Apollo Investment Corp (AINV) 2010 Q1 法說會逐字稿

Good morning and welcome to the Apollo Investment Corporation's first fiscal quarter 2010 earnings conference call. At this time, all participants have been placed on a listen-only mode.

This 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. Jim 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 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?

Certainly. 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. Information about the audio replay of this call 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 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. It has been quite a quarter. The breadth of the global and domestic stimulus programs have had a meaningful impact upon investor sentiment and in turn pushed the equity and credit markets higher for the quarter.

The S&P 500 and the Russell 2000 Financial Services Index returned more than 15 and 10% respectively for the quarter ended June 30, 2009 while shares of AINV increased by 80% assuming reinvested dividends. Clearly these results and others are indicative of equity investors' belief that the equity markets, especially many companies within the financial services sector, were broadly oversold prior to the June quarter.

Other positive elements during the quarter ended June 30 included continued inventory reduction as well as a rally in the broad capital markets evidenced by the sharp increase in debt and equity issuances and significant spread tightening. Such developments and others offer some healthy signs that investors believe that the economy is in the beginning of a recovery Or at least flattening towards a bottom.

While recent reports show that the economy has contracted for the fourth consecutive quarter, the contraction was slight, contributing to the continuation of the broad equity markets [rally]. While these indicators are only relatively positive, there are improvements from 12 months ago.

We believe that the economy will face its share of hurdles ahead. In addition, we think that many consumer led businesses will continue to face headwinds and fundamental challenges before they see material improvement in their top lines.

That said, we believe the significantly improved visibility of the macroeconomic challenges and being able to forecast business results a bit more clearly have brought more overall stability to the marketplace. Accordingly, the quarter ended June 30, 2009 for Apollo Investment Corporation was one of additional stability and improvement.

Apollo Investment Corporation closed the quarter with solid earnings results of $0.35 per share of net investment income. In addition, we ended the quarter with lower leverage and stronger liquidity as we continued our portfolio optimization strategy.

Ultimately our results yielded a relatively healthy total return based on net asset value of 6% including dividends. Furthermore, our results increased retained earnings which increased our harvest of undistributable taxable earnings.

We believe this growing amount of accumulated undistributed taxable earnings provides significant cushion to our quarterly dividends to shareholders. In addition, given our current earnings rate in excess of dividends to shareholders as well as the improved market conditions overall, we are pleased to announce an 8% increase in our quarterly dividend to shareholders from $0.26 to $0.28 per share.

As we look back from today over the last 24 months, we are pleased with the execution of our thoughtful business strategy and how we have guided Apollo Investment Corporation through this severe cycle to date. While we clearly have not been immune to the considerable challenges of the recession, so far we have managed to avoid many of the more significant issues that struck many others in the financial sector.

We have also been deliberate in strategically positioning the Company for long-term growth. Today, we remain a reputable, consistent, value-added, long-term capital partner enjoying unqualified credibility with our financial sponsor relationships. We believe these relationships and their building blocks will further differentiate as a leading capital provider.

Before I turn the call over to Rich to update you on our quarterly financial highlights, I would like to say that as we look out the rest of the year 2009 and peek into the first half of 2010, we believe investors that have access to significant amount of capital will be the ones best positioned to capture new vintage accretive opportunities in many of the best in class companies with highly attractive terms and superior capital structure. With that, I'll turn it over to Rich.

Thank you Jim. I will first go through some balance sheet highlights. We closed our quarter on June 30 with an investment portfolio of $2.52 billion, up from $2.45 billion at March 31. Our net assets totaled $1.44 billion at June 30 with a net asset value of $10.15 per share.

This compares to net assets of $1.40 billion at March 31 and a net asset value per share of $9.82. The $0.33 increase in NEV per share for the quarter was driven primarily by net unrealized appreciation on our investment portfolio as well as from earnings in excess of distributions to shareholders.

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 maturing in April 2011.

