Apollo Investment Corp (AINV) 2007 Q4 法說會逐字稿

Good morning and welcome to the Apollo Investment Corporation fourth quarter and fiscal year 2007 earnings conference call. At this time, all participants have been placed on a listen-only mode. The call will be open for a question-and-answer session following the speakers' remarks. (OPERATOR INSTRUCTIONS)

It is now my pleasure to turn the call over to Mr. John Hannan, Chairman and Chief Executive Officer of Apollo Investment Corporation. Mr. Hannan, you may begin your conference.

Thank you and good morning, everyone. I would like to welcome you to our fourth quarter and fiscal year 2007 earnings conference call. I am joined today by Jim Zelter, Apollo Investment Corporation's President and COO, and Richard Peteka, our Chief Financial Officer.

Before we begin, Rich would you start off by disclosing some general conference call information, and the discussion of our forward-looking statements?

Thank you John. I would like to remind everyone that today's call is being recorded. Please note that this call is the property of Apollo Investment Corporation, and that any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call is available on it, with information available in our press release.

I would also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. Today's conference call may include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.apolloIC.com, or call us at 212-515-3450.

At this time, I would like to turn the call back to our Chairman and Chief Executive Officer, John Hannan.

Thanks, Rich. Our fourth quarter fiscal quarter was active on many fronts. The quarter saw continued strong deal flow from new and existing relationships, as well as from Apollo's integrated global sourcing platform. In addition, our disciplined underwriting and portfolio management strategy continued to produce desired results with successful harvest across both debt and equity investments.

These harvests generated significant pretax premiums and realized capital gains, giving us strong dividend visibility as we progress further into fiscal 2008. We also added to our significant liquidity and capital base during the quarter. We raised approximately $443 million in net proceeds from our follow-on public equity offering, and added approximately 450 million of additional commitments, from new and existing lenders under our multicurrency revolving credit facility.

In summary, we closed the quarter and fiscal year in a position of strength with substantial liquidity, a global investment sourcing platform, and significant dividend visibility. The investing environment continue to be extremely competitive during the quarter, and we expect more of the same, once we have progressed further into 2007. Borrowers continue to benefit from senior lenders and high yield market, offering capital at increasingly attractive terms. Many other capital providers have felt pressure to change their business or investment strategy, in order to compete effectively.

We at Apollo Investment Corporation remain IRR driven, value investors who continue to focus on selective mezzanine and private equity assets, to deliver superior long-term risk-adjusted returns to shareholder. As a reminder, mezzanine and private equity investing is not a quarterly business. Therefore, you should continue to expect periods of both relative inactivity, and periods in which we are very actively investing.

For the quarter ended March 31, we invested approximately $432 million across eight new and several existing portfolio companies. Investments by asset type totalled approximately $199 million in subordinated debt, $50 million in preferred stock, $98 million in second lien bank debt, $40 million in first lien bank debt, and $45 million in common stock.

For the full fiscal year, gross investments totaled approximately $1.45 billion. Total invested capital since our IPO now exceeds $3.4 billion across 86 portfolio companies. At March 31, our investment portfolio consists of approximately, of 57 portfolio companies valued at $2.3 billion, and it continues to perform very well.

Our portfolio management strategy of selectively and opportunistically adding private equity investments to our portfolio of primarily mezzanine assets continues to deliver superior risk-adjusted returns. From commencement of operations in April 2004 through March 31, 2007, we have generated an IRR exceeding 21%, on more than $3.4 billion of invested capital.

Furthermore, we are pleased to report that shareholders of AINV stock received a total return of approximately 31.7 for the financial year ended March 31, 2007, assuming reinvestment of dividends. Shareholders investing in AINV at its IPO in April 2004 have received an average annual return of approximately 21%, or 76% cumulative through March 31, 2007, again assuming reinvestment of dividends. Our most recently announced quarterly dividend at $0.51 per share in March 2007, translates into a relatively high current annualized dividend yield of 9.1%.

At this time, I would like to turn the call over to our President and COO, Jim Zelter to go through more detail on some of our investments. Our CFO, Rich Peteka will then take us through more specifics on a quarterly and annual financial results. Jim?

Thanks, John. During the quarter we continue to attract an increasing number of investment opportunities from new and existing relationships. Given the environment, we also choose to do a much smaller percentage of the deals we saw.

