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, common stock, 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 by the Adviser as the valuation designee approved 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 by the valuation 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’s valuation designee 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 valuation designee’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.
The valuation techniques used by the valuation designee to measure fair value at September 30, 2022 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.
| Apollo Tactical Income Fund Inc. | | | |
| Consolidated Schedule of Investments (continued) | | |
| September 30, 2022 (unaudited) | | | |
A summary of the Fund’s investments categorized in the fair value hierarchy as of September 30, 2022 is as follows:
| Apollo Tactical Income Fund Inc. | | | | | | | | | | | | |
| | | Total Fair Value at September 30, 2022 | | | Level 1 Quoted Price | | | Level 2 Significant Observable Inputs | | | Level 3 Significant Unobservable Inputs | |
| Assets: | | | | | | | | | | | | |
| Cash and Cash Equivalents | | $ | 4,497,686 | | | $ | 4,497,686 | | | $ | - | | | $ | - | |
| Senior Loans | | | 231,058,666 | | | | - | | | | 163,481,362 | | | | 67,577,304 | |
| Corporate Notes and Bonds | | | 52,138,912 | | | | - | | | | 51,436,368 | | | | 702,544 | |
| Convertible Bonds | | | 1,125,225 | | | | - | | | | 1,125,225 | | | | - | |
| Structured Products | | | 20,735,659 | | | | - | | | | 20,735,659 | | | | - | |
| Common Stocks | | | 2,514,139 | | | | - | | | | - | | | | 2,514,139 | |
| Preferred Stocks | | | 246,034 | | | | - | | | | - | | | | 246,034 | |
| Unrealized appreciation on Unfunded Loan Commitments | | | 26,529 | | | | - | | | | - | | | | 26,529 | |
| Total Assets | | $ | 312,342,850 | | | $ | 4,497,686 | | | $ | 236,778,614 | | | $ | 71,066,550 | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Unrealized depreciation on Unfunded Loan Commitments | | | (76,426 | ) | | | - | | | | (57,282 | ) | | | (19,144 | ) |
| Total Liabilities | | | (76,426 | ) | | | - | | | | (57,282 | ) | | | (19,144 | ) |
| | | $ | 312,266,424 | | | $ | 4,497,686 | | | $ | 236,721,332 | | | $ | 71,047,406 | |
| Apollo Tactical Income Fund Inc. | | | |
| Consolidated Schedule of Investments (continued) | | |
| September 30, 2022 (unaudited) | | | |
The following is a reconciliation of Level 3 holdings for which significant unobservable inputs were used in determining fair value for the period January 1, 2022 through September 30, 2022:
| Apollo Tactical Income Fund Inc. | | | | | | | | | | | | | | | | |
| | | Total | | | Senior Loans | | | Corporate Notes and Bonds | | | Common Stocks | | | Preferred Stocks | | | Unfunded Loan Commitments | |
| Total Fair Value, beginning of period | | $ | 22,189,981 | | | $ | 18,179,101 | | | $ | 709,303 | | | $ | 2,186,073 | | | $ | 1,116,802 | | | $ | (1,298 | ) |
| Purchases, including capitalized PIK | | | 53,166,052 | | | | 53,166,052 | | | | - | | | | - | | | | - | | | | - | |
| Sales/Paydowns | | | (8,959,000 | ) | | | (7,896,442 | ) | | | - | | | | (115,983 | ) | | | (946,575 | ) | | | - | |
| Accretion/(amortization) of discounts/ (premiums) | | | 34,167 | | | | 34,167 | | | | - | | | | - | | | | - | | | | - | |
| Net realized gain/(loss) | | | (1,036,598 | ) | | | (1,171,513 | ) | | | - | | | | 115,983 | | | | 18,932 | | | | - | |
| Change in net unrealized appreciation/ (depreciation) | | | (718,866 | ) | | | (15,883 | ) | | | (6,759 | ) | | | (673,612 | ) | | | (31,295 | ) | | | 8,683 | |
| Transfers into Level 3 | | | 8,164,848 | | | | 7,075,000 | | | | - | | | | 1,001,678 | | | | 88,170 | | | | - | |
| Transfers out of Level 3 | | | (1,793,178 | ) | | | (1,793,178 | ) | | | - | | | | - | | | | - | | | | - | |
| Total Fair Value, end of period | | $ | 71,047,406 | | | $ | 67,577,304 | | | $ | 702,544 | | | $ | 2,514,139 | | | $ | 246,034 | | | $ | 7,385 | |
Assets were transferred from Level 2 to Level 3 or from Level 3 to Level 2 as a result of changes in levels of liquid market observability when subject to various criteria as discussed above. The net change in unrealized appreciation/(depreciation) attributable to Level 3 investments still held at September 30, 2022 was $(853,633).