Barring terms through maturity remain at LIBOR plus 100 basis points. As of June 30, we had $1.07 billion outstanding and $628 million of unused capacity. In addition, our debt to equity ratio measured at fair value declined again for the second consecutive quarter closing at 0.74 to 1 debt to equity. Accordingly, for the quarter ended June and to date, we've continue to be in compliance with all of our credit facility financial covenants.

As for operating results, gross investment income for the quarter totaled $82.6 million. This compares to $85.3 million for the March 2009 quarter and $91 million for the comparable June quarter a year earlier.

Net operating expenses for the quarter June 30 totaled $33.2 million. This compares to $34.5 million for the March 31 quarter and $44.6 million for the comparable June quarter a year earlier.

Accordingly, net investment income totaled $49.3 million or $0.35 per share as Jim mentioned earlier as compared to $50.7 million or $0.36 per share for the March 2009 quarter and $46.3 million or $0.35 per share for the comparable quarter a year earlier. As part of our continuing portfolio optimization strategy, the Company exited select portfolio company investments during the quarter.

Proceeds from investments sold totaled $70 million which realized previously recognized unrealized depreciation. Total net realized losses were $98.2 million. For the June 2008 quarter a year earlier, realized losses totaled $29.8 million on $89 million of investment sales.

The Company also recognized $133.4 million of appreciation on its investment portfolio during the quarter. This compares to recognizing net unrealized appreciation of $55.3 million for the comparable June quarter a year earlier.

In total, our quarterly operating results increased net assets by $84.5 million for the quarter or $0.59 per share versus an increase of $71.8 million and $0.55 per share for the quarter ended June 30, 2008. Now let me turn the call back to our President and Chief Operating Officer, Patrick Dalton.

Thanks Rich. During the quarter ended June 30, 2009 we employed several of our portfolio optimization strategies that resulted in us investing $61 million in four existing portfolio companies and selling $70 million across nine existing portfolio companies. One such strategy was to utilize the rally in the credit markets to further improve the long-term credit quality and diversification of our overall portfolio.

In addition, we are proactive with one portfolio company and leading a debt exchange and with several others in providing advice and support in an effort to improve cash flows in underlying portfolio companies as they aggressively work through this cycle. In addition, we invested growth capital in an existing portfolio company as it seeks to take advantage of attractive acquisition opportunities to build accretive market share and enhance overall value. We believe our portfolio management activity improves the overall credit quality of the portfolio while also slightly deleveraging our balance sheet on a net basis from 0.76 to 1 debt to equity to 0.74 to 1.

And with the capital markets beginning to heal, we are now more optimistic albeit cautious. Back in February of 2008 in the heat of the global recession where the market was continuing to absorb the [class] of Lehman Brothers, I categorized our approach to the market as a patient yet opportunistic investor. Today as we sit here in August of 2009 and are witnessing what may now be the very early development of a recovery, we are now approaching the marketplace as an opportunistic yet and as always, patient investor.

There are many that believe we are now in the later innings of this recession. But we at Apollo will continue to manage our business as if there will be extra innings.

Yet as we witnessed during the last cycle recovery in 2002, we do expect that there will be a number of very attractive mezzanine investment opportunities on the horizon. We would expect similar to last cycle recovery for there to be a relatively roughly extended period of new vintage, well priced, modestly levered, larger middle-market company financing opportunities for those that have the (technical difficulty) and the scale to be relevant in the financing markets.

We also expect substantially less competition for some time. Given the stress and the risk aversion that remains within the banking sector, the increasing challenges that other commercial lenders are experiencing and the lessons every financial sponsor has learned about the importance of a well built and stable capital structure and the reliance on close relationships with all their lenders. All that said, we respect a fundamental recovery to develop a bit more slowly than the recent equity and credit market rallies seem to suggest during the past quarter. At this time, I would like to and [enter] some specific information on our portfolio activity for the quarter

In a defensive move, we sold our entire depositions and advanced or communications on a B2B media company and Neff Rentals, an equipment rental company. We also exited our first lean investment in Oriental Trading, a direct marketer, at a slight gain.