In this competitive yet robust marketplace, many opportunities exist to invest in overleveraged companies, or companies with challenging working capital or capital expenditure needs. Rather, we have focused on utilizing Apollo's proprietary knowledge and strategic relationships, to better attract and diligence the more complex transactions to find opportunities and create value.

Accordingly and using our credible consistent no-surprise capital commitment process, we continue to have repeat business with our current relationships, and attract new relationships through the extension of our proprietary information and diligence edge. Across 86 portfolio companies invested through March 31 '07, we have invested with 56 different financial sponsors. As John mentioned earlier, we selectively invested $432 million across eight new and several existing portfolio companies during the quarter.

In general and given where we are in the credit cycle, our business model continues to focus opportunistically on larger companies. Our average investment in the new portfolio companies exceeded $36 million for the quarter, and our overall average portfolio investment continues to exceed $41 million. Let me take you through some of our investments made during the quarter.

We invested $39.8 million into subordinated debt, and 2.8 million in the common equity of Dura-Line Holdings, the leading high-density polyethylene conduit supplier, to telecom and utility providers in North America and India. This investment was to back the buyout of Dura-Line Holdings by ARNCO Corporation by Audax Group.

EXCO Resources is an exploration and production company focused on the exploration and production of natural gas in the on-shore North American markets. We invested $50 million in convertible preferred equity to fund the company's future acquisition growth program, and refinance our bridge facility used to acquire three properties.

We also invested $40 million in the first out bank debt, 70 million in the second out bank debt, and $2 million in the common equity of Gray Wireline Services Inc., one of the leading independent providers and operators of measurement and maintenance tools, that are used to service oil and natural gas wells. Our investment was to finance an add-on acquisition and a partial dividend recapitalization by the company by Center Partners Management and Center Southwest Partners LLC.

Infor Global Solutions is a market leading provider of end-to-end enterprise software applications serving predominately middle market companies. We invested $10 million in second lien bank debt, $6.2 million euros in the euro denominated second lien bank debt, and $7.5 million U.S. in whole co pick notes to support the refinancing of a subordinated bridge facility, and fund a shareholder dividend. Infor Global is a Golden Gate Capital portfolio capital company.

We also invested $15 million in the common equity of Prism Business Media Holdings LLC, to finance the acquisition of Penton Media by Prism Business Media. Prism Business Media is the largest business-to-business media company in the U.S. Prism Business Media Holdings is a Wasserstein Perella portfolio company.

Generac Power Systems is the leading manufacturer of Standby Power generators in North America. We opportunistically invested $10 million in the second lien bank debt in the secondary market. CCMP Capital Advisors is a sponsor of Generac.

General Nutrition Centers is the largest global specialty retailer of health and wellness products, including vitamins, minerals, and herbal and specialty supplements. We opportunistically invested $15 million in senior floating rate pick toggle notes discounted in the secondary market. GNC was previously sold to Ares Management and the Ontario Teacher's Pension Plan by Apollo Management.

Travelex Global was a former portfolio investment of Apollo Investment Corporation, and Travelex is one of the world's largest nonbank providers of commercial foreign currency payment services, and also one of the leading providers of foreign currency to bank retail locations. We invested 9.3 Sterling in subordinated pick notes in the refinancing of the capital structure. Travelex is an Apax Partner portfolio company.

With regard to existing investments, we invested an additional $63 million in the subordinated note of ALM Media to support a shareholder dividend. ALM publishes 35 national legal periodicals, produces legal trade shows, textbooks, conferences and seminars, and operates a Website, law.com, which provides web content to the legal industry. Wasserstein & Co. is the financial sponsor. ALM had been and has been a portfolio company since March 2005.

We also invested an additional $16.9 million euros in the subordinated notes of Casema Holding B.V., to back the buyout of Essent Kabelcom by Cinven and Warburg Pincus, as part of their consolidation of the Dutch cable industry. The combined company is a leading Dutch cable provider with over 3.3 million subscribers, and a 55% market share.

