Apollo Investment Corp (AINV) 2009 Q3 法說會逐字稿

Good morning and welcome to Apollo Investment Corporation's third fiscal quarter 2009 earnings conference call. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Mr. James Zelter, Chief Executive Officer of Apollo Investment Corporation. Mr. Zelter, you may begin your conference.

Thank you and good morning. I am joined today by Patrick Dalton, Apollo Investment Corporation's President and Chief operating Officer; and Mr. Richard Peteka, our Chief Financial Officer. Rich, before we begin, would you start off by disclosing some general conference call information and include the comments about forward-looking statements?

Sure. Thanks Jim. I would like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited.

Audio replay information is available in our earnings 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 and webcast 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 statements and projections. We do not undertake to update our forward-looking statements or projections unless required by law.

To obtain copies of our latest SEC filings, please visit our website at the www.apolloic.com or call us at 212-515-3450. At this time I would like to turn the call back to our Chief Executive Officer, Jim Zelter.

Thank you Rich. We believe we're now more than 18 months into this historic cycle in credit. Major technical and fundamental pressures have caused substantial damage to the financial sector and the economy as a whole.

Banks, commercial finance companies, hedge funds and many other credit (inaudible) are undergoing extraordinary change as marked to market accounting in this unprecedented, illiquid market continues to challenge the capital ratios of many regulated financial institutions including BDC's which specifically and primarily invest in credit with intentions for holding to maturity. The [technical] credit cycle has now evolved into a fundamental cycle of credit and many businesses face increasingly difficult challenges.

Apollo Investment Corporation will not be immune to these challenges. That said, we believe that we had have prudent with both our portfolio construction and our use of leverage.

Approximately three years ago, we made a strategic decision about portfolio construction and transitioning our overall portfolio into larger companies with highly experienced management teams that we believe would better position us for a down cycle. Furthermore, we also believe that many of these investors will offer us increased portfolio liquidity as needed.

In addition, our historical conservative use of leverage has remained a conscious and purposeful business strategy, specifically keeping our leverage approximately half of our allowable regulatory limit of one to one debt to equity on average. And while our portfolio underwriting and performance has been relatively strong since our IPO date, we expect to see some credit deterioration as we progress further into 2009.

During the quarter ended December 31, 2008 we continued our work and focus on our existing portfolio including taking the opportunity to selectively exit certain portfolio investments. Harvesting existing investments for liquidity is one important management tool available to us in managing through this cycle.

Other management tools at our disposal include new investment pacing and managing our dividend policy, among others. Given the dramatic and substantial challenges suffered by many companies during this down cycle, we won't hesitate to use all available management tools in this difficult environment to protect Apollo Investment Corporation and its shareholders.

Our overall strategy in this market will be a proven one and our objective remains to protect and preserve long-term shareholder value. As a reminder, BDC's are governed by certain regulatory limitations on debt to equity levels of one to one. This limitation is also commonly used by creditors of the BDC's including Apollo Investment Corporation.

Historically and by design, we have managed our leverage levels well below the limitation. However, during the recent volatility of asset values, we must now more than ever manage our balance sheet with additional conservativism in light of what we expect may be more volatility with a goal of maintaining compliance at all times.

Accordingly and like so many other companies navigating through this storm, we believe reducing our quarterly dividend is appropriate and prudent and therefore in the best interest of our shareholders. We believe a reduction of 50% will help strengthen our balance sheet as it more closely approximates our average expected cash flows and also increases retained earnings to build additional cushion in our asset coverage ratio.

There were many considerations in our decision including the lack of visibility and how much further (inaudible) marked to market accouting will impact portfolio valuations and how much the current economy will impact our portfolio company investments. Furthermore, as valuation pressures continue, we may seek additional -- harvest additional portfolio investments which would further reduce earnings.

Therefore we established a dividend rate of $0.26 per share for the March quarter considering both qualitative and quantitative factors. Before I turn the call over to Rich, let me say that we understand the importance of the quarterly dividend to our shareholders and have made this decision after considerable thought.