We very modestly trimmed our positions in that eSharing Corporation, a service provider to the wireless communication industry, Sorenson Communications, a video relay services provider; Car Holdings, a vehicle auction provider; and General Nutrition Centers, a nutritional supplement retailer. As was mentioned earlier in the call, these sales reduced overall leverage and were part of our strategy to continue optimizing the portfolio and further highlights our significant liquidity and well-balanced construction.

During the quarter, we also made some add-on investments to the current portfolio. We purchased an additional $51.5 million of senior notes in US Food Service, a food service distributor; while reducing our investment in Cengage, a publisher of education materials. The investment in US Food Service senior notes was purchased entirely with the proceeds from the Cengage sale, thus allowing us to avoid borrowing additional funds.

Also during the quarter as part of our proactive strategy of improving credit quality, we led a debt exchange out of our [super hold co.] position and Associated Materials, receiving cash for new securities. This transaction allowed us to improve our credit position within the capital structure of the Company with only a minimal impact on our net exchange valuation.

Ultimately, our investment portfolio at June 30 consisted of 72 companies with a market value of $2.52 billion. It was invested 26% in senior secured loans, 58% in subordinated debt, 3% 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 our overall debt portfolio at our original cost at June 30, 2009 was 11.8% versus 11.7% at March 31.

The weighted average yields on our subordinated debt and senior loan portfolios were 13.4 and 7.9% respectively at June 30, 2009 versus 13.2% and 8.2% respectively at March 31. Please note that our floating rate debt portfolio is well matched with our floating-rate credit facility. With borrowing capacity at LIBOR plus 100 basis points, our net interest margin remains highly attractive for future investments.

Furthermore at June 30, the weighted average EBITDA of our portfolio companies continues to exceed $250 million and the average cash interest coverage of the portfolio remains over two times. The weighted average risk rating for our total portfolio at our original cost also remained flat at approximately 2.5 rating at June 30, 2009.

Before we open up the call to questions, I would like to reiterate what Jim said earlier in the call with regards to the opportunities that lie ahead for those with capital. We are encouraged by the expansion and the quality that we are seeing in our new deal pipeline.

We stand poised and ready to selectively capitalize on such opportunities while and as always we will continue our steadfast focus on our current portfolio and protecting your capital. In closing, I would like to thank our highly dedicated professionals from our entire team across our platform for their unwavering and enthusiastic commitment and perseverance. I would also like to thank our faithful long-term shareholders for their continued long-term support and confidence in the Apollo Investment Corporation. With that, operator, please open up the call for questions.

(Operator Instructions) Sanjay Sakhrani, KBW.

Thank you. Good morning. So first question was on the $61 million that you guys invested. Just want to make sure I got that right. So most of it was made in existing portfolio companies and could you maybe just go over some of those?

Sure, effectively all that was in existing portfolio companies, we mentioned that we bought some more US Food Service using the proceeds of Cengage. Cengage is a great company and so is US Food Service.

We were able to capture of a 6 point discount between the exchange where we sold our Cengage and reinvested those proceeds at a lower price than US Food Service. That was the majority of it and the higher yield expected on that one. We believe both those companies are high quality.

In addition, we invested are some dollars alongside KRG Capital and Collect America, which is their portfolio company, as they seek to expand their business and acquire new portfolios. The rest of it was minor investments.

It wasn't like you were investing in a distressed situation. You were actually doing it where you thought there was value and there's upside from here.

That's correct.

Okay, I just wanted to make sure that was the case. And then, Patrick, I think you guys were going through a portfolio review or some kind of re-underwriting. Is that complete? And could you maybe just talk about if it is, what the implications are going forward and did that kind of tie into your thought process in raising the dividend?

Every quarter we have a very robust and [full] process where we re-underwrite the portfolio as we are doing portfolio review. So it's not new. It's something we have been doing all along.