BNY Convergence Group is a leading institutional agency-only broker and financial technology provider, offering a complete spectrum of pretrade, trade, and post-trade services to traditional asset managers, hedge fund, broker dealers, corporations, and plan sponsors. We invested $15 million in subordinated operating company mezz notes in the secondary market. We made a C$22.3 million investment in the subordinated notes of Varel International. Varel designs and manufacturers drill bits for use in oil and gas exploration and production, as well as in mining applications. This financing was used to support Varel's acquisition of Pendemak Industries Limited.

AIC also participated in the follow-on private placement of C$29.6 million of common equity of MEG Energy Corp. MEG is a privately-held company focused on oil sands development in the Athabasca region of Alberta, Canada. The financing was used to repay an outstanding bridge facility, and to fund the acquisition of additional land resources.

Our net portfolio at March 31 consisted of 57 companies with a market value of $2.35 billion, and was comprised of 61% of subordinated debt, 26% in senior secured bank debt, 4% in preferred stock, and 9% in common equity and warrants. The weighted average yield on our debt portfolio was 13.1%, as compared to the same number at the end of the previous fiscal year. The average weighted yield on our subordinated debt portfolio, including preferred stock was 13.5%, compared to 13.6 last year, while the weighted average yield on our senior loans was 12.3, versus 12.2 at March 31 '06.

Despite the continuing and general trends towards spread compression in the overall market, we have been able to utilize our relationships and proprietary information edge, to maintain a relatively stable yield on our portfolio. That being said, we recognize that we are not bigger than the market, and therefore will continue to carefully evaluate each risk/reward opportunity, both individually, and as part of our overall portfolio end strategy.

In addition and subsequent to quarter end, we entered into a definitive agreement to acquire Innkeepers USA Trust through an affiliate for $17.75 per share in cash, plus the assumption of Innkeepers indebtedness. In connection with the transaction, Apollo Investment Corp. made a commitment of up to $200 million in common and preferred equity, and agreed to pay certain fee obligations of the purchaser under certain circumstances. The transaction is subject to the approval of the common shareholders of Innkeepers, and other customary closing conditions. The transaction was sourced through the overall Apollo network, and is an ideal long-term asset for our capital.

Assuming the agreement is reached, we expect this portfolio company investment to deliver strong cash on cash returns over the long-term, while complementing the duration of our mezzanine assets. Also, subsequent to quarter end, Prysmian Cables & Systems closed on their initial public offering, issuing shares at EUR 15 per share. This successful IPO further increases the value of our position in GS Prysmian Co-Invest LP on May 3, 2010, to approximately EUR 114 million, based on the initial public offering price.

With that, I will turn over the call to our CFO, Richard Peteka.

Thanks, Jim. We closed our fourth quarter in financial year 2007 on March 31, 2007, with a net asset value of $17.87 per share, up from $16.36 per share at December 31, and $15.15 per share at March 31, 2006. The increase for the quarter was driven by strong quarter-over-quarter operating results, combined with the accretive affect of our public equity raise.

Gross investment income for the quarter totaled $75.3 million, and included a $1.4 million structuring fee on our investment in Gray Wireline that Jim mentioned earlier. This compared to $71.1 million for the quarter ended December 31, and $42.5 million for the comparable quarter a year earlier. Our quarter-over-quarter net investment income increased 6%, as our net portfolio size increased from $2.25 billion at December 31, 2006, to $2.35 billion at March 31, 2007.

Net operating expenses for the quarter were $53.1 million, of which $10.7 million was our performance-based net investment income incentive fee. In addition, we accrued $21.3 million in net realized capital gains based incentive fees, given the significant net capital gains realized during the quarter. Interest and other credit facility-related expenses totaled $7.7 million for the quarter.

Operating expenses net of incentive fees and the credit facility-related expenses were $13.4 million, versus $12.3 million for the quarter ended December 31, 2006, and $8.2 million for the quarter ended March 31, 2006. These increases were primarily due to the increase in asset-based management fees related to the growth of our overall investment portfolio, as compared to the December and March comparative quarters. Net operating expenses exclusive of interest to credit facility related expenses for fiscal year 2007 were $105.3 million, versus $50.7 million for fiscal year 2006.

This increase was primarily due to the growth in the portfolio, and the accrual of the net realized capital gain-based incentive fee. In addition, excise taxes totaling $0.4 million is $1.1 million for the quarter in fiscal year ended March. General & Administrative expenses totaled $6.8 million for fiscal 2007, versus $5 million for fiscal year 2006.

