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: September 30, 2014
Item 1. Schedule of Investments.
The Schedule(s) of Investments is attached herewith.
| Apollo Tactical Income Fund Inc.
Schedule of Investments September 30, 2014 (unaudited)
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| See accompanying Notes to Schedule of Investments. | 1 |
| Apollo Tactical Income Fund Inc.
Schedule of Investments (continued) September 30, 2014 (unaudited)
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| 2 | See accompanying Notes to Schedule of Investments. |
| Apollo Tactical Income Fund Inc.
Schedule of Investments (continued) September 30, 2014 (unaudited)
|
| See accompanying Notes to Schedule of Investments. | 3 |
| Apollo Tactical Income Fund Inc.
Schedule of Investments (continued) September 30, 2014 (unaudited)
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| 4 | See accompanying Notes to Schedule of Investments. |
| Apollo Tactical Income Fund Inc.
Schedule of Investments (continued) September 30, 2014 (unaudited)
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| (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 September 30, 2014. Senior Loans are generally not registered under the 1933 Act and often contain certain restrictions on resale and cannot be sold publicly. Senior Loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual maturity may be substantially less than the stated maturity shown. |
| See accompanying Notes to Schedule of Investments. | 5 |
| Apollo Tactical Income Fund Inc.
Schedule of Investments (continued) September 30, 2014 (unaudited)
|
| (b) | Fair Value Level 3 security. All remaining securities are categorized as Level 2. |
| (c) | All or a portion of this position has not settled. Full contract rates do not take effect until settlement date. |
| (d) | Fixed rate asset. |
| (e) | Foreign issuer traded in U.S. dollars. |
| (f) | Represents a payment-in-kind security which may pay interest in additional principal amount. |
| (g) | Senior Loan assets have additional unfunded loan commitments. As of September 30, 2014, the Fund had unfunded loan commitments, which could be extended at the option of the borrower, pursuant to the following loan agreements: |
| Borrower | Unfunded Loan Commitments |
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| Charger OpCo B.V. (Oak Tea, Inc.) |
$3,693,609 | |||||
| GTCR Valor Companies, Inc. |
865,442 | |||||
| The SI Organization, Inc. |
88,137 | |||||
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| Total Unfunded Loan Commitments |
$4,647,188 | |||||
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| (h) | 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 September 30, 2014, these securities amounted to $118,445,867, or 42.2% of net assets. |
| (i) | Asset-backed securities include collateralized loan obligations (“CLOs”). A CLO typically takes the form of a financing company (generally called a special purpose vehicle or “SPV”), created to reapportion the risk and return characteristics of a pool of assets. While the assets underlying CLOs are often Senior Loans or corporate notes and bonds, the assets may also include (i) subordinated loans; (ii) debt tranches of other CLOs; and (iii) equity securities incidental to investments in Senior Loans. The Fund may invest in lower tranches of CLOs, which typically experience a lower recovery, greater risk of loss or deferral or non-payment of interest than more senior tranches of the CLO. A key feature of the CLO structure is the prioritization of the cash flows from a pool of debt securities among the several classes of the CLO. The SPV is a company founded for the purpose of securitizing payment claims arising out of this asset pool. On this basis, marketable securities are issued by the SPV which, due to the diversification of the underlying risk, generally represent a lower level of risk than the original assets. The redemption of the securities issued by the SPV typically takes place at maturity out of the cash flow generated by the collected claims. |
| (j) | Floating rate asset. The interest rate shown reflects the rate in effect at September 30, 2014. |
| (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 |
$ | 5,468,182 | ||||
| Gross unrealized depreciation |
(4,624,686 | ) | ||||
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| Net unrealized appreciation |
$ | 843,496 | ||||
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| 6 | See accompanying Notes to Schedule of Investments. |
| Apollo Tactical Income Fund Inc.
Notes to Schedule of Investments September 30, 2014 (unaudited)
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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, preferred stock, warrants and asset-backed securities 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 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, 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 instruments in active markets to which the Fund has 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 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.
| 7 |
| Apollo Tactical Income Fund Inc.