| Apollo Tactical Income Fund Inc. | | | |
| Consolidated Schedule of Investments (continued) | | |
| September 30, 2022 (unaudited) | | | |
The following table provides quantitative measures used to determine the fair values of the Level 3 investments as of September 30, 2022:
| | Assets/Liabilities | | Fair Value at September 30, 2022 | Valuation Technique(s)(a) | | Unobservable Input(s) | | Range of Unobservable Input(s) Utilized
| Weighted Average Unobservable
Input(s) |
| Senior Loans | | $
| 2,216,911 | | Independent pricing service and/or broker quotes | Vendor and/or broker quotes | N/A | | N/A |
| | | | | | | | | | | | |
| | | | - | | Recoverability (b) | | Estimated Proceeds (b) | | $- | | $- |
| | | | | | | | | | | | |
| | | | 48,038,204 | | Discounted Cash Flow (c) | | Discount Rate (c) | | 7.67%-18.54% | | 10.22% |
| | | | | | | | | | | | |
| | | | 12,301,111 | | Transaction Approach (d) | | Cost (d) | | N/A | | N/A |
| | | | | | | | | | | | |
| | | | 2,821,642 | | Guideline Public Company (e) | | TEV / Revenue Multiple(e) | | 0.55x-0.65x | | 0.65x |
| | | | | | Discounted Cash Flow (c) | | Discount Rate (c) | | 14.0%-16.0% | | 15.0% |
| | | | | | Independent pricing service and/or broker quotes | Vendor and/or broker quotes | | N/A | | N/A |
| | | | | | | | | | | | |
| | | | 2,199,436 | | Recoverability (b) | | Estimated Proceeds (b) | | $939.3m-$1,327.5m | | $1,133.4m |
| | | | | | Guideline Public Company (f) | | TEV / EBITDA Multiple (f) | | 6.0x-8.0x | | 7.0x |
| | | | | | Independent pricing service and/or broker quotes | Vendor and/or broker quotes | | N/A | | N/A |
| | | | | | | | | | | | |
| Corporate Notes and Bonds | | 702,544 | | Recoverability (b) | | Estimated Proceeds (b) | | $53.9m | | $53.9m |
| | | | | | Discounted Cash Flow (c) | | Discount Rate (c) | | 3.7% | | 3.7% |
| | | | | | | | | | | | |
| | | | - | | Recoverability (b) | | Estimated Proceeds (b) | | $- | | $- |
| | | | | | | | | | | | |
| Common Stocks | | 2,484,767 | | Guideline Public Company (f) | | TEV / EBITDA Multiple (f) | | 3.25x-7.30x | | 3.76x |
| | | | | | | | | | | | |
| | | | - | | Recoverability (b) | | Estimated Proceeds (b) | | $- | | $- |
| | | | | | | | | | | | |
| | | | 17,422 | | Recoverability (b) | | Estimated Proceeds (b) | | $29.3m | | $29.3m |
| | | | | | Discounted Cash Flow (c) | | Discount Rate (c) | | 8.0%-10.0% | | 9.0% |
| | | | | | | | | | | | |
| | | | 11,950 | | Discounted Cash Flow (c) | | Discount Rate (c) | | 14.25% - 16.25% | | 15.25% |
| | | | | | Guideline Public Company (f) | | TEV / EBIDTA Multiple (f) | | 5.85x-12.75x | | 9.8x |
| | | | | | | | | | | | |
| Preferred Stocks | | 157,864 | | Guideline Public Company (f) | | TEV / EBITDA Multiple (f) | | 7.3x | | 7.3x |
| | | | | | | | | | | | |
| | | | 88,170 | | Option Model (g) | | Volatility (g) | | 40.0% | | 40.0% |
| | | | | | Discounted Cash Flow (c) | | Discount Rate (c) | | 31.61%-33.61% | | 32.61% |
| | | | | | | | | | | | |
| Unfunded Loan Commitments | 7,531 | | Discounted Cash Flow (c) | | Discount Rate (c) | | 8.71%-15.31% | | 9.68% |
| | | | | | | | | | | | |
| | | | (146) | | Transaction Approach (d) | | Cost (d) | | N/A | | N/A |
| | | | | | | | | | | | |
| Total Fair Value | | $
| 71,047,406 | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(a) | For the assets which have multiple valuation techniques, the Fund may rely on the techniques individually or in aggregate based on a weight ranging from 0-100%. |
(b) | The Fund utilized a recoverability approach to fair value these securities, specifically a liquidation analysis. There are various, company specific inputs used in the valuation analysis that relate to the liquidation value of a company’s assets. The significant unobservable input used in the valuation model was estimated proceeds. Significant increases or decreases in the input in isolation may result in a significantly higher or lower fair value measurement.