Accordingly, net investment income excluding the accrual of net realized capital gains-based incentive fees was $43.0 million, or $0.44 per share for the quarter, compared to 38 million, or $0.46 per share for the quarter ended December 2006, and $22.7 million, or $0.35 per share for the comparable quarter a year earlier. Net investment income after deducting the accrual for the net realized capital gains incentive fee was $21.7 million, or $0.22 per share.

Apollo Investment Corporation's GAAP net investment income continues to represent only a portion of our taxable income included in quarterly dividends. Taxable income also includes commitment and other up-front fees received from investments that we are amortizing over the respective terms of our loans, among other book to tax differences. Our investment sales and prepayments for the quarter totaled $348.7 million.

In addition, we received $107.6 million capital gains distribution from our investment in GS Prysmian, as mentioned earlier. Total net realized gains during the quarter were $106.6 million, as compared to net realized losses of $0.5 million for the quarter ended December, and net realized gains of $0.3 million for the comparable quarter March 2006.

Total net realized gains for the fiscal year ended March were $132.9 million, versus $11.2 million net realized gains for fiscal 2006. As a reminder, every portfolio company is valued at each quarter using independent market quotations, or is fair valued by a Board of Directors with our assistance of independent valuation firms, based on all relevant and currently available information through the balance sheet date.

At March 31, 2007, and after the reversal of approximately $96 million in unrealized appreciation on our investment in GS Prysmian Co-Invest, from December, our overall investment portfolio had net unrealized appreciation of $92.2 million. This compares to $117.8 million of net appreciation at December, and $38.3 million at March 31, 2006. For the quarter, net unrealized appreciation decreased by $25.6 million, versus a net increase of $19.4 million for the quarter ended December, and a net increase of $19.3 million for the quarter ended March 2006. In total quarterly operating results increased net assets by $102.8 million, or $1.04 per share, versus an increase of $57 million, or $0.69 per share for the quarter ended December, and $42.3 million, or $0.65 per share, for the quarter ended March 31, 2006.

Now let me turn the call back to John.

Thanks, Rich. Looking out into fiscal 2008, we continue to be extremely excited about our business and our prospects. We firmly believe that Apollo Investment Corporation is well-positioned, and will continue to benefit from a thoughtful, long-term business plan, and the relationships we have established and enhanced since our IPO.

We are also finding new and exciting ways to leverage off of the Apollo's overall integrated global sourcing and due diligence platforms, to find interesting opportunities and value in a competitive marketplace. I would also like to reiterate again our view that mezzanine and private equity investing is not a quarterly business, and you should continue to expect us to have both periods of relative inactivity, and very increased activity, as we seek the best relative value for our capital, and to preserve our principal.

In closing, I would like to thank our growing and talented team of professionals for the commitment and dedication to the overall success of Apollo Investment Corporation. Thank you all for your time today, and for your continued investment and confidence in us. That concludes our remarks.

At this time, I would like to open the call to questions.

Thank you. (OPERATOR INSTRUCTIONS) Your first question is from Carl Drake with SunTrust Robinson Humphrey.

Good morning. And congratulations on a nice quarter, and the Prysmian deal!

The question I have in terms of the deal activity in the quarter, $430 million, 13 transactions while the middle market was relatively flat according to S&P. Are you all going after, obviously your addressable market is larger, are you going to continue to move up market deals? Maybe you could comment on the average EBITDA and the size of the companies closed during the quarter?

Hi, Carl, it's Jim. I don't have a number for the average, because they are chunky in size, but certainly as you get in the later stages of the cycle, which we have talked about, our experience is in some cases larger companies just have a lot more flexibility and survivability when they get into some challenging investment environments, which we expect it to come some time in the future.

So if you look at our, the eight new investments we made for the quarter, there is a broad swath of some that are classic size, and some are a little bit larger in size. We took advantage of some secondary market opportunities as well, but I don't have an exact number, but certainly the theme of us trying to look at larger opportunities and larger entities, is something that we are continuing to look at, especially as we get later in this credit cycle.

Okay. Thank you. In terms of the Innkeepers transaction, maybe you can touch on the strategy there to enhance operations, it is a pretty significant opportunity for you all, and maybe also the potential yield impact on the portfolio that that might have?

