/(depreciation) on investments |
878,509 | (3,309,656 | ) | |||||
|
|
|
|
|
|||||
| Net Assets (Applicable to Common Shareholders) |
$293,377,361 | $ | 272,864,114 | |||||
|
|
|
|
|
|||||
| Number of Common Shares outstanding |
15,567,291 | 14,464,026 | ||||||
| Net Asset Value, per Common Share |
$ 18.85 | $ | 18.87 | |||||
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 Period Ended June 30, 2013 (unaudited)
| Apollo Senior Floating Rate Fund Inc.* |
Apollo Tactical Income Fund Inc.** |
|||||||||||
| Investment Income: |
||||||||||||
| Interest |
$ | 15,264,647 | $ | 5,969,199 | ||||||||
|
|
|
|
|
|||||||||
| Total Investment Income |
15,264,647 | 5,969,199 | ||||||||||
|
|
|
|
|
|||||||||
| Expenses: |
||||||||||||
| Investment advisory fee (Note 3) |
2,227,635 | 1,079,184 | ||||||||||
| Interest and commitment fee expense (Note 8) |
1,045,841 | 240,639 | ||||||||||
| Audit and legal fees |
228,486 | 193,314 | ||||||||||
| Administrative services of the Adviser (Note 3) |
271,104 | 215,851 | ||||||||||
| Insurance expense |
219,697 | 125,017 | ||||||||||
| Amortization of deferred financing costs (Note 8) |
171,095 | 11,088 | ||||||||||
| Board of Directors fees (Note 3) |
43,338 | 35,554 | ||||||||||
| Other operating expenses (Note 3) |
206,682 | 170,767 | ||||||||||
|
|
|
|
|
|||||||||
| Total Expenses |
4,413,878 | 2,071,414 | ||||||||||
| Expense reimbursement waived by Adviser (Note 3) |
— | (258,865 | ) | |||||||||
|
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|
|
|||||||||
| Net Expenses |
4,413,878 | 1,812,549 | ||||||||||
|
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|
|||||||||
| Net Investment Income |
10,850,769 | 4,156,650 | ||||||||||
|
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|
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|
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| Net Realized and Unrealized Gain/(Loss) on investments |
||||||||||||
| Net realized loss on investments |
(4,791,351 | ) | (282,843 | ) | ||||||||
| Net change in unrealized appreciation/(depreciation) on investments |
5,927,574 | (3,309,656 | ) | |||||||||
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|
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|
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| Net realized and unrealized gain/(loss) on investments |
1,136,223 | (3,592,499 | ) | |||||||||
|
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|
|||||||||
| Distributions to Preferred Shareholders: |
||||||||||||
| From net investment income |
(338,619 | ) | — | |||||||||
|
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|
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| Net increase in net assets, available to common shareholders, resulting from operations |
$ | 11,648,373 | $ | 564,151 | ||||||||
|
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|
|||||||||
| * | For the six months ended June 30, 2013. |
| ** | For the period from February 25, 2013 (commencement of operations) to June 30, 2013. |
20 | See accompanying Notes to Financial Statements.