Notes to Schedule of Investments (continued) September 30, 2014 (unaudited)
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The valuation techniques used by the Fund to measure fair value at September 30, 2014 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 September 30, 2014 is as follows:
| Level 2 | Level 3 | |||||||||||||||
| Fair Value at | Significant | Significant | ||||||||||||||
| September | Level 1 | Observable | Unobservable | |||||||||||||
| Assets in Fair Value Hierarchy: | 30, 2014 | Quoted Price | Inputs | Inputs | ||||||||||||
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| Cash and Cash Equivalents |
$ | 15,513,682 | $ | 15,513,682 | $ | — | $ | — | ||||||||
| Senior Loans |
251,219,990 | — | 194,887,023 | 56,332,967 | ||||||||||||
| Corporate Notes and Bonds |
113,200,902 | — | 107,963,402 | 5,237,500 | ||||||||||||
| Asset-Backed Securities |
39,935,933 | — | 9,298,347 | 30,637,586 | ||||||||||||
| Preferred Stock |
3,920,000 | — | — | 3,920,000 | ||||||||||||
| Warrants |
12,672 | — | — | 12,672 | ||||||||||||
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| Total Assets |
$ | 423,803,179 | $ | 15,513,682 | $ | 312,148,772 | $ | 96,140,725 | ||||||||
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The Fund did not have any liabilities that were measured at fair value at September 30, 2014. The following is a reconciliation of Level 3 holdings for which significant unobservable inputs were used in determining fair value as of September 30, 2014:
| Fair Value | Senior Loans | Corporate Notes and Bonds |
Asset-Backed Securities |
Preferred Stock |
Warrants | |||||||||||||||||||
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| Fair Value, beginning of period |
$ | 90,759,035 | $ | 41,939,669 | $ | 30,897,963 | $ | 17,913,800 | $ | — | $ | 7,603 | ||||||||||||
| Purchases |
52,438,977 | 33,394,893 | — | 15,124,084 | 3,920,000 | — | ||||||||||||||||||
| Sales |
(27,973,683 | ) | (20,971,535 | ) | (5,002,148 | ) | (2,000,000 | ) | — | — | ||||||||||||||
| Accretion/(amortization) of discounts/(premiums) |
219,674 | 163,109 | 3,682 | 52,883 | — | — | ||||||||||||||||||
| Net realized gain/(loss) |
338,439 | 243,657 | 91,409 | 3,373 | — | — | ||||||||||||||||||
| Change in net unrealized appreciation/(depreciation) |
1,037,920 | 406,201 | 1,083,204 | (456,554 | ) | — | 5,069 | |||||||||||||||||
| Transfers into Level 3 |
15,105,173 | 15,105,173 | — | — | — | — | ||||||||||||||||||
| Transfers out of Level 3 |
(35,784,810 | ) | (13,948,200 | ) | (21,836,610 | ) | — | — | — | |||||||||||||||
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| Total Fair Value, end of period |
$ | 96,140,725 | $ | 56,332,967 | $ | 5,237,500 | $ | 30,637,586 | $ | 3,920,000 | $ | 12,672 | ||||||||||||
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Investments were transferred into and out of Level 3 and into and out of Level 2 during the nine months ended September 30, 2014 due to changes in the quantity and quality of information obtained to support the fair value of each investment as assessed by Apollo Credit Management, LLC, the Fund’s investment adviser. The net change in unrealized appreciation/ (depreciation) attributable to Level 3 investments still held at September 30, 2014 was $(347,667).
| 8 |
| Apollo Tactical Income Fund Inc.
Notes to Schedule of Investments (continued) September 30, 2014 (unaudited)
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The following table provides quantitative measures used to determine the fair values of the Level 3 investments as of September 30, 2014:
| Assets | Fair Value at September 30, 2014 |
Valuation Technique(s) | Unobservable Input(s) | Multiple | Weighted Average or Range | |||||||||||
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| Senior Loans |
$ | 56,332,967 | Third-party pricing service and/or | Vendor and/or |
N/A | N/A | ||||||||||
| broker quotes | broker quotes |
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| Corporate Notes and Bonds |
5,237,500 | Third-party pricing service and/or | Vendor and/or |
N/A | N/A | |||||||||||
| broker quotes | broker quotes |
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| Asset-Backed Securities |
30,637,586 | Third-party pricing service and/or | Vendor and/or |
N/A | N/A | |||||||||||
| broker quotes | broker quotes |
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| Preferred Stock |
3,920,000 | Cost(1) | N/A |
N/A | N/A | |||||||||||
| Warrants |
12,672 | Third-party pricing service and/or | Vendor and/or |
N/A | N/A | |||||||||||
| broker quotes | broker quotes |
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| Total Fair Value |
$ | 96,140,725 | ||||||||||||||
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(1) The Fund values its Level 3 investments in accordance with its fair valuation procedures. These investments are generally privately held securities. There may not be a secondary market for these securities, the issuer may be newly formed and/or there may be a limited number of investors seeking to purchase or sell these securities. The value of certain Level 3 securities may be estimated to approximate cost. The value of such securities is monitored utilizing available market information to determine if the carrying value should be adjusted. Such market data may include, but is not limited to, observations of the trading multiples of public companies considered comparable to the private companies being valued, financial or operational information released by the company, and/or news or corporate events that may affect the investment. Valuations may be adjusted to account for company-specific issues, the lack of liquidity inherent in a nonpublic investment and/or the fact that comparable public companies are not identical to the investments being fair valued by the Fund.
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.
| 9 |
Item 2. Controls and Procedures.
| (a) | The Fund’s principal executive and principal financial officers 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 |
November 21, 2014 |
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 |
November 21, 2014 |
| By (Signature and Title) |
/s/ Frank Marra | |
| Frank Marra, Treasurer and Chief Financial Officer (principal financial officer) |
| Date |
November 21, 2014 |