Well, let me answer that and I will turn it over on the financial side to Rich. We feel we bought an asset that is actually in great shape and we don't need, the existing management team has done a great job historically, and we expect them to do a very good one going forward. So this is not by any means a turnaround story. We bought a good, clean, high-cash flow-producing asset. Our real focus on doing it was really just the value, but also the great duration that it provides to the portfolio. I will pass the second part along to Rich.

This is yet to be structured. Our commitment is up to $200 million, and maybe some number below that. It also may be structured between common and preferred. That is all being worked through now. We would expect given the asset and given our diligence, that there may be some initial capital expenditure charges.

That is to be determined whether that comes out of our commitment, or whether we allow the free cash flow that's currently being generated by the properties to pay for that, we will look at that as we go forward. But this first and foremost is an equity investment for us, but it has got great current cash on cash returns. To the extent we don't see cash being thrown off in the first quarter or very little, that's one thing, but this is going to be something that is going to deliver for us throughout the rest of our fiscal year, and just improve there forward.

Okay. Thank you. Final question, just on credit quality. Looked like you had talked a little bit about average ratings, or the system in the 10-K. I don't know that you disclosed your average ratings in the past, but maybe you can give us an overall view of credit quality? Looks like it's very good and maybe there is only a few devalued companies in the entire portfolio. Maybe you can touch on that, please?

Sure, Carl. Our average in the portfolio was a 2. We are diligent on every quarter. We had, if you look through the numbers quarter over quarter, we had a handful of upgrades, and a couple of downgrades, so the average credit quality went up a small, marginal amount. It has stayed in that 2 zip code for some time.

To the point earlier that you should call for Mitch's comments and John's comments. At this point in the cycle, we are seeing a lot transactions. We are seeing more and more of them all the time, which is fine for us. We really believe that our perspective of being a long-term investor in this asset class and not focusing on quarterly returns, is going to make a big difference in the investor performance.

Absolutely. Okay. Thank you, guys.

Thank you. Your next question is from Sanjay Sakhrani with KBW.

Thanks. First off, great quarter. First question was, I was just wondering what your thoughts were on how you will manage the substantial spillover of taxable income? Would you guys consider a special dividend?

Everything is going to be considered, Sanjay. We have typically, extra dividends are paid in December. I think we will try to figure out between now and then what we want to do. Whether that is going to be a special dividend, or whether we want to push that as a spillover into subsequent years, similar to some other business companies, and what they do. We are in a great position.

Our company is run by an independent Board. Cost management is going to continue to review that, consider precedent and everything else. Look at the nature of this really successful security, and see what we want to establish as a go-forward basis. We are primarily a debt portfolio, trying to match our dividend each and every quarter.

We feel great that we have been very successful with equity investment in Prysmian, but we also want to be cognizant of precedence going forward, so again we will work with our Board and figure out what to do. It is a little early for that in any decision.

Great. Second question, I guess on the Innkeeper's transaction, what is the estimated close date? I know you talked about it generating good cash-on-cash returns, but is it going to be generating recurring yield income? Is that how you guys anticipate structuring that deal?

Yes, Sanjay. We would expect, our intention is to close it in the quarter ending June 30. Obviously there is no guarantee of that, but that is our focus and goal at this point in time. Yes, there is a variety, when we think about our business, we think about the dividend as our real liability, this is an asset that is going to generate what we think is substantial cash-on-cash returns, that will allow to us to make that dividend a lot more on a consistent basis continually for many, many years ahead.

It was a relatively simple concept that came in through our broad sourcing network, and after looking at it and seeing the type of capital structure we could put into play, and as Rich said, structuring our investment as an equity in a preferred equity investment, we believe it will fit very consistently within the rest of our portfolio.

Okay, all right. Great. Maybe just a final question. The prepayment rate was pretty high this quarter. Do you guys anticipate that level being sustainable, or has there been sort of a step function down this quarter, and maybe on a go-forward basis?