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Statements of Changes in Net Assets
| Six Months Ended June 30, 2013 (unaudited) |
Year Ended December 31, 2012 | |||||||||||||||
| Increase in Net Assets: |
||||||||||||||||
| From Operations |
||||||||||||||||
| Net investment income |
$ | 10,850,769 | $ 21,470,829 | |||||||||||||
| Net realized loss on investments |
(4,791,351 | ) | (1,019,683 | ) | ||||||||||||
| Net change in unrealized appreciation on investments |
5,927,574 | 17,887,503 | ||||||||||||||
| Distributions to preferred shareholders |
(338,619 | ) | (738,358 | ) | ||||||||||||
|
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|
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|
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| Net increase in net assets from operations |
11,648,373 | 37,600,291 | ||||||||||||||
|
|
|
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|
|||||||||||||
| Distributions to Common Shareholders |
||||||||||||||||
| From net investment income |
(9,794,347 | ) | (21,312,205 | ) | ||||||||||||
| From realized gain on investments |
— | (137,220 | )* | |||||||||||||
|
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|
|||||||||||||
| Total distributions to common shareholders |
(9,794,347 | ) | (21,449,425 | ) | ||||||||||||
|
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|
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| Capital Transactions from Common Shares |
||||||||||||||||
| Reinvestment of dividends |
701,391 | 1,021,185 | ||||||||||||||
|
|
|
|
|
|||||||||||||
| Net increase in net assets from share transactions |
701,391 | 1,021,185 | ||||||||||||||
|
|
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|
|
|||||||||||||
| Total increase in net assets |
$ | 2,555,417 | $ 17,172,051 | |||||||||||||
| Net Assets Applicable to Common Shares |
||||||||||||||||
| Beginning of period |
290,821,944 | 273,649,893 | ||||||||||||||
|
|
|
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|
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| End of period |
$ | 293,377,361 | $290,821,944 | |||||||||||||
|
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|
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| Undistributed net investment income |
$ | 1,717,230 | $ 999,427 | |||||||||||||
|
|
|
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|
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| * | Amount stated reflects the nature of the underlying short-term investment transactions. |
See accompanying Notes to Financial Statements. | 21
Table of Contents
Apollo Tactical Income Fund Inc.
Statement of Changes in Net Assets
|
Period Ended June 30, 2013* (unaudited) | ||||||||||||||||||
| Increase in Net Assets: |
||||||||||||||||||
| From Operations |
||||||||||||||||||
| Net investment income |
$ 4,156,650 | |||||||||||||||||
| Net realized loss on investments |
(282,843 | ) | ||||||||||||||||
| Net change in unrealized depreciation on investments |
(3,309,656 | ) | ||||||||||||||||
|
|
|
|||||||||||||||||
| Net increase in net assets from operations |
564,151 | |||||||||||||||||
|
|
|
|||||||||||||||||
| Distributions to Common Shareholders |
||||||||||||||||||
| From net investment income |
(3,384,582 | ) | ||||||||||||||||
|
|
|
|||||||||||||||||
| Total distributions to common shareholders |
(3,384,582 | ) | ||||||||||||||||
|
|
|
|||||||||||||||||
| 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 |
$272,764,106 | |||||||||||||||||
| Net Assets Applicable to Common Shares |
||||||||||||||||||
| Beginning of period |
100,008 | ** | ||||||||||||||||
|
|
|
|||||||||||||||||
| End of period |
|
$272,864,114 |
|
|||||||||||||||
|
|
|
|||||||||||||||||
| Undistributed net investment income |
$ 772,068 | |||||||||||||||||
|
|
|
|||||||||||||||||
| * | For the period from February 25, 2013 (commencement of operations) to June 30, 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 Six Months Ended June 30, 2013 (unaudited)
|
|
||||
| Cash Flows From Operating Activities |
||||
| Net increase in net assets from operations excluding distributions to preferred shareholders |
$ | 11,986,992 | ||
| 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 |
4,791,351 | |||
| Net change in unrealized appreciation on investments |
(5,927,574 | ) | ||
| Net amortization/(accretion) of premium/(discount) |
(422,992 | ) | ||
| Purchase of investment securities |
(178,826,913 | ) | ||
| Proceeds from disposition of investment securities |
168,420,317 | |||
| Amortization of deferred financing costs |
171,095 | |||
| Changes in operating assets and liabilities |
||||
| Decrease in interest receivable |
929,614 | |||
| Increase in prepaid expenses |
(194,887 | ) | ||
| Decrease in interest payable |
(30,084 | ) | ||
| Decrease in investment advisory fee payable |
(7,820 | ) | ||
| Decrease in other payables and accrued expenses due to affiliates |
(103,931 | ) | ||
| Decrease in directors fees payable |
(22,750 | ) | ||
| Increase in other payables and accrued expenses |
52,043 | |||
|
|
|
|||
| Net cash flows provided by operating activities |
814,461 | |||
|
|
|
|||
| Cash Flows From Financing Activities |
||||
| Distributions paid to common shareholders |
(9,092,940 | ) | ||
| Distributions paid to preferred shareholders |
(346,567 | ) | ||
|
|
|
|||
| Net cash flows used in financing activities |
(9,439,507 | ) | ||
|
|
|
|||
| Net decrease in cash and cash equivalents |
(8,625,046 | ) | ||
| Cash and cash equivalents, beginning of period |
29,158,515 | |||
|
|
|
|||
| Cash and cash equivalents, end of period |
$ | 20,533,469 | ||
|
|
|
|||
| Supplemental Disclosure of Cash Flow Information |
||||
| Cash paid during the period for interest |
$ | 1,075,925 | ||
|
|
|
|||
| Supplemental Disclosure of Non-Cash Financing Activity |
||||
| Value of common shares issued as reinvestment of dividends to common shareholders |
$ | 701,391 | ||
|
|
|
|||
See accompanying Notes to Financial Statements. | 23
Table of Contents
Apollo Tactical Income Fund Inc.
