UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED
MANAGEMENT INVESTMENT COMPANY
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: March 31, 2015
Item 1. Schedule of Investments.
The Schedule(s) of Investments is attached herewith.
Apollo Tactical Income Fund Inc.
Schedule of Investments
March 31, 2015 (unaudited)
See accompanying Notes to Schedule of Investments. | 1
Apollo Tactical Income Fund Inc.
Schedule of Investments (continued)
March 31, 2015 (unaudited)
2 | See accompanying Notes to Schedule of Investments.
Apollo Tactical Income Fund Inc.
Schedule of Investments (continued)
March 31, 2015 (unaudited)
See accompanying Notes to Schedule of Investments. | 3
Apollo Tactical Income Fund Inc.
Schedule of Investments (continued)
March 31, 2015 (unaudited)
4 | See accompanying Notes to Schedule of Investments.
Apollo Tactical Income Fund Inc.
Schedule of Investments (continued)
March 31, 2015 (unaudited)
See accompanying Notes to Schedule of Investments. | 5
Apollo Tactical Income Fund Inc.
Schedule of Investments (continued)
March 31, 2015 (unaudited)
6 | See accompanying Notes to Schedule of Investments.
Apollo Tactical Income Fund Inc.
Schedule of Investments (continued)
March 31, 2015 (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 March 31, 2015. Senior Loans are generally not registered under the Securities Act of 1933 (the “1993 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. |
| Senior Loan assets may have additional unfunded loan commitments. As of March 31, 2015, the Apollo Tactical Income Fund Inc. had unfunded loan commitments, which could be extended at the option of the borrower, pursuant to the following loan agreements: |
| Unfunded Loan | ||||||||
| Borrower | Commitments | |||||||
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| Charger OpCo B.V. (Oak Tea, Inc.) |
$ | 3,745,300 | ||||||
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| Total Unfunded Loan Commitments |
$ | 3,745,300 | ||||||
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| (b) | Fair Value Level 3 security. All remaining securities are categorized as Level 2. |
| (c) | Fixed rate asset. |
| (d) | All or a portion of this Senior Loan position has not settled. Full contract rates do not take effect until settlement date. |
| (e) | Foreign issuer traded in U.S. dollars. |
| (f) | Represents a payment-in-kind (“PIK”) 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 March 31, 2015, these securities amounted to $88,168,100, or 33.2% 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 March 31, 2015. |
| (j) | Non income-producing asset. |
| (k) | Cost for U.S. federal income tax purposes differs from book basis primarily due to the deferral of losses from wash sales. Unrealized appreciation and depreciation on investments are as follows: |
| Gross unrealized appreciation |
$ | 5,911,591 | ||||||
| Gross unrealized depreciation |
(17,686,890 | ) | ||||||
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| Net unrealized depreciation |
$ | (11,775,299 | ) | |||||
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See accompanying Notes to Schedule of Investments. | 7
Apollo Tactical Income Fund Inc.
Notes to Schedule of Investments
March 31, 2015 (unaudited)
Security Valuation
Apollo Tactical Income Fund Inc. (the “Fund”) values its 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, structured products, preferred stock and warrants 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 Fund’s board of directors (the “Board”). In general, the fair value of a security is the amount that the Fund 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, the Fund’s net asset value (“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 the Fund’s valuation of a security will not differ from the amount that it realizes upon the sale of such security.
Fair Value Measurements
The 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 Fund’s 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 Fund has 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 Fund has 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 Fund’s 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.
8 |
Apollo Tactical Income Fund Inc.
Notes to Schedule of Investments (continued)
March 31, 2015 (unaudited)
The valuation techniques used by the Fund to measure fair value at March 31, 2015 maximized the use of observable inputs and minimized the use of unobservable inputs. The inputs or methodologies 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. A summary of the Fund’s investments categorized in the fair value hierarchy as of March 31, 2015 is as follows:
| Apollo Tactical Income Fund Inc. | ||||||||||||||||
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| Total Fair Value March 31, 2015 |
Level 1 Quoted Price |
Level 2 Significant Observable Inputs |
Level 3 Significant Unobservable Inputs |
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| Assets: |
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| Cash and Cash Equivalents |
$ | 13,815,313 | $ | 13,815,313 | $ | — | $ | — | ||||||||
| Senior Loans |
261,848,988 | — | 194,227,838 | 67,621,150 | ||||||||||||
| Corporate Notes and Bonds |
92,780,986 | — | 89,030,986 | 3,750,000 | ||||||||||||
| Structured Products |
38,849,646 | — | 1,532,355 | 37,317,291 | ||||||||||||
| Preferred Stock |
3,920,000 | — | — | 3,920,000 | ||||||||||||
| Warrants |
— | — | — | — | ||||||||||||
| Unrealized appreciation on Unfunded Loan Commitments |
61,090 | — | 61,090 | — | ||||||||||||
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| Total Assets |
$ | 411,276,023 | $13,815,313 | $ | 284,852,269 | $ | 112,608,441 | |||||||||
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The following is a reconciliation of Level 3 holdings for which significant unobservable inputs were used in determining fair value as of March 31, 2015:
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| Total Fair Value |
Senior Loans |
Corporate Notes and Bonds |
Structured Products |
Preferred Stock |
Warrants | |||||||||||||||||||
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| Fair Value, beginning of period | $ | 129,149,862 | $ | 67,400,467 | $ | 27,031,563 | $ | 30,795,044 | $ | 3,920,000 | $ | 2,788 | ||||||||||||
| Purchases, including capitalized PIK | 13,185,394 | 6,795,019 | — | 6,390,375 | — | — | ||||||||||||||||||
| Sales | (11,305,195 | ) | (4,090,260 | ) | (7,214,935 | ) | — | — | — | |||||||||||||||
| Accretion/(amortization) of discounts/(premiums) | 44,843 | 26,852 | (10,568 | ) | 28,559 | — | — | |||||||||||||||||
| Net realized gain/(loss) | 211,975 | 17,681 | 194,294 | — | — | — | ||||||||||||||||||
| Change in net unrealized appreciation/(depreciation) | (207,584 | ) | (622,483 | ) | 314,374 | 103,313 | — | $ | (2,788 | ) | ||||||||||||||
| Transfers into Level 3 | 16,281,082 | 16,281,082 | — | — | — | |||||||||||||||||||
| Transfers out of Level 3 | (34,751,936 | ) | (18,187,208 | ) | (16,564,728 | ) | — | — | — | |||||||||||||||
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| Total Fair Value, end of period | $ | 112,608,441 | $ | 67,621,150 | $ | 3,750,000 | $ | 37,317,291 | $ | 3,920,000 | $ | — | ||||||||||||
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Investments were transferred into Level 3 during the three months ended March 31, 2015 due to a decrease in the availability of qualified observable inputs obtained to support the fair value of each investment as assessed by Apollo Credit Management, LLC, the Fund’s investment adviser (the “Adviser”). Transfers out of Level 3 during the three months ended March 31, 2015 were due to an increase in the availability of qualified observable inputs as assessed by the Adviser. There were no transfers between Level 1 and Level 2 fair value measurement during the period shown. The net change in unrealized appreciation/(depreciation) attributable to Level 3 investments still held at March 31, 2015 was $(243,087).
| 9
Apollo Tactical Income Fund Inc.
Notes to Schedule of Investments (continued)
March 31, 2015 (unaudited)
The following table provides quantitative measures used to determine the fair values of the Level 3 investments as of March 31, 2015:
| Apollo Tactical Income Fund Inc. |
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| Assets |
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Fair Value at March 31, 2015 |
Valuation Technique(s) | Unobservable Input(s) | Range of Unobservable Input(s) Utilized | |||||||
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| Senior Loans |
$ | 64,444,700 | Independent pricing service and/or broker quotes |
Vendor and/or broker quotes | N/A | |||||||
| 3,176,450 | Market comparable approach(a) |
Total enterprise value/EBITDA(a) | 6.8x | |||||||||
| Corporate Notes and Bonds |
3,750,000 | Independent pricing service and/or broker quotes |
Vendor and/or broker quotes | N/A | ||||||||
| Structured Products |
37,317,291 | Independent pricing service and/or broker quotes |
Vendor and/or broker quotes | N/A | ||||||||
| Preferred Stock |
3,920,000 | Discounted cash flow(b) |
Discount rate(b) | 8.67% | ||||||||
| Warrants |
— | Market comparable approach(a) |
Total enterprise value/EBITDA(a) | 6.8x | ||||||||
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| Total Fair Value |
$ | 112,608,441 | ||||||||||
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| (a) | The Fund utilized a market comparable approach to fair value a senior loan and associated common stock warrants. The significant unobservable inputs used in the valuation model were total enterprise value and earnings before interest, taxes, depreciation and amortization (“EBITDA”) based on comparable multiples for a similar investment with similar risks. Significant increases or decreases in either of these inputs in isolation may result in a significantly higher or lower fair value measurement. |
| (b) | The Fund utilized a discounted cash flow model to fair value the preferred stock. The significant unobservable input used in the valuation model was the discount rate, which was determined based on the market rates an investor would expect for a similar investment with similar risks. The discount rate was applied to present value the projected cash flows in the valuation model. Significant increases in the discount rate may significantly lower the fair value of an investment; conversely, significant decreases in the discount rate may significantly increase the fair value of an investment. |
For more information with regard to significant accounting policies, see the Fund’s most recent annual report filed with the Securities and Exchange Commission.
10 |
Item 2. Controls and Procedures.
| (a) | The Fund’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the Fund’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective, as of a date within 90 days of the filing date of this report, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended. |
| (b) | There were no changes in the Fund’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the Fund’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Fund’s internal control over financial reporting. |
Item 3. Exhibits.
Certifications pursuant to Rule 30a-2(a) under the 1940 Act are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Apollo Tactical Income Fund Inc.
By (Signature and Title) /s/ Joseph Moroney
Joseph Moroney, President
(principal executive officer)
Date 05/20/15
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By (Signature and Title) /s/ Joseph Moroney
Joseph Moroney, President
(principal executive officer)
Date 05/20/15
By (Signature and Title) /s/ Frank Marra
Frank Marra, Treasurer and Chief Financial Officer
(principal financial officer)
Date 05/20/15