Certainly, the capital markets are very aggressive right now, and good companies that we financed are producing very well. In this type of market, the marketplace is showing them refinancing opportunities that as an equityholder those companies have got a follow on. I don't think we have seen the trough of it yet. We are seeing the market get a little bit cautious on some of the recaps to some degree, but again we can only really focus on what we put in on new investments, and if the investments we choose that have done well get refinanced, that is somewhat out of our control, but I think we are still seeing a very buoyant debt financing market, which is giving a lot of companies opportunities.

Okay. Great quarter again. Thanks!

Thank you. Your next question is from Joel Houck with Wachovia Securities.

Thanks, good morning. The question is really related around -- you guys are moving up market in a generally tighter environment, yet your yields are holding constant. That is obviously a good thing. What can you tell us regarding structure, leveraged multiples, covenants? Are you guys happy with the structure today on deals, is it as tight or as solid as it was a year ago, or are you having to make some concessions to hold the line on pricing?

I think we are seeing, when you get a market like we are in right now, there is more and more companies that have access to a variety of financing alternatives. We are seeing more investments. Certainly, we have been consistent in the last 12 months talking about what's going on in terms of redemption provisions getting watered down, out of the box.

We have seen some structures that we think that the covenants are going to be challenging, and quite frankly we are finding ourselves turning down many, many more deals than we're looking at, even to a greater percentage than we have in time.

Certainly, as I talked about earlier, the ability to go up market a little bit in larger size companies we think have a greater ability to sustain a challenging economic period, but still with the right type of head room, if you would, in the working capital and debt facilities the allow them to thrive. We are doing so. But certainly, is there a constant degradation of covenants, there are. I think that we are seeing that trough out a little bit.

Certainly what you are seeing though, you are seeing a continued increase in valuation of these purchase prices multiples, and that is giving lenders a great degree of conviction about lending in higher multiples. We are just refusing to give in to our core view about companies that can really turn EBITDA into free cash flow, and we are maintaining that. We are not, as much as we had a very, very active topline on this last quarter, and certainly if you saw what happened on some of our prepayments, that was somewhat out of our control, but we can always focus on our topline.

Okay, good. That is good color. On portfolio quality, what we are seeing on Apollo is consistent with a lot of companies focused in the middle market. What, if you guys had to look out a year from now, what kind of guidance or color would you offer with respect to the marketplace, and any prospective inflection point with respect to corporate credit quality? Particularly in the middle market?

I would say, I think it is our theme here that we all, we collectively believe that we are in the very late stages of a credit cycle. It is well publicized in any magazine or newspaper you read these days. By no means we think this cycle is different, it will end. But certainly think that we have a view that we are not constructing our portfolio expecting a 2001 or 2002 meltdown overall in the environment. We are expecting, that certainly over the last 12 to 18 months, if you were in the airline space, or if you were a Tier 2 supplier to Detroit, there was rolling recessions or rolling challenges in certain businesses.

We have attempted to avoid those in our portfolio here, but we are not expecting a complete meltdown of the credit cycle, although if you look at how we have financed ourselves, as John mentioned earlier, we always make sure we have ample liquidity to take advantage of those because we believe with our historic investment acumen here at the firm, we will be able to benefit from those opportunities.

Okay, thanks. Great execution again, guys.

Thank you.

Thank you.

Thank you. Your next question is from Richard McCaffray with Stifel Nicolaus.

Hi, good morning. Thanks for taking my question. You provided some nice detail on Prysmian. I see about a 29 cost basis and 56 million fair value. And then you referenced with the IPO and your equity stake about $155 million total value there. Could you just walk me through a little bit what happened specifically in terms of that transaction, and some of the fair value there?

Sure, Rich. Back in March when we worked with the independent valuation firms and our Board to come up with the fair value, we had in January received securities and cash from that distribution back in January, so these are new securities, they represent a slightly different ownership interest and looking at the value, those came in at around EUR 15 million, or $20 million in January.

Earnings continued to do well for the company, they made an announcement during the quarter, that they had intended to do an initial public offering. It was still to be determined whether it would actually get done or not. On March 31, looking at both the increased earnings capacity during the quarter and post distribution in January, together with looking at the comparable companies in the market, where they were trading, what multiples they were trading at, and kind of discounting, increasing our multiple because we had kept that pretty close to the going in multiple a year and a half ago, and started to step that up a little bit, seeing other transactions in the marketplace, and getting some color from Goldman Sachs and the underwriters of where they think this would come out, and then haircutting that because you never know when a deal is done unless it is done.