Statement of Cash Flows
For the Period from February 25, 2013 (commencement of operations) to June 30, 2013 (unaudited)
|
|
||||
| Cash Flows From Operating Activities |
||||
| Net increase in net assets from operations |
$ | 564,151 | ||
| Adjustments to Reconcile Net Increase in Net Assets from Operations to Net Cash Flows Used in Operating Activities |
||||
| Net realized loss on investments |
282,843 | |||
| Net change in unrealized depreciation on investments |
3,309,656 | |||
| Net amortization/(accretion) of premium/(discount) |
(26,690 | ) | ||
| Purchase of investment securities |
(464,336,242 | ) | ||
| Proceeds from disposition of investment securities |
79,967,012 | |||
| Amortization of deferred financing costs |
11,088 | |||
| Changes in operating assets and liabilities |
||||
| Increase in interest receivable |
(4,483,293 | ) | ||
| Increase in prepaid expenses |
(221,802 | ) | ||
| Increase in interest payable |
227,468 | |||
| Increase in investment advisory fee payable |
332,674 | |||
| Increase in other payables and accrued expenses due to affiliates |
59,219 | |||
| Increase in other payables and accrued expenses |
399,132 | |||
|
|
|
|||
| Net cash flows used in operating activities |
(383,914,784 | ) | ||
|
|
|
|||
| Cash Flows From Financing Activities |
||||
| Proceeds from borrowings under the credit facility |
138,000,000 | |||
| Deferred financing costs |
(124,528 | ) | ||
| Proceeds from capital stock issued |
276,262,897 | |||
| Offering costs |
(578,352 | ) | ||
| Distributions paid to common shareholders |
(3,278,947 | ) | ||
|
|
|
|||
| Net cash flows provided by financing activities |
410,281,070 | |||
|
|
|
|||
| Net increase in cash and cash equivalents |
26,366,286 | |||
| Cash and cash equivalents, beginning of period |
— | |||
|
|
|
|||
| Cash and cash equivalents, end of period |
$ | 26,366,286 | ||
|
|
|
|||
| Supplemental Disclosure of Cash Flow Information |
||||
| Cash paid during the period for interest |
$ | 13,171 | ||
|
|
|
|||
| Supplemental Disclosure of Non-Cash Financing Activity |
||||
| Value of common shares issued as reinvestment of dividends to common shareholders |
$ | — | ||
|
|
|
|||
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
| Common Shares Per Share Operating Performance: | For the Six Months Ended June 30, 2013 (unaudited) |
For the Year Ended |
For the Period Ended December 31, | |||||||||||||||||||
| Net Asset Value, Beginning of Period |
$ | 18.73 | $ 17.68 | $ 19.10(b) | ||||||||||||||||||
| Income from Investment Operations: |
||||||||||||||||||||||
| Net investment income |
0.70 | 1.39 | 1.00 | |||||||||||||||||||
| Net realized and unrealized gain/(loss) on investments |
0.07 | 1.10 | (1.46) | |||||||||||||||||||
| Distributions from net investment income to preferred shareholders |
(0.02) | (0.05) | (0.02) | |||||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||
| Total from investment operations |
0.75 | 2.44 | (0.48) | |||||||||||||||||||
| Less Distributions Paid to Common Shareholders from: |
||||||||||||||||||||||
| Net investment income |
(0.63) | (1.38) | (0.88) | |||||||||||||||||||
| Net realized gain on investments |
— | (0.01) | (0.02) | |||||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||
| Total distributions paid to Common Shareholders |
(0.63) | (1.39) | (0.90) | |||||||||||||||||||
| Common Share offering charges to paid-in capital |
— | — | (0.04) | |||||||||||||||||||
| Net Asset Value, End of Period |
$ | 18.85 | $ 18.73 | $ 17.68 | ||||||||||||||||||
| Market Value, End of Period |
$ | 19.66 | $ 18.77 | $ 16.01 | ||||||||||||||||||
| Total return based on net asset value(c) |
4.01%(d) | 14.23% | (2.43)%(d) | |||||||||||||||||||
| Total return based on market value(c) |
8.25%(d) | 26.41% | (15.62)%(d) | |||||||||||||||||||
| Ratios to Average Net Assets available to Common Shareholders: |
||||||||||||||||||||||
| Ratio of total expenses to average net assets |
3.01%(e) | 3.21% | 2.99%(e) | |||||||||||||||||||
| Ratio of net expenses to average net assets |