We ultimately concluded that retaining excess earnings and cash flow within Apollo Investment Corporation further fortified our balance sheet during this unfavorable credit cycle and therefore we believe in the best long-term interest of our shareholders. Of course we will also continue evaluating all of our options as we progress further through this cycle and make such adjustment to our strategy to the extent we believe such adjustments are appropriate and in the best interest of AIC and our shareholders.

With that, I will pass along to Rich Peteka, our CFO.

Thank you Jim. Let me briefly go through some balance sheet highlights. We closed our quarter on December 31, 2008 with an investment portfolio of $2.4 billion(Sic-press release), down from $3.19 billion as of September 30. Our stockholders equity totaled $1.40 billion at December 31 with a net asset value per share of $9.87. This compares to stockholders equity of $1.95 billion at September 30 and a net asset value per share of $13.73.

The decrease in NAV was primarily driven by significant marked to market net unrealized depreciation from the general capital markets technical dislocation as well as fair value reductions on a certain number of our portfolio company investments who are facing challenges in this economy. Let me remind you that 100% of our investments are valued each quarter by independent third parties.

At December 31, 2008 Apollo Investment Corporation placed its investment in Latham International on nonaccrual status and effectively wrote off $1.2 million in interest for the three months ended December 31, 2008. There were no other nonaccrual -- no other loans on nonaccrual status at December 31 and no other interest passed through at that time.

Next I will discuss Apollo Investment Corporation's outstanding debt and leverage ratio. As a reminder, we maintain a $1.7 billion multi-currency revolving credit facility with a syndicate of banks.

Our borrowing terms are LIBOR plus 100. As of December 31, 2008 we had $1.16 billion outstanding and $538 million of unused capacity. And while we have reduced our outstanding balance on our revolver during the quarter, our debt to equity ratio has increased from 0.64 to 1 debt to equity to 0.83 to 1 debt to equity at December 31.

Lastly, for the quarter ended December 31, 2008 we are in compliance with all revolving credit facility financial covenants. As for operating results, gross investment income for the quarter totaled $97.5 million.

This compared to $92.9 million or a 5% increase from the comparable December quarter a year earlier. Net operating expenses for the quarter totaled $43.9 million. This compares to $49.7 million or a 12% decrease in operating expenses from the comparable quarter a year earlier.

The net decrease in quarterly expenses year-over-year was driven primarily by decreases in management incentive fees as well as lower interest expenses. Ultimately, net investment income was $52.8 million or $0.37 per share as compared to $41.5 million or $0.35 per share for the comparable quarter a year earlier.

As Jim noted, the Company exited select portfolio company investments during the quarter. Investment sales and prepayments totaled $144 million and net realized losses totaled $3.6 million. This compared to realizing gains of $80.5 million for the comparable December quarter a year earlier.

In addition and as noted earlier, the Company recognized significant marked to market net unrealized depreciation which totaled $524.8 million for the quarter ended December and this compared to recognizing net unrealized depreciation of $147.6 million to the comparable December quarter a year earlier.

In total, our quarterly operating results decreased net assets by $475.5 million or $3.34 per share versus a decrease of $25.6 million or $0.21 per share for the quarter ended December 31, 2007. I will finish up with some performance figures which include reinvested dividends.

Since our IP0 on April 8, 2004 and through December 31, 2008; Apollo Investment Corporation has generated cumulative and average annual total returns based on net asset value of 15.2% and 3% respectively. The cumulative and average annual total returns based on the market price of AINV shares for the same periods are 3.8% negative 0.8% negative, respectively. Now let me turn the call over to our President and Chief Operating Officer, Patrick Dalton.

Thanks Rich. During the quarter ended December 2008, we witnessed a marked weakening in the global economy. Early in the quarter, the digestion of the news of the [lien] and bankruptcy in September began to show its true impact.

The further downtrend was dramatic and swift. The market technicals broke and the credit markets froze even more so. We also witnessed a series of hedge fund unwinds which led to over $5 billion of forced sales of assets, further depressing market value across most asset classes, many without regard to underlying fundamental performance of these companies.

The credit market dislocation finally did lead into a more fundamental weakening in the economy. During the quarter, we witnessed hundreds of thousands of job losses. Job losses of this extent dramatically lowered consumer confidence and brought consumer spending to a near halt.