We're feeling better about what we are seeing now because as Jim mentioned on the call, the ability to measure and foresee that things may not get so significantly worse is a positive for us. That allows us to have the confidence to tap into -- we've got $370 million of revolver capacity before we get to one-to-one leverage.

Now we're going to be prudent as we have proven before. We're going to be cautious. But we have more capital available.

And as we underwrite the portfolio, we continue to cleanse the portfolio by either writing down assets appropriately and, if we have the opportunity, to sell assets at prices that we think will be ultimately higher than our recovery. And we have been doing that every quarter.

Okay, great. And then finally, you guys seem to be indicating there is an opportunity here for those with capital. Is that something you are thinking about, about raising capital? I saw that you guys put out an N2A. Is that foreshadowing something? Maybe you could just talk about that a little. Thanks.

Sure, Sanjay. This is Jim. Consistently from day one, we have always wanted to understand the ability for us to raise capital and whether it was accretive to our business or not and we constantly do that.

Right now, we believe that there are a lot of interesting opportunities but it is a model we have had. It's consistent. And again, if [we are assuming] it's accretive to long-term interest to shareholders, we will do so if indeed appropriate.

And we always want to update our shelf. We've consistently done that the last couple of years. We've always made sure we had the same size we have now of capital for us. So it's a consistent move like many of our moves how we operate the portfolio.

Vernon Plack, BB&T Capital Markets.

Patrick, could you give us an update on Innkeepers, please?

Innkeepers, as we [talk] each call, the management team right down to the wholesale level employees are working very, very hard in what is an industry that has gone through the challenge starting in the fourth quarter of '08. We are somewhat encouraged that things are getting less worse. We are seeing -- we track it daily and weekly the trends in revenue per available room were sliding into the first quarter, are stabilizing.

We're not calling a trend on the upside but we've got a very, very aggressive management team working very, very hard to cut costs where appropriate; to improve revenue management where appropriate.

So the visibility is getting a little bit better. Obviously as we enter into the third and fourth -- the fourth quarter will be interesting to see versus last year when things were quite tough. But we're more encouraged today than we were last quarter.

Thanks and one other question. I'm interested in the new opportunities that you are looking at and I don't know if you can give us any color there as it relates to perhaps specific industries?

I think this reminds us -- Jim and I talk about this all the time, about what happened in the last cycle recovery 2002. What generally happens is we expect and we're seeing now develop is companies that have shown the ability to make it through and actually grow through are the companies that can come to market and get the highest enterprise value, will get a premium relative to others.

If you have capital to be available, it could be very accretive. The companies we're seeing are in defensive industries, i.e. defense, consulting, education, healthcare. Most of these industries have shown they can get through the cycle and maybe even will have a nice tailwind as the recovery affects all the companies.

But the earlier ones that will get done well, they're companies that the owner can sell and make a good return because the operations have improved. Multiples clearly going to take some time before they either stabilize or expand. So you really have to have true operational excellence in these companies. So that's kind of what we're seeing develop.

There will be a section of portfolio companies that do not fit that profile. We're going to look at -- opportunities [that we look at], we're not going to do. We're going to focus on (inaudible) the ones we deem to be appropriate because we are not assuming that we are out of this cycle. We are planning for it to be -- continued tough road ahead for at least the near term.

Faye Elliott, Bank of America.

Hi, good morning. I apologize if you have already covered this. I fell off the call. Did you go over the underlying EBITDA trends on the portfolio?

We didn't. What we said on the call we saw each quarter is [to get what] the weighted average EBITDA is for the portfolio. It's a number that is quite high.

So we kind of use a 250 and above. It's higher that. It has shown improvement this quarter, modest improvement.

But that's -- we're encouraged by that. But there are certainly lumps that will come. Some companies are not performing well. So there will be no surprise this year that we will have further lumps as we go but encouraging that -- we are seeing sort of a stable -- stability, we think.

And the areas where you are seeing maybe weaker performance, are those companies that are already on kind of a watch list?