3.01%(e) | 3.18% | 2.88%(e) | |||||||||||||||||||
| Ratio of net investment income to average net assets(f) |
7.40%(e) | 7.51% | 6.49%(e) | |||||||||||||||||||
| Ratio of net investment income to average net assets net of distributions to Series A Preferred Shareholders |
7.17%(e) | 7.25% | 6.33%(e) | |||||||||||||||||||
| Supplemental Data: |
||||||||||||||||||||||
| Portfolio turnover rate |
43.6%(d) | 66.6% | 41.5%(d) | |||||||||||||||||||
| Net assets at end of period (000’s) |
$ | 293,377 | $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) |
$ | 291,240 | $289,574 | $278,380 | ||||||||||||||||||
| Loan outstanding (in 000’s) |
$ | 122,705 | $122,705 | $122,705 | ||||||||||||||||||
| Asset coverage per $1,000 of loan outstanding(h) |
$ | 3,641 | $ 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 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. |
| (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 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
| Common Shares Per Share Operating Performance: | For the Period Ended June 30, 2013(a) (unaudited) | |||||||||
| Net Asset Value, Beginning of Period |
$ 19.10(b) | |||||||||
| Income from Investment Operations: |
||||||||||
| Net investment income |
0.28 | |||||||||
| Net realized and unrealized loss on investments |
(0.24) | |||||||||
|
| ||||||||||
| Total from investment operations |
0.04 | |||||||||
| Less Distributions Paid to Common Shareholders from: |
||||||||||
| Net investment income |
(0.23) | |||||||||
|
| ||||||||||
| Total distributions paid to Common Shareholders |
(0.23) | |||||||||
|
| ||||||||||
| Common share offering charges to paid-in capital |
(0.04) | |||||||||
|
| ||||||||||
| Net Asset Value, End of Period |
$ 18.87 | |||||||||
| Market Value, End of Period |
$ 18.08 | |||||||||
| Total return based on net asset value(c) |
0.08%(d) | |||||||||
| Total return based on market value(c) |
(8.43)%(d) | |||||||||
| Ratios to Average Net Assets available to Common Shareholders: |
||||||||||
| Ratio of total expenses to average net assets |
2.23%(e) | |||||||||
| Ratio of net expenses to average net assets |
1.95%(e) | |||||||||
| Ratio of net investment income to average net assets |
4.48%(e) | |||||||||
| Supplemental Data: |
||||||||||
| Portfolio turnover rate |
40.8%(d) | |||||||||
| Net assets at end of period (000’s) |
$272,864 | |||||||||
| Senior Securities: |
||||||||||
| Loan outstanding (in 000’s) |
$138,000 | |||||||||
| Asset coverage per $1,000 of loan outstanding(f) |
$ 2,977 | |||||||||
| (a) | From February 25, 2013 (commencement of operations) to June 30, 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 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
June 30, 2013 (unaudited)
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 closed-end, non-diversified 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 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
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, 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 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’ 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.
Semi-Annual Report | 27
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Notes to Financial Statements (continued)
June 30, 2013 (unaudited)
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 Fund’s common shares is 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 price provided by a nationally recognized security pricing service or broker. Securities and assets for which market quotations are not readily available, or for which the valuations provided by the primary pricing sources are believed to be unreliable, are valued at fair value 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. 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 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. These 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 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 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.