Clearly this has and will continue to put increased pressure on the topline revenues for many businesses especially in the consumer discretionary sector. We also expect some businesses traditionally considered more defensive to also see revenues soften.

It seems the longer the cycle drags on, the greater the loss of confidence and the longer it will take for a sustained recovery. As Jim noted earlier on the call, we have been in this downturn for more than 18 months now and we expect more challenges ahead.

During the quarter, we assessed this [fluid] situation and implemented our contingency plans to further fortify our balance sheet. For example, we reduced our new investment activity and sold a select number of liquid assets and used these proceeds to reduce our debt.

During the quarter we did experience a material declines in the performance at our control investment, Grand Prix Holdings. Grand Prix is a holding company of Innkeepers USA which is a real estate investment trust which owns 75 hotels and focuses on the extended stay and limited service hotel market.

Through the third quarter of 2008, Innkeepers was performing ahead of 2007, yet the weakening economy in the fourth quarter, we witnessed a significant decline across the hotel industry. Innkeepers was not immune to this decline.

We immediately developed our contingency plans and quickly put them into action. Today, we continue to work very closely with the Innkeepers management team to manage through this downturn.

Appropriately, given the industry decline in the fourth quarter and the challenging market ahead for 2009, we've taken a significant unrealized write-down in this investment from approximately $206 million at September 30 to approximately $75 million at December 31.

At this time, I would like to give you additional information on the portfolio activity for the quarter. Given the overall environment, we deliberately curtailed new investment activity during the quarter, investing only $22 million all totaled.

Also during the quarter, we had both sales and prepayments. These totaled $144 million and included selling our remaining position in Exco Resources Inc., a and natural gas focused exploration and production company; as well as exiting our position in Applied Systems, a leading provider of enterprise management software to property and casualty insurance distribution businesses; and Casema, the third largest cable television operator in the Netherlands.

We also sold our mezzanine debt position and energy futures holdings, TXU, a broad-based Texas electric utility. Lastly, we received a full prepayment on our positions in HydroChem Industrial Services. HydroChem was sold by Harvest Partners to Teachers' Private Capital, the private equity unit of the Ontario Teachers Pension Plan.

This transaction called away our investments in HydroChem's second lien bank debt as well as our HydroChem (inaudible) PIK notes at a premium to our original investment price. Ultimately our investment portfolio at December 31 consisted of 73 companies with a market value of $2.54 billion and was invested 24% in senior secured loans, 59% in subordinated debt, 4% in preferred equity and 13% in common equity and warrants measured at fair value.

The portfolio continues to be diversified by issuer and by industry. The weighted average yield on overall debt portfolio at our original cost at December 31, 2008 was 12.1%, down 40 basis points from the previous quarter. The weighted average yields at original cost on our subordinated debt and senior loan portfolios were 13.3% and 9%, respectively versus 13.4% and 10.2% respectively in the prior quarter.

Please note that the reduction in yield on our overall debt portfolio was largely offset by lower borrowing cost on our floating-rate debt and had little impact on our our recorded net investment income. Furthermore, at December 31, the weighted average EBITDA of our portfolio companies continues to exceed $250 million per company while the weighted average risk rating for our total portfolio did increase slightly but still remains at two. In addition, the weighted average cash interest coverage also remains over two times.

Before I open up the call to questions, I would like to say that we continue to work closely with all of our current portfolio companies and financial sponsors to provide any necessary support and assistance. Our focus remains on protecting your capital.

In closing, I would like to thank our dedicated team of professionals and all of our shareholders for their continued long-term support. With that, operator, please open up the call to questions.

(Operator Instructions) Sanjay Sakhrani, KBW.

Good morning, thank you. So while it seems you guys have a fair amount of cushion before you're breaching any covenants, could you maybe elaborate on the steps that would be taken if that happens? And by that, I mean are there any specific investments that you target and do you have an active dialogue with the banks now? Just wanted to get some color on that. Thanks.