Yes, definitely. We have a very aggressive approach to the watch list where any company that's rated three, four, five is automatically on the watch list irregardless of its performance. [Perhaps it's the industry attendant] puts on the watch list.

And they're not surprises because we've been tracking them. We look out at least 18 months on every company to see what we believe may be an issue looming and aggressively try to help and also mark those assets down based on fundamentals.

Okay, thanks. So basically with your credit quality, I guess would it be fair to say that at this point, you are not seeing any new migration from credits that are just starting to deteriorate?

Every company may have a micro issue. We're not seeing any more macroeconomic developments (multiple speakers) but things happen in companies.

There are going to be challenges that affect any company as it goes through even a recovery. So we can't say that doesn't affect anything. We think we have aggressively and appropriately done our best to see where that's going and marked them appropriately.

Okay, great. And I guess the question was answered on Innkeepers. I guess leverage levels in the portfolio is probably in line with the EBITDA trends improving, but again lumpy?

Lumpy is a good word. We really look at -- focus on the cash flow. Cash flow is what pays us back across the portfolio. Cash flow has been stable. Multiple cash flow is two times -- I'm sorry -- the multiple of cash interest EBITDA is two times and that's encouraging.

(Operator Instructions) Jasper Birch, Fox Pitt Kelton.

Just to start off, last quarter now we have seen a lot of increased high yield bond issuance and we have seen a lot of bond for loan takeouts. Considering your guys portfolio, could you give us any color? Are you guys seeing increased prepayments or do you expect to be refunded on some of your debt going forward?

That's a good question but certainly as you point out, in the first half of the year there was around $75 billion of high-yield issuance and 75 to 80% of that was really part of the amend and extend strategy that many of the large LBOs did in the first half. Since we don't own a lot of bank debt in our portfolio, we were not the recipient of that.

But it certainly is a positive sign that the high-yield market is healthy. There hasn't been a lot of new product for the loan market.

But general receptivity of capital and the tightening of spreads has opened up the market and that's -- it's precisely that point that we believe the vintage which will be late '09 and 2010 will compare to this vintage of '02-'03, so we get excited by that. A good high-yield market, an open loan market allows the new sponsor deals, while they may be large middle market, to get done and that's our sweet spot.

That's very helpful. And then in terms of looking longer term, I mean you guys obviously have a very attractive credit facility with some time left on it. But on the same token, you have an investment-grade ratings from S&P.

How are you guys looking at -- are you looking at going forward as the markets improve? Are you looking at maybe shifting into longer-term debt, maybe preferred equity? Is that something that's on the table?

Sure, I mean the theme we have always had is we want to have a flexible robust capital structure. We've got some great partners in our facility. They've been very supportive.

We've got a large group of banks, large and small; and they've been very, very supportive. The fact that we've been conservative in our philosophy has certainly helped.

You're right to say we do have an investment grade rating and we want to over time, when it's accretive to our investors, to term out to have more fixed rate as well as full floating-rate debt. So will do so as appropriate.

We are in constant dialogue with the capital markets desk on Wall Street. And at the time that it makes sense for us, we will do so. We don't have to get forced in a corner or anything. We have a lot of flexibility.

And then in terms of -- you mentioned that you expect the first sort of wave of new issuance to be the more defensive, higher enterprise multiple companies coming through; does that mean that we should expect your portfolio cycling more into that or that's where you're going to be investing more of your money going forward? And also in terms of subordination, what is your sort of target mix going forward? Is it pretty much where it is now?

I'll let Patrick talk about that last part. But basically we believe -- we are a relative value investor. We have been able to be opportunistic the last 12 or 18 months vis a vis where there hasn't been a new market, we been able to buy interesting names like a US Food Service.

But I think what Patrick will tell you and we'll talk about is we believe our asset mix right now of subordinated debt will maintain the same -- probably tick up a bit and will be able to buy better relative value with lower leverage stats for a higher coupon.

And one thing that we don't do is we don't chase yields. Now we would much rather move up in the credit quality.