28 | Semi-Annual Report
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Notes to Financial Statements (continued)
June 30, 2013 (unaudited)
The valuation techniques used by the Funds to measure fair value at June 30, 2013 maximized the use of observable inputs and minimized the use of unobservable inputs. All investments at June 30, 2013 were valued using prices provided by an approved third party pricing service and/or broker quotes. 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. A summary of the levels of the Funds’ fair value hierarchy as of June 30, 2013 are as follows:
Apollo Senior Floating Rate Fund Inc.
| Assets in Fair Value Hierarchy: | Total Value at June 30, 2013 |
Level
1 Price |
Level 2 Significant Observable Inputs |
Level 3 Significant Unobservable Inputs | ||||||||||||||||
| Cash and Cash Equivalents |
$ | 20,533,469 | $ | 20,533,469 | $ | — | $ | — | ||||||||||||
| Senior Loans |
400,272,183 | — | 340,599,223 | 59,672,960 | ||||||||||||||||
| Corporate Notes and Bonds |
30,416,375 | — | 30,114,875 | 301,500 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Assets |
$ | 451,222,027 | $ | 20,533,469 | $ | 370,714,098 | $ | 59,974,460 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
AFT did not have any liabilities that were measured at fair value at June 30, 2013. The following is a reconciliation of Level 3 holdings for which significant unobservable inputs were used in determining fair value as of June 30, 2013:
| Total Fair Value |
Senior Loans | Corporate Notes and Bonds | ||||||||||||||||||
| Fair Value, beginning of period |
$ | 56,173,954 | $ | 50,723,074 | $ 5,450,880 | |||||||||||||||
| Purchases |
33,377,320 | 33,077,320 | 300,000 | |||||||||||||||||
| Sales |
(12,386,761 | ) | (9,926,761 | ) | (2,460,000 | ) | ||||||||||||||
| Accrued discounts/(premiums) |
65,776 | 64,252 | 1,524 | |||||||||||||||||
| Total net realized (loss)/gain |
(404,165 | ) | 135,835 | (540,000 | ) | |||||||||||||||
| Change in net unrealized appreciation/(depreciation) |
758,374 | 774,538 | (16,164 | ) | ||||||||||||||||
| Transfers into Level 3 |
8,030,352 | 8,030,352 | — | |||||||||||||||||
| Transfers out of Level 3 |
(25,640,390 | ) | (23,205,650 | ) | (2,434,740 | ) | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Fair Value, end of period |
$ | 59,974,460 | $ | 59,672,960 | $ 301,500 | |||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
Investments were transferred in and out of Level 3 and in and out of Level 2 during the period ended June 30, 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. Net change in unrealized appreciation attributable to Level 3 investments still held at June 30, 2013 was $839,804 for AFT.
Apollo Tactical Income Fund Inc.
| Assets in Fair Value Hierarchy: | Total Value at June 30, 2013 |
Level 1 Quoted Price |
Level 2 Significant Observable Inputs |
Level 3 Significant Unobservable Inputs | ||||||||||||||||
| Cash and Cash Equivalents |
$ | 26,366,286 | $ | 26,366,286 | $ | — | $ | — | ||||||||||||
| Senior Loans |
178,138,926 | — | 149,029,994 | 29,108,932 | ||||||||||||||||
| Corporate Notes and Bonds |
171,859,202 | — | 168,134,302 | 3,724,900 | ||||||||||||||||
| Asset-Backed Securities |
35,747,947 | — | — | 35,747,947 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Assets |
$ | 412,112,361 | $ | 26,366,286 | $ | 317,164,296 | $ | 68,581,779 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
Semi-Annual Report | 29
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Notes to Financial Statements (continued)
June 30, 2013 (unaudited)
AIF did not have any liabilities that were measured at fair value at June 30, 2013. The following is a reconciliation of Level 3 holdings for which significant unobservable inputs were used in determining fair value as of June 30, 2013:
| Total | Corporate Notes | Asset-Backed | ||||||||||||||||||||||||||||||||||
| Fair Value | Senior Loans | and Bonds | Securities | |||||||||||||||||||||||||||||||||
| Fair Value, beginning of period |
$ | — | $ | — | $ — | $ | — | |||||||||||||||||||||||||||||
| Purchases |
69,127,957 | 28,786,757 | 4,008,700 | 36,332,500 | ||||||||||||||||||||||||||||||||
| Sales |
(150,184 | ) | (150,184 | ) | — | — | ||||||||||||||||||||||||||||||
| Accrued discounts/(premiums) |
18,882 | 5,211 | (1,442 | ) | 15,113 | |||||||||||||||||||||||||||||||
| Total net realized gains/ (losses) |
1,470 | 1,470 | — | — | ||||||||||||||||||||||||||||||||
| Total net unrealized (depreciation)/appreciation |
(416,346 | ) | 465,678 | (282,358 | ) | (599,666 | ) | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Fair Value, end of period |
$ | 68,581,779 | $ | 29,108,932 | $3,724,900 | $ | 35,747,947 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
There were no investments transferred in or out of Level 3 or Level 2 for the period ended June 30, 2013. Net change in unrealized depreciation attributable to Level 3 investments still held at June 30, 2013 was $416,346 for AIF.