Let me answer the second question and to Patrick I'll defer the first one. As far as conversations with the banks, I think we have received -- we typically provide quarterly information to the banks and monthly information to banks so there's always ongoing dialogue and people checking and in that hasn't changed. But I would say that given some of the difficulties some companies in the space might have encountered, there's probably been more prevalent inbound calls to us. But from a credit facility perspective, it's businesses as usual.

To answer the first part of that question, by design we have developed a portfolio that has a mix of liquid and some illiquid portfolio companies. The benefit of having liquid securities is liquidity there should you need it. Part of our contingency plans are to on a daily basis have a list of where our holdings are that are liquid, looking at what the prices we could sell those securities at and knowing that if we needed a certain amount of capital, we would have a priority order of selling some assets down to provide that cushion that we didn't in our revolver.

Okay, I guess on the credit quality side, you guys have that one nonaccrual. Are there any specific investments that you could maybe just talk about where you're keeping a closer eye than usual and that could be at risk?

Definitely with this economy, we're looking at every single company in our portfolio very, very actively. We do have a watch list that we have discussed in the past where it's a set of companies that we think are more stressed. What we have added to that watch list are any maturities or covenants.

We're fortunate that we don't have a lot of our portfolio companies that have debt maturities coming due. We do have covenants that even good companies are expected to meet over time that step down. And so we are in active dialogue with the portfolio companies and the sponsors and have been successful in a number of occasions of helping them to get some covenant relief should the business just continue to go sideways but yet they're generating cash flow. These are good businesses.

We have added those to the list. There are a couple of companies as you can imagine (inaudible) this economy that are more stressed. Certainly we saw that with Latham now having a situation on accruals. We're keeping our eye on a handful of other ones that are developing situations. We're very aggressively working and our watch list task force is all over them.

Okay and maybe one just final one, Patrick, on Innkeepers. Obviously, you guys have that big equity write-down. I'm approaching this more from the preferred side. Where are we with the accruing of that income there? You guys feel pretty comfortable that you could continue to accrue there?

Hi Sanjay. This is Rich. I'll answer that one. You know we have active dialogue with the -- Patrick and the investment team and the management team at Innkeepers. Clearly given that that is our control investment, we have really good insight and access to the information real-time. So that gives us the benefit of monitoring that close enough in order to make accounting judgments.

So again, there's -- right now whether it be for Marriott or Smith Travel or anybody else, there's not a lot of guidance out there in the marketplace. And typically January, February is a really tough time. Last we looked and through the measurement date December 31, the company has been meeting its debt service and other operating needs.

That is something we're monitoring very closely and we'll watch on a day-to-day, week-to-week basis as we progress further into '09 as it could be challenging period for any business in lodging. Again we're fortunate enough to have a birds eye view of that.

Faye Elliott, Banc of America.

Good morning, thanks for taking my call. Could we go through kind of your most restrictive covenants relative to your current income and NAV levels and discuss where the Company stands with respect to those covenants just to get an idea of your comfort level and your lenders' comfort level and if there is anything we need to be watching more closely at this standpoint?

Sure, Faye. This is Rich. I'll handle that one. Our credit facility is publicly filed and there's really only a few financial covenants in that facility. The most restrictive one is the 200% asset coverage. Jim described it earlier as far as BDC's also having that regulatory 200% asset coverage within many of the space's credit facilities and/or debt.

So that to us is something that we're looking at every day throughout each day and managing very carefully. Again we're fortunate enough to have a strategy that moved into (inaudible) liquid position. So to the extent necessary, we could always again harvest some of those positions and reduce our debt outstanding.

So again it's a strategy that has worked to date. We're hopeful that it will continue to deliver on what we expected. But again, this is a pretty dramatic cycle that we're going through and it's all hands on deck and we're working real hard to make sure that we manage to that 200% asset coverage and not [trip it].

Sure, and so if we look to that as the one that you consider the most restrictive, then we shouldn't be then by comparison as worried about any interest coverage or minimum NAV?

There are no interest coverage covenants. There is a minimum net worth coverage covenant but again we would [tip] the 200% before we would hit those.

Okay, okay. So just really keep an eye on that one and by extension, really abilities to continue to harvest other investments and just keep the ability to pay down the debt going to maintain appropriate levels.

That is correct.