All that considered, all that information given to one of our valuation firms they have put it in their black box, we looked at it as well and we came up with a value of $66 million, or appreciation of $46 million since the January event. So in two months we thought the trend was there, the markup was real, and at the balance sheet date, we thought we had an asset worth about $66 million. There was potentially some more upside if they were to get their IPO done, still to be determined.

In May, May 3, they did get the IPO done, and came out at EUR 15 per share, and ultimately our interest through the partnership, ultimately ended up being a 4% ownership in that public company, and roughly equated to about 114 million euro, or US$155 million. So that's kind of where we stood today. That was a significant move up from the balance sheet date. We wanted to make sure that was available to you. That impacts our book value per share pretty significantly.

Got it. That is very helpful. Thanks. You have covered most everything else. Just looking at the shift a little bit in terms of industries and where the portfolio is mixed and oil and gas are now kind of sitting on top. Obviously you had some opportunistic plays there. So I guess my question is just, are you seeing anything on the macro side in terms of industries that you like or dislike, or is it purely a bottom-up credit by credit analysis that is driving where your mix is now?

It is really bottom's up. We have some views, like I mentioned earlier on the credit cycle, and certain industries that we don't think, are great are not providing great returns to the mezzanine investor. I will just mention that some of our energy investments are more on the services side, which we think makes sense for us. Where we are on the capital structure, we have the one investment in Canada, but it is really a bottom's up investment philosophy. We don't have a view that the portfolio should have a certain amount of 15 different industries in it by any means. We really are bottom's up, name by name.

Got it, thank you.

Thank you. Your next question is from Jim Ballan with Bear, Stearns.

Thanks a lot. There have been a lot of great questions. Just a couple others. on the Innkeepers's side, Jim, you mentioned in your comments you thought it would complement your mezzanine asset portfolio well. If you could expound on that. And also probably for Rich, I assume that Innkeepers doesn't qualify as an eligible asset? If it doesn't, where are you relative to that 30% cap?

Let me just -- we talked a lot today about prepayments. When you looked at the Innkeepers transaction and the way we could structure it in the capital structure, and the actual securities we own and the cash-on-cash returns, certainly what interested us was the safety of the asset, the breadth of the asset in terms of the role where it really was in the REIT sector, but also the most important asset, one of the most important aspects was the duration.

We look at this as a very, very long duration asset. It is significant, especially when we see the prepayments that have occurred in our book in the last 6 to 12 months. That is something that fits very well between our mezzanine and our equity returns. We think it has a combination of both, but in an environment we are talking about, an extended credit cycle, we think it has the right type of risk/reward for this type of asset class, as we take a very simple thought about having an asset that we can match against our dividend, which is our liability. So duration had a great deal of interest to us in the investment. I will pass it over to Rich to talk about the asset specifically.

Sure. From our view, this is an investment in a, it is a public to private transaction in which we will have a controlling interest. We will control a U.S. private company at the transaction. So it's our view today that that's going to be a qualifying asset for the 70% basket.

Okay, great. Thanks a lot, gentleman.

Yes.

Thank you. (OPERATOR INSTRUCTIONS) Your next question is from Jim Ackor with RBC Capital Markets.

Thank you, good morning. Just a couple of questions. To make sure I understand what you were going through on the Prysmian, Rich. Based on your 4% ownership and the revised valuation of $155 million U.S., does that, that implies basically that your NAV is understated as it's written in the most recent quarterly results by roughly $1.00 a share; is that right?

That is correct.

Okay. With regard to the Innkeepers' transaction, just in terms of trying to understand how it impacts the income statement, it almost looks to me like whatever component is comprised of a preferred, will have some sort of dividend income contribution to the income statement, but is it fair to say that the investment over the long run is really one that will ultimately help benefit your NAV as the company generates cash and builds it's balance sheet?

Consistent with our investment mandate, we look for high current income and capital appreciation. So we would like to believe that this asset is going to satisfy both of those. Unlike some of the other equity assets, which will be largely capital gain, this will be a nice blend of both current cash and capital appreciation over the long-term. That is our expectation.