Subordinated debt can be high quality. Just because it's subordinated doesn't mean it's low quality.

That certainly is a strategy that we have deployed in our asset liability strategies to invest in a security that pays the bills. We make our income from interest income and not have to have to rely on other income streams to pay the dividends and our interest expenses. So we will look to that to be an opportunity but we're going to look for the highest quality and best risk-adjusted returns in this new vintage.

Thank you guys. Nice job this quarter.

James Shanahan, Wells Fargo.

I have one quick question please. Remind me, what was the dividend or undistributed income carryover from last fiscal year and how does if at all the realized losses impact that potential distribution?

This is Rich Peteka. March 31 is our fiscal year end, to remind everybody. So we brought $0.60 a share into April 1 that was undistributed. That's in our footnote 13 in our 10-K for anyone that wants to look at that.

As far as offsetting, there's definitely a lot of confusion in the marketplace about this. But all I'll say is long-term capital losses do not offset net investment income. Net investment income is required to be paid out.

It sounds like that answers it. Thank you very much.

Scott Valentin, FBR Capital.

Good morning. Thanks for taking my question. Just in terms when you to bid on new deals or look at new deals, are you seeing increased levels of competition? And also in terms of covenants, are you comfortable where the covenants are? I assume they have tightened but do you think there will be further tightening or do you think they have reached as tight as they will get?

Great question. I think we are definitely seeing less competition as we mentioned in our script that those with capital and those with scale. We've been working very, very aggressively and you don't see it in the numbers. Over the last two years working with our sponsors, deepening developing, sharing information so we can strengthen our relationships with them.

We also are focused on the Wall Street firms as they've been going through their pain for the last couple of years so we can be the provider of capital choice for them when they're thinking about new deal opportunities, what structures may work, where would you like to see it, help them structure these deals, maybe structure them ourselves directly. So are encouraged by that and there has been less competition.

We expect there to be a lot less competition than there was when the hedge funds and other highly leveraged investment vehicles were around investing in subordinated debt. So definitely see -- in our industry as well, we think there will be less capital in the BDC space for the moment for those of us with scale and we are encouraged by that.

We don't just call people when they're looking to do a deal. We try to deepen those relationships as we act the same way. So we are encouraged by that.

And on the covenant packages, new deals are emerging. We certainly are working very hard on capturing or recapturing what documents look like prior to the highest peak of the credit cycle.

I think a lot of things that were in documents which we actually would walk away from far too many deals that we should have in the peak of the market because of documentation. We will only do deals we are comfortable with the documentation irrespective of cycle.

We do think that more deals that come to market will be reflective of covenant packages that are appropriately structured; give either remedies, the rights that make sense for all capital providers.

Troy Ward, Stifel Nicolaus.

Great, thank you. Rich, as a follow-up on Vernon's question on Innkeepers, can you describe to us -- in the dividend receivables line, we usually see an increase in that figure every quarter for the Innkeepers dividend. But we didn't see in increase there. Can you tell us if something has changed with the accounting there?

No, there's nothing that's changed with the accounting and the dividend receivable line for Innkeepers is the same as it is every quarter. Maybe what you are seeing or getting confused by is maybe other dividends received in other quarters on top of the Innkeepers dividends?

Well usually we see an increase in dividends receivable quarter over quarter and we didn't see that this quarter. Was there a reason why -- I mean for the last eight quarters --

Because we have received some dividends and then it's no longer receivable. We get the cash.

Okay, so did the Innkeepers dividend paid in cash this quarter?

We don't disclose security breakdowns and timings of dividends. I'm not sure where you're going with this.

I was just wondering if we're missing a change there. Okay, moving on (multiple speakers) we look at (multiple speakers)

(multiple speakers) things going on with the dividends.

Okay, QHB Holdings, is that investment on non-accrual?

No, it's not.

With a cost of $52 million and a fair value of zero, how do you continue to accrue income on a fair value of zero?