Vernon Plack, BB&T Capital Markets.

My questions have already been answered. Thank you.

(Operator Instructions) Jeff [Rudner], UBS.

Hi.

Do you have a question?

Jon Arfstrom, RBC Capital.

Can you talk a bit about how you approached setting the actual dividend levels that you came up with, the $0.26 number?

Sure, from our perspective, we wanted to (inaudible) as I spoke to in my comments and certainly we look at right now the environment is one where -- as the last questioner put forth, we really have one covenant we focus on, is our one-to-one debt to equity? And we (inaudible) view of our portfolio and [cultural] line that the cash earnings with the portfolio on what we think is the environment we're in right now.

And taking all those into consideration, we believe this is the right level which really manages and really optimizes a variety of those factors and that's why we chose this level right now. Certainly we understand as I said the importance of the dividend and why people follow the stock and invest in the stock. And certainly we're trying to balance the short-term and long-term objectives of the dividend payout to what we are seeing as appropriate for long-term.

Is it likely to create a situation where perhaps at the end of the year you have some kind of a true-up dividend?

You know certainly we understand the regulatory requirement for distributing dividends in due course such that it is not a negative tax implication. We're very focused on that. We will do what's appropriate to make sure that we distribute the appropriate amount and maintain the proper liquidity and debt balances as appropriate.

Then one more on the dividend. Any thoughts on the ability to pay the dividend in stock rather than cash?

I will have Rich answer that.

At this time there is no intention on our part. This ability, I think it has been more prevalent in the news recently with a minor change. This has been something that REITs have been doing for a little while now and I think there has been some acknowledgment that regulated investment companies also have that option.

But really the only change from last month, last year, five years ago was essentially to be able to move it from 80% in stock to 90% in stock. 10% difference is a change, I guess made some news and doesn't really move the needle at the end of the day. I think the overall theory of if there is a company that needs an option, we have available tools to us. If there's a company that maybe don't have as many tools we have, it's a good option for them to consider in this environment.

To the extent that we ever need to use it, it will be considered along with all of our other options. But there are no intention at this time.

Jeff [Rudner], UBS.

Hi Jeff. This is Rich. I apologize. You accidentally -- the technology froze very briefly and you and someone from Stifel also appeared to gotten cut out of the queue. Stifel, if you're on, please call back in. As far as your call, Jeff, we're here for you. What do you have?

Okay, somewhat tough question regarding the net asset value. The press release obviously presents a snapshot of the net asset value as of December 31. Today is February 6.

Five weeks, six weeks have gone by the since that snapshot taken at the end of last year. Would you be able to make a guess as to how much the NAV has changed, roughly ballpark figure, between then and now?

I'll take it. This is Jim. That's something that we -- historically and currently that's not directly given. I will tell you that the last month or so, the credit markets have not experienced the volatility of the equity market.

And if you looked at what high yield has done and other benchmarks, you can see what with the indexes have done. But I think it would be inappropriate to give any quarter -- inter-quarter view on that. We go through a rigorous process at quarter end and that is the process that we've garnered historically and will maintain.

Troy Ward, Stifel Nicolaus.

Hi, Troy. This is Rich.

(multiple speakers) Hey guys, real quickly on -- I apologize if we missed this -- on the income statement, the dividends from control investments was roughly let's say half of what it was in the prior quarter. Can you tell us what the difference in that was?

Sure. That was AIC Credit Opportunities fund. This is a fund that has underlying structured investments and cash flows from those investments come up into AIC Credit Opportunities fund periodically, in certain cases will dividend up to the BDC those cash flows.

In other cases we will harvest those in the fund and it will be reflected in valuation. So it could go up and down in this market where we're dealing with those structured investments which have some liquidity and quoted activity.

We want to keep cash in the AIC Credit Opportunities fund to the extent there are margin calls or money coming back. So it's a daily variation at one point. Right now we elected not to move money from AIC Credit Opportunities fund which is earning income on the underlying investments but to keep that money in its value. So that is the difference.

Great. On the preferred -- on Innkeepers, the other control piece, we know that Innkeepers as the public record deal put out there release (technical difficulty) piece of public preferred that's out there, they're not going to pay a fourth-quarter dividend. Can you clarify how your preferred relates to the public preferred, whether it's (inaudible) and how that may impact your accrual of dividends from the preferred piece?