Cash and Cash Equivalents
Cash and cash equivalents of the Funds consist of cash held in bank accounts and liquid investments with maturities, at the date of acquisition, not exceeding 90 days. As of June 30, 2013, cash and cash equivalents were comprised of cash deposited with U.S. financial institutions in which carrying value approximated fair value and are considered to be Level 1 in the fair value hierarchy.
Industry Classifications
The industry classifications of the Funds’ investments, as presented in the accompanying Schedules of Investments, represent management’s belief as to the most meaningful presentation of the classification of such investments. For Fund compliance purposes, the Funds’ industry classifications refer to any one or more of the industry sub-classifications used by one or more widely recognized market indexes or rating group indexes, with the primary source being Moody’s, and/or as defined by the Funds’ management. These definitions may not apply for purposes of this report, which may combine industry sub-classifications.
Fair Value of Financial Instruments
The fair value of the Funds’ assets and liabilities that qualify as financial instruments under U.S. GAAP approximate the carrying amounts presented in the accompanying Statements of Assets and Liabilities.
Securities Transactions and Investment Income
Securities transactions of the Funds are recorded on the trade date for financial reporting purposes. Cost is determined based on consideration given, and the gains or losses on investment securities are the difference between fair value determined in compliance with the valuation policy approved by the Board and the cost. Realized gains and losses from securities transactions and foreign currency transactions, if any, are recorded on the basis of identified cost and stated separately in the Statements of Operations. Interest income is recorded on the accrual basis and includes the accretion of original issue discount and amortization of premiums where applicable.
U.S. Federal Income Tax Status
The Funds intend to qualify each year as regulated investment companies (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies and will distribute substantially all of their net investment income and net capital gains, if any, for their tax years. The Funds may elect to incur excise tax if it is deemed prudent by the Board from a cash management perspective or in the best interest of shareholders due to other facts and circumstances. For the year ended December 31, 2012, AFT recorded a U.S. Federal excise tax provision of $16,643. In 2012, it was deemed prudent for cash management purposes for AFT to pay a nominal excise tax which equated to $0.001 per common share. No federal income tax or excise tax provision is required for the period ended June 30, 2013.
The Funds have followed the authoritative guidance on accounting for and disclosure of uncertainty in tax positions, which requires the Funds to determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Funds have
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Table of Contents
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Notes to Financial Statements (continued)
June 30, 2013 (unaudited)
determined that there was no material effect on the financial statements from following this authoritative guidance. In the normal course of business, the Funds are subject to examination by federal, state and local jurisdictions, where applicable, for tax years for which applicable statutes of limitations have not expired. The statute of limitations on AFT’s federal and state tax filings remain open for the years ended December 31, 2011 and 2012.
Distributions to Common Shareholders
The Funds intend to make regular monthly cash distributions of all or a portion of their net investment income available to common shareholders. The Funds intend to pay common shareholders at least annually all or substantially all of their net investment income after the payment of dividends and interest owed with respect to outstanding preferred shares and/or notes or other forms of leverage utilized by the Funds. The Funds intend to pay any capital gains distributions at least annually. If the Funds make a long-term capital gain distribution, they will be required to allocate such gain between the common shares and any preferred shares issued by the Funds in proportion to the total dividends paid to each class for the year in which the income is realized.