I'll start and maybe Patrick will jump in, Troy. It does look a little [odd for] your information that this is a company that is still current on all its debt service. It is not in covenant default and they have paid all their cash interest through June 30. That's 2009. So we can't put anything on non-accrual that's current on all its cash interest where the interest payments are on the measurement date.

Okay, so it's more just a conservative take on the fair value?

That's my opinion, yes. And, Patrick, why don't you (multiple speakers)

I would just a couple of things, Troy. The sponsor injected cash at the quarter end out of their own funds at par to pay down some of the debt and the cash was obviously -- helped on the balance sheet.

We are on the board so we have to be very careful on the confidentiality. The Company has hired advisers. We are working very, very closely with the sponsor to effect whatever help we can into that situation. It's in process.

And then on the opportunities to continue to buy investments like you did with US Food, what is the current opportunity to continue to do that? And have you seen a difference say in the last three to six months in the market for the pricing of higher-quality assets versus lower quality?

Sure Troy. I mean I'm sure you are familiar, but there's lots of indexes out there and if you look at where the indexes were whether they were the high-yield master index or the BB index, they have tightened several hundred basis points over the last six months. As we came into the beginning of the year, you had high-yield indexes close to 20%. And as of the end of the quarter, they were a little bit over 1000 and now they're probably 900 over.

So a tremendous repricing of the indexes. We are not an index fund but certainly we have benefited a great degree from that and now it's to the point because we are a relative value investor, it makes more sense for us if we can capture a great secondary opportunity like we did in US Food Service, we will. But what's very interesting is while the high-yield market is open right now and $75 billion has been issued, the average height-yield deal is about $500 million.

So there's going to be many transactions, 200 to $300 million transactions that the high-yield market cannot accommodate. This is a theme we talked about several years ago. This was the vintage of 2003, 2003.

And if you look last year whether it was [Convatec], Weather Channel, Booz Allen, those are high double-digit 13/14 coupons, great call schedule, levered at lower levels. So that is the opportunity where high-yield funds can't take advantage of it.

So it's a great transition period for us. We are a relative value investor. Spreads have compressed but now the opportunity for us to have a very unique marketplace to our own.

Okay, and then one final one. On transactions where you move out of an investment that has gone sideways where you have had to sell it, you've moved on because you got a good price but you actually exited a realized loss, how does that impact any income that has been accrued if - PIK income that has been accrued in the past? Is that reversed out? Or how does that work from an accounting standpoint?

Troy, this is Rich. As far as the calculation of gains and losses, we record those under our GAAP, our accounting policies are in our footnote 2. But to answer your question directly, you look at the proceeds received in versus your amortized cost, that's your gain or loss.

Any previously recognized or I should say accrued income if it is sold flat without interest would not be written off. And to the extent that that hits our income, you see that in our earnings-per-share or in our net investment income per share. So again, we beat consensus by $0.01 so there was clearly nothing material there.

(Operator Instructions) Sam Martini, ACI.

I just had two questions, one thematic. If you look at the LCDX versus the HY12 which I know aren't really representative of your book, but for the first time in a while, these indices -- you probably have marks that are meaningfully lower than the market on the sheets right now especially in the loan book.

You had a 7.9, probably about -- almost a 550 basis point disadvantage in the secured book and I'm assuming that has narrowed meaningfully since the quarter given a 10% rally in the last 30 days in the loan market. Can you talk about how you look at the sort of first and secondly an opportunity given the loans are all trading plus or minus kind of I would say 5 to 7 points south of par, giving you meaningfully lower yields versus the opportunity to shift back into high yield? It's a little bit more of a detailed continuation of the question someone asked earlier.

And then I had a question on the bulk purchase of US Food. It was a pretty big purchase of a bond that's a little bit illiquid. How much does it play into your strategy to take when you can buy $50 million of face as opposed to -- did you buy US Food because it was a $50 million face block for sale or was US Food something that you just had to chip away and buy twos and threes in the market and it takes three months to acquire? That's more of a liquidity question on how you view your incremental opportunity. Thanks.