The preferred (inaudible) the public preferred has historically been paying a cash dividend. We at the board elected that it was a better use of cash to keep that cash on the balance sheet and we have the ability through our documents to suspend those to the dividend payments.

They certainly accrue and we would owe them back. We have to date not taken any cash dividends into AIC from Innkeepers. As Rich mentioned, it's a process that we go through diligently and we evaluate in each quarter what is appropriate.

All right and then moving on, on the marked to market with FAS 157-3 coming out in the fourth quarter, we have seen some other BDC's kind of utilize that quite honestly and use a DCF, not take market quotes. Can you talk to how that maybe impacted you? Because it looked like you probably stuck more with quotes this quarter.

I would say that 157-3, if you speak to all the big four, they'll tell you it's just a clarification to what has already been provided under FAS 157. We as well as many others have added that disclosure in our Form 10-Q's. And from our perspective, our methodology, our pricing methodology or valuation processes have not changed. We use independent third parties for many of our investments and it's not a percentage [but] all of those investments each quarter and where there are market quotes that are readily available and indicative of fair value, we use those.

So we haven't changed our processes given 157-3 quite frankly. I just think it provides more clarity around 157.

Going back quickly on where you're talking about the Innkeepers piece being some non-cash, can you just clarify for us how much in the quarter was PIK and OID? I know that gets lumpy at times so if it's not -- just for this quarter, maybe just kind of an average of PIK and OID in your portfolio each quarter.

I did get a chance to read your note. Thank you for sending it along this morning. Just a clarifying point which is the common equity which is written down dramatically, $130 million or so for the quarter, has not paid common dividends. Since the closing of this transaction, we have been working very hard and putting cash flow back into the Company, investing in this business through capital expenditure whether it be adding flat screen TVs to the entities that didn't have them or refreshing lobbies.

Again this was a long-term investment for us. We understand it is cyclical but you don't want to have places that nobody wants to stay when you come out of this cycle. So we continue to put money into those entities.

But at the same time -- so we're not -- the common equities never paid us dividends and we don't expect them to continue to pay us what they haven't paid us already. Again if you look at your note -- I just want to clarify that point. We have not received cash dividends on our common investment in Innkeepers.

Just to clarify, I was more speaking on the portfolio other than just Innkeepers, the PIK and OID on the portfolio.

Jim mentioned earlier that the reduction of our dividend more closely reflects the average cash flows. Cash flows in our portfolio are lumpy and quite frankly it's very difficult to measure because each of our investments, some of which are half PIK options, some of which have a small component of PIK or some have market discounts, some have OID; they are lumpy payments.

We may get full cash payment on a PIK security one quarter and we may get contractual partial cash and partial PIK the next. So I could take averages. I could say over the last two quarters or the last five quarters.

It's really a number that's really not representative on a quarterly view. But again I think given Jim's guidance which was we reduced our dividend to a level that more closely approximates the cash flow and it's also increase in our retained earnings at the same time, taxable earnings.

Great, thanks. Just one more and I will hop back in the queue. You talked a lot about access to liquidity and actively seeking liquidity to make sure you can protect yourself against further declines from a marked to market issue. With the GS (inaudible) I think in the past you have spoken that you have some sort of lockup or some sort of contractual agreement on your ability to sell that. Can you just clarify that for us?

We have an interest and a partnership that Goldman Sachs Capital Partners controls. We are a minority investor with them. That partnership owns the right to the securities that are public. So we own rights in a partnership that (technical difficulty) we clearly given the success of the transaction to date are partnering with Goldman Sachs and talking to them very frequently about when they choose the right time and we have dialogue with them. But when we agree the right time to gather that partnership and then have the liquid stock to choose what we do. But right now we're in the partnership with Goldman.

Faye Elliott, Banc of America.

Hi, thanks. You may -- I think we have actually touched on this but I wanted to see if I could get a sense of where you think sales and repayments might be based on the activity you saw in the fourth quarter and what you're seeing so far. It looked like the fourth quarter had a lot more activity than the prior quarter, the calendar quarter. And just I know you don't give guidance but can you kind of maybe hint at where things -- how things are looking for this quarter?