|
(c) | The Fund utilized a discounted cash flow model to fair value these securities. 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. |
| |
(d) | The Fund utilized a recent transaction, specifically purchase price, to fair value these securities. |
(e) | The Fund utilized a guideline public company method to fair value this security. The significant unobservable inputs used in the valuation model were total enterprise value (“TEV”) and revenue 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. |
| |
(f) | The Fund utilized a guideline public company method to fair value these securities. The significant unobservable inputs used in the valuation model were total enterprise value (“TEV”) 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. |
| |
(g) | The Fund utilized an options pricing model to fair value this security. The significant unobservable input used in the valuation model was volatility. Significant increases or decreases in the input in isolation may result in a significantly higher or lower fair value measurement. |
| Apollo Tactical Income Fund Inc. | | | |
| Consolidated Schedule of Investments (continued) | | |
| September 30, 2022 (unaudited) | | | |
General Commitments and Contingencies
As of September 30, 2022, the Fund had unfunded loan commitments outstanding, which could be extended at the option of the borrower, as detailed below:
| Borrower | | Unfunded Loan Commitments | |
| Accelerate360 Holdings, LLC Revolving Term Loan | | $ | 636,092 | |
| Advarra Holdings, Inc. Delayed Draw Term Loan | | | 580,151 | |
| Anaplan, Inc. Revolving Term Loan | | | 349,471 | |
| Anuvu Holdings 2, LLC Delayed Draw Term Loan | | | 102,990 | |
| Athenahealth Group, Inc. Delayed Draw Term Loan | | | 662,124 | |
| Coretrust Purchasing Group, LLC Delayed Draw Term Loan | | | 338,346 | |
| Coretrust Purchasing Group, LLC Revolving Term Loan | | | 338,346 | |
| Gateway US Holdings, Inc. Delayed Draw Term Loan * | | | 145,804 | |
| Gateway US Holdings, Inc. Revolving Term Loan | | | 50,709 | |
| IBG Borrower, LLC Delayed Draw Term Loan | | | 1,153,846 | |
| Inovalon Holdings, Inc. Delayed Draw Term Loan | | | 660,211 | |
| IQN Holding Corporation Delayed Draw Term Loan* | | | 802,139 | |
| IQN Holding Corporation Revolving Term Loan * | | | 320,856 | |
| Keystone Acquisition Corporation Delayed Draw Term Loan | | | 652,174 | |
| Keystone Acquisition Corporation Revolving Term Loan | | | 326,087 | |
| NCL Corporation Ltd. Secured Notes Bridge Term Loan | | | 4,500,000 | |
| NCL Corporation Ltd. Unsecured Notes Bridge Term Loan | | | 5,500,000 | |
| Ultimate Baked Goods Midco, LLC Revolving Term Loan | | | 74,595 | |
| Total unfunded loan commitments | | $ | 17,193,941 | |
| | | | | |
| *Subsequent to September 30, 2022, all or a portion of the outstanding loan commitment was funded. | |
Additionally, from time to time, the Adviser and its affiliates may commit to an investment on behalf of the funds it manages, including the Fund. Certain terms of these investments are not finalized at the time of the commitment and each respective fund’s allocation may change prior to the date of the funding. In this regard, the Fund may have to fund additional commitments in the future that it is currently not obligated to but may at a future point in time.
For more information with regard to significant accounting policies, see the Fund’s most recent semi-annual report filed with the Securities and Exchange Commission.