Sam, this is Patrick. I'll answer the second question first. It's more direct.

US Food Service was -- the first thing we do is look at our portfolio for diversification, credit quality yields. We were able to capture with one bank -- we can't disclose who it is -- who was looking to offload from their balance sheet a piece of this. We went into them on the idea. We liked the credit.

We were looking to diversify a little bit out of Cengage -- we had owned almost $80 million at cost of Cengage -- to use some of those proceeds to find something relatively attractive. We were able to source that from the bank who had it in inventory and we got it at a very good price.

So those dollars that we had in one well-performing asset, we believe we can capture a higher yield, higher upside in another well-performing asset given that that institution had an issue. So we were -- because we're talking to Wall Street every day, we're in the dialogue, we're trying to be added value, those opportunities come up to us. So that was really a block trade in a transaction to exchange and capture some potential upside.

Are you still seeing meaningful amounts of those? I know that your AIC opportunities reflects the First Data and the TXU trades from last year and things that the banks are trying to get inventory off the sheets. Are you still getting a lot of calls on that or has that opportunity window narrowed meaningfully?

That window has narrowed meaningfully. I think that some of the banks have put stuff in the back book and they're not going to sell it for a long time. But I think we are -- there is stuff being shown to us but the names just don't pass mustard from day one.

But the amount and the overall size from where it was 24 months ago is a fraction. So that's really why the new issue market has heated up because cash is coming into funds and they're looking for a place to put home.

So we were able to really opportunistically do something on a credit we liked. We had been following it, we know it very well and it made sense for us. So as Patrick said, it was very strategic for us with this counterparty.

It looks like $0.60 on the dollar is a pretty good price.

And the one-to-one comment you also made about the liquidity, I think that we're pleased to say with this rally, there is not a broker-dealer out there that's not calling us every day because they can see what's in our portfolio, asking us if we're willing to sell including this name and others at or above where we paid for these assets. So, the strategy of going in when the market is dislocated at prices at discounts, we're now sometimes above and beyond that.

But we're not going to sell an asset for a temporary gain. Those are nice liquidity options for us if we have a primary market opportunity but a better L to value, we can get liquidity and we've demonstrated that time after time. Then on your first question about -- we don't really look at the LCDX and the other indices as a measurement of our business.

I understand. I'm just pointing out, you're still carrying your second lien portfolio at $0.80. I don't know if it's $0.82 today or $0.90 today but it's not $0.80 today 30 days later.

So I'm just curious because it was 7.9 I think at the quarter end. I am assuming that's 6 or lower now. Versus high yield, it's probably still 11 and change. How do you think about that? How do you think about shifting down into high yield?

We think about it every day. One thing that's important to us is to be matched. We're roughly matched with floating-rate assets and floating-rate liabilities.

So although there might be a short-term/medium-term opportunity to swap some of our floating-rate assets at LIBOR plus 750, they appear to only capture an 8 or 9% yield at par and into 13, 14%. We evaluate that everyday.

But we do like to be matched. But it really comes to do we have an interesting investment opportunity? If we do, we have many, many ways we can find liquidity; one of which is to sell down maybe an asset that is a lower spread to capture something at a higher spread.

I mean as we just talk about it as friends in the public forum, how are you thinking about it?

We're thinking about it every day. As Jim said, it really depends on the credit quality of the opportunity ahead of us. Do we think it's the right risk adjusted return? Do we have too much exposure or enough exposure or not enough?

But we also have a LIBOR plus 100 revolver with $370 million of capacity before we even get close to the one-to-one ratio. That's maybe a better use of that capital versus selling an asset that we've been [diligencing] and living with for two to three years.

Fair enough. Thanks guys.

This concludes the Q&A session of today's conference. I will now turn the conference back over to Mr. Jim Zelter.

Well thank you very much operator and certainly we appreciate all of the questions and the support from our shareholders on the call. We take this job very, very seriously and we look forward to working hard and talking to you next quarter. Thank you very much.