I'm going to answer your question on sales repayments generally. Last quarter we did have a company in our portfolio that was sold and we had secondly -- and we had (inaudible) PIK securities that were taken out at a premium. Not a ton of M&A activity that we all understand today.

So we're not relying right now on any sales or repayments from harvesting by the sponsors selling their companies. That may happen. Good companies do get sold even in these markets. When we choose to sell an investment of our liquid securities, it's for two reasons.

First reason is because we think there's a credit issue looming and we think the price at which we could sell is a prudent thing to do. But the other one that we have exercised last quarter is if we see more volatility in the asset values and we think that our cushion that we have today may shrink, we would like to have a cushion vis a vis our asset coverage.

We would then as I mentioned earlier, we prioritize all of the portfolio of liquid securities to generate a significant amount of capital should we need that. We really don't like to sell good companies at prices below par because we think we're going to get par or more if there is a callout earlier. But those are two reasons we do that that and that's an active discussion we have internally with our investment committee.

In terms above -- do you have that much control of the harvesting? That sounds like I think some of the other BDC's are having lower levels of harvesting just because they're not able to find buyers.

Do you have a greater ability to based on the composition of your portfolio, to sell out if you need to? In that case should we assume that that number of sales and repayment number could be higher than what we saw, say, in the second and third quarters of the last year?

By design in the portfolio we do have with -- larger companies attract more buyers and sellers. Broker-dealers are more active in the larger company space versus smaller companies that are not well understood or well followed, don't have a large following, don't have a lot of liquidity in the securities. Larger companies generally do.

(inaudible) construction includes many of those larger companies that have -- willing to buy and sell quickly should you need it through active broker-dealers and third parties looking to buy those assets. We (inaudible) have that ability.

We certainly don't like to sell good assets but we do think on a relative basis, our portfolio construction allows us as demonstrated. It's not only to sell but to sell at prices that we deem to be reasonable and not fire sell at really rock bottom prices which we don't like to do especially on good companies. So we think by design that has helped us.

[Jim Cavalero], private investor.

Good morning gentlemen. I had a few questions if you want to make note. What are you doing internally to help control your expenses?

Secondly, why is the next dividend being paid in April versus late March? And lastly, is there anything positive -- and I stress positive -- that you could tell us as the common shareholders looking forward on what needs to be or will be done to try to recapture some of the severe losses that we've all experienced?

Rich, why don't you answer the question on (multiple speakers)

I think day in and day out, we work very hard at controlling expenses, not adding to headcount at least in my area even though I think that it would probably be accurate to say that everybody at Apollo Investment Corporation is probably working harder than they ever have whether it be the ramp-up or whether it be through the last three years or even the past 18 months as Jim mentioned in this cycle.

But -- so we are always working very hard to control expenses. As far as losses, again Patrick referenced what he does with regard to share -- protecting capital and not just fire selling assets but building that portfolio construction.

Regarding the question on April versus March --

I think that's one of timing issues, Jim. The reality is that cash flows from private companies are lumpy and sometimes they'll -- we have for example this quarter, we will have a whole host of interest payment due on March 31. And so interest that can come due -- most of the time they will hit on March 31, a good portion of it. But a lot of it will likely come in when we come in on the first.

Because we have to fund our dividend to our transfer agent the morning of payroll date, we didn't want to do -- is have to borrow on our revolver for a day or two across year-end just to fund that dividend. We would rather wait for the cash flows to come in that are scheduled to come in in order to pay that dividend and so that just gave us an extra two-day cushion.

Let me answer the last question about what you can think about as positive. I would say that we are a credit investor and as we talk a lot in the quarter with our quarterly decrease in net assets from $435 million, there is a large difference between what I would consider real impairment versus marked to market unrealized depreciation.

We're very transparent in our portfolio, in our Q and (inaudible) every investor. I think that as an investor as I am as well and Patrick is as well, we look at our companies and there's many of them that we believe have the ability to withstand a challenging environment.