The distributions for any full or partial year might not be made in equal amounts, and one distribution may be larger than the other. The Funds will make a distribution only if authorized by the Board and declared by the Funds out of assets legally available for these distributions. The Funds may pay a special distribution at the end of each calendar year, if necessary, to comply with U.S. federal income tax requirements. This distribution policy may, under certain circumstances, have certain adverse consequences to the Funds and their shareholders because it may result in a return of capital to shareholders, which would reduce the Funds’ NAV and, over time, potentially increase the Funds’ expense ratio. If the Funds distribute a return of capital, it means that the Funds are returning to shareholders a portion of their investment rather than making a distribution that is funded from the Funds earned income or other profits. The Board may elect to change AFT’s or AIF’s distribution policy at any time.
New Pronouncements
In December 2011, the Financial Accounting Standards Board, (the “FASB”) issued amended guidance which will enhance disclosures required by U.S. GAAP by requiring improved information about financial instruments and derivative instruments that are either (1) offset or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset. This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. Fund management believes that the adoption of this guidance did not have an impact on the Funds’ financial statements.
In June 2013, the FASB issued guidance to change the assessment of whether an entity is an investment company by developing a new two-tiered approach that requires an entity to possess certain fundamental characteristics while allowing judgment in assessing certain typical characteristics. The fundamental characteristics that an investment company is required to have include the following: (1) it obtains funds from one or more investors and provides the investor(s) with investment management services; (2) it commits to its investor(s) that its business purpose and only substantive activities are investing the funds solely for returns from capital appreciation, investment income or both; and (3) it does not obtain returns or benefits from an investee or its affiliates that are not normally attributable to ownership interests. The typical characteristics of an investment company that an entity should consider before concluding whether it is an investment company include the following: (1) it has more than one investment; (2) it has more than one investor; (3) it has investors that are not related parties of the parent or the investment manager; (4) it has ownership interests in the form of equity or partnership interests; and (5) it manages substantially all of its investments on a fair value basis. The new approach requires an entity to assess all of the characteristics of an investment company and consider its purpose and design to determine whether it is an investment company. The guidance includes disclosure requirements about an entity’s status as an investment company and financial support provided or contractually required to be provided by an investment company to its investees. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2013. Earlier application is prohibited. Fund management believes that the adoption of this guidance will not have an impact on the Funds’ financial statements.
Semi-Annual Report | 31
Table of Contents
Apollo Senior Floating Rate Fund Inc.
Apollo Tactical Income Fund Inc.
Notes to Financial Statements (continued)
June 30, 2013 (unaudited)
Note 3. Investment Advisory, Administration and Other Agreements with Affiliates
Investment Advisory Fee
The Adviser provides certain investment advisory, management and administrative services to the Funds pursuant to investment advisory and management agreements with each of the Funds (the “Investment Advisory Agreement”). For its services, each Fund pays the Adviser monthly at the annual rate of 1.0% of the average daily value of the Fund’s managed assets. Managed assets are defined as the total assets of a Fund (including any assets attributable to any preferred shares that may be issued or to money borrowed or notes issued by the Fund) minus the sum of the Fund’s accrued liabilities, including accrued interest and accumulated dividends (other than liabilities for money borrowed (including the liquidation preference of preferred shares) or notes issued). The Adviser may elect from time to time, in its sole discretion, to waive its receipt of the advisory fee from a Fund. If the Adviser elects to waive its compensation, such action may have a positive effect on the Fund’s performance or yield. The Adviser is under no obligation to waive its fees, may elect not to do so, may decide to waive its compensation periodically or may decide to waive its compensation on only one of the Funds at any given time. For the period ended June 30, 2013, the Adviser earned fees of $2,227,635 and $1,079,184 from AFT and AIF, respectively.
Administrative Services and Expense Reimbursements
The Funds and the Adviser have entered into Administrative Services and Expense Reimbursement Agreements pursuant to which the Adviser provides certain administr