Let me just clarify the NAV point I mentioned earlier when I said you were correct. The March 31st NAV is not understated, that is correct as of March 31, but we want to bring that balance sheet up to date in May when this thing IPO'd, so because it is significant, we wanted to let you know currently in May that value is now $1.00 higher.

Understood. Thanks for the details. Appreciate it.

Thank you. Your next question is from Scott Valentin with Friedman, Billings, Ramsey.

Thanks for taking my question. You referenced the fact that you are sourcing deals globally now, and you mentioned several times the the competitive nature of the U.S. market. Are you finding deals outside the U.S. [inaudible-audio break]

Lost the end of your question, I didn't catch it. Are we finding transactions outside the U.S.? I believe the question was, are we finding transactions outside the U.S.? Really, in this portfolio, yes, we are.

When we talk about global, we really are talking about the ability to source transactions, not only primarily from the U.S., but with a 30% noneligible basket really in Europe. The investments that you have seen here that are in that basket are really European investments, so that is to some degree a focus for us, but we have not gone into other regions of the globe.

Okay, I apologize for that. I assume returns are more attractive outside the U.S., or are they about the same?

Generally, I think that it is a case-by-case basis. Certainly the environments that we are operating in in Europe, in terms of being an investor in, where we do not believe that we are giving, making a concession in terms of the creditor rights in those places. So overall if we can, what we are really trying to do is use our middle market relationships and our sponsor relationships as they expand, go with them to provide the mezzanine product with them, and we have found some success extending the reach over to Europe in that regard.

Okay. Thanks very much.

Thank you.

Thank you. Your next question is from [Jason Green] with Moore Capital.

Hi. Thanks for taking my question. Most of my questions have been answered. Just two quick things. With respect to the discussion on NAV and the Prysmian investment, that $1.00 per share number that we've talked about is at the IPO price, is that correct?

That is correct.

And the second one and if this is not something you have discussed before that is fine, I just wanted to know, is it your intention to keep the existing preferred stock of Innkeepers outstanding?

We have not disclosed the post capital structure on Innkeepers.

Got you. Thanks very much.

Thank you.

Thank you. Your next question is from Brad Ball with Citi.

Thanks. I understand you sold Alliance Mortgage during the quarter at a loss. How much was that loss, and does that eliminate your exposure to the U.S. mortgage industry, either directly or indirectly?

Brad, this is Jim. We have not historically gotten into individual evaluations on losses, but certainly we thought this was a company that in the environment that it was in, we thought the best route for us was to exit that investment. We did so. It was a loss and we completely got out of it by the end of the quarter, but that does eliminate any exposure we have, to some of the issues that are revolving around the mortgage space broadly speaking.

Okay, great. Thank you.

Thank you. Your next question is from Martin Ji with Banc of America Securities.

Thanks. Most of my questions have been answered. Just one more. I want to circle back to the Prysmian transaction. First of all, you said there was $107 million gains. How much of that was cash, how much of that was the U.S. securities?

Around $90 million, U.S. dollars was cash?

Okay. Also, I am not sure if that if the new securities has been IPO'd, floating on the market right now. Is that still considered a qualified asset? If not, do you have to sell that whole 4% holdings after the 180-day lock-up?

Right now, our ownership is to a Cayman partnership and it's a private investment. I think that there was some disclosure, Martin, in the press release that talked about once our lock-up is over, that partnership is likely to dissolve, and then we would be free to sell --

But after --

That buy/sell decision hasn't been made yet.

After that entity has been dissolved, then you directly own those shares, which is a public company, right?

Yes.

I see. Thanks.

Just so you know, Martin, that is a foreign investment, or a non-U.S. investment today, so we wouldn't be changing classifications because of its public nature.

I see. Okay, thanks.

Thank you. Your final question is from Dan Fisher with Wachovia Securities.

Hi, guys. With the amount of prepayments you have had, can you give any guidance as far as the likelihood of any follow-on offerings or capital raises?

I think that we are very comfortable with the liquidity we have today, and certainly as we really tried to to be consistent with our theme of not being a quarter to quarter investment, certainly we feel very comfortable with our liquidity at this point in time, and certainly don't have any plans at this point in time to be issuing any other securities.

Thank you. Great quarter, guys.

Thanks.

Thank you. This concludes today's Apollo Investment Corporation conference call. You may now disconnect.