So it is our view that while there is a large number of net unrealized depreciation in the portfolio, there are certain assets that we believe will be able to withstand the test of time. It's going to be a credit cycle and you need to be able to withstand it. You need to be able to be in the game if you would by taking a step back.

That's why we're taking (inaudible) dividend. That's why we're very, very focused on the overall -- we have one credit facility. We're very focused on that and I think that we're doing all the prudent things to allow this Company and our shareholders to have the time for those high-quality assets to cycle through the marketplace. So as an investor or shareholder, that's what you should be positive about.

[Walter Keating], UBS.

Good morning, a quick two-part question for you. Number one, I have been following LSTA as a good way to monitor what's going on in this area as far as general level of prices. Is that the best way to monitor it or is there another method to (technical difficulty) insight into what's going on intra-quarter?

Let me answer. This is Jim. Certainly (technical difficulty) the LSTA index, it's (inaudible) loan index. There's a variety (inaudible) S&P loan index.

You know certainly there are a variety of into credit indexes whether it's loans or high yield that would certainly give you an insight at what's going on in the credit markets. Some of our investments are somewhat parallel to that and (inaudible) a variety of others don't correlate to that.

But certainly those indexes are general indications of what is going on in the credit markets as a whole in its entirety. We are a much more individual idiosyncratic investor. So they give you direction and insight but they're not -- the correlation is not perfect by any means.

That's fine. Second question is one other BDC adopted FASB rule 159 to mark to market their liabilities. My understanding is this is only done annually at the end of the fiscal year. Is this something you're considering? Your coverage ratios are still in good shape but that might help it a little bit. Is that something you're considering?

I'll answer that. FAS 159 was available to a limited number of BDC's over the last two quarters, really since the markets have dramatically dislocated. It's really based on your fiscal year end to whether you have that option available.

It's no longer an option for most of the BDC's in that space. But again, we will see -- this is something that again that the accountants work with. The SEC has put at least a temporary suspension on that adoption.

So today we don't have that adoption. If we did have that ability, we may or may not take advantage of that because there are trade-offs in all decisions that invoke (inaudible) rules. We don't have that option so it's not something that we need to consider.

Jay (inaudible), Charles Schwab.

Thank you. Good morning. Just a quick question. I know the banks obviously have pulled in their reigns severely on lending money. My thought was with many of the BDC's including yours that that would actually be good, meaning that there would be companies that get shut down by the banks that come to you.

The reason I'm bringing this up is I was just wondering could you give us some color in terms of what you're seeing out there in your pipeline? Is it -- has business stopped? Is it going down? Is it leveling off? That is my question.

That's a great question. First of all, this really is supposed to be the time when the BDC space comes into the marketplace and filling a void where the banks have retrenched. We're definitely seeing banks pull back lending. You can read about how tight they have become on lending capital to any company small, medium or large.

We would love to be in that marketplace right now. Given sort of the constraints and our leverage level and the mark to market volatility, we're sitting on several honored million dollars of capacity under our revolver that by design is keeping a cushion and also (inaudible) the asset coverage ratio, we don't really have the ability to do that.

We would love to be able to do that. Having said that, there is not a lot right now of new deal flow but we are and do see a tremendous amount of existing companies with existing credit facilities under enormous strain with their existing lenders. People have covenants, good companies have covenants that may step down even if the companies are performing in this credit cycle and they're not going to be able to meet those covenants.

What happens is the banks or current lenders may increase their prices significantly, may ask for fees, may not want to renew, may look at this as an opportunity to take capital back. Companies then lay off people, they shrink their business, it's not good for the economy.

BDC's, we would love to be able to fill that void right now. But given our mark to market rules and given our asset coverage, we are as an industry somewhat constrained to be able to do that.

That is the conclusion of today's question-and-answer session. I will now turn the call over to to Mr. Jim Zelter for any closing remarks.

I want to thank you all for listening in today and participating and asking great question for us. We appreciate your long-term support and look forward to speaking to you at the end of next quarter. Have a good day.

Thank you. This does conclude today's Apollo Investment Corporation's third fiscal quarter 2009 earnings conference call. Please disconnect your lines at this time and have a wonderful day.