Apollo Investment Corp (AINV) 2010 Q2 法說會逐字稿

Good morning, and welcome to Apollo Investment Corporation earnings conference call. At this time all participants have been placed on 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'm joined today by Patrick Dalton, Apollo Investment Corporation's President of Apollo Investment Corporation and Richard Peteka, Chief Financial Officer. Before we begin, we'll start off by disclosing some general conference call information.

Thanks, Jim. I'd like to remind everyone that today's call and web cast 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 call is available in our earnings press release. I'd 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 web cast 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 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 turn the call back to our Chief Executive Officer, Jim Zelter.

Thanks Rich, and good morning. The September 2009 quarter saw the US equity markets continue their strong rebound. The S&P index gained 16% while the Russel 2000 Financial Services Index advanced 18%. The broad credit markets also improved during the quarter with a CS leverage loan index returning 10% and the CS [hilo] index almost 14%. Clearly cost cutting and productivity gains have led to greater than expected profits and have positioned many companies for increased margins as they slowly move out of the recession.

We also believe that improvement in the trend of jobless claims is critical as consumer confidence may spur further increases in consumer spending. Recently various leading economic indicators have shown signs of improvement and together with a steepening yield curve helping to recharge financial sector profitability, there is optimism that the economy will continue to move forward and slowly grind out of the recession. Given the above, we believe that the quarter ending September 30, 2009, was one of continued stability, methodical actions and progress for Apollo Investment Corporation. During the quarter, we continue to focus a significant amount of time on existing investments together with further optimizing the portfolio where appropriate. At the same time, we became increasingly encouraged with the dialogue we are having with financial sponsors and Wall Street firms on the over all pipeline opportunities that were beginning to build.

As a reminder, privately negotiated transactions take time to develop and diligence and we advised our investors over the years to expect a highly variable investment pace quarter to quarter. We at Apollo Investment Corporation remain an investment business. One that is managed without being captive to quarterly budgets. Again, portfolio growth has been, and will continue to be thoughtful, selective and only after extensive due diligence that includes lessons learned from past and present credit cycles and recessions. This past August, we were opportunistic and successful in accessing the equity capital markets raising $173 million in net proceeds.

In addition we were pleased with the support of many new and existing investors, which ultimately led to AINV to offer a price that was higher than the closing market price on the day the transaction was announced. Ultimately, this new capital adds to our already significant dry powder giving us approximately $800 million of committed capital to invest to date. We believe this amount of available capital provides for substantial investment opportunities over time.

As the September quarter came to a close, equity investors continue to evidence their ability to differentiate stocks within broad industries. Accordingly, we saw our shares continue their strong performance with the shares rising over 60% for the quarter including dividends. Other highlights including a portfolio investments totaling $2.6 billion and a leverage and and a modest 0.54 to 1.0 debt to equity. Furthermore in considering the 20.7 million new shares mentioned earlier, earning results also remain strong with $0.34 per share of net investment income and total earnings per share of $0.71. We are pleased with these results. And given that our quarterly net investment income continues to exceed our quarterly dividend to shareholders, we have again added dollars to our harvest of indistributable taxable earnings which continues to provide significant visibility to our quarterly dividend shareholders.

Before I turn the call over to Rich, I'd like to say while we believe the economy will continue its slow and choppy recovery for the foreseeable future, we feel we are extremely well positioned with significant capital and low leverage. We are also appropriately engaged with all primary and secondary markets as we move ahead in this recovery. Lastly, let me say we take serious our leadership role within the industry and remain committed to our investment discipline and credibility as we continue to review all available market opportunities. At this time I'll turn the call over to Rich to take you through some financial highlights for the quarter. Rich?

Thank you, Jim. Let me start off with September 30 balance sheet highlights. Our portfolio had a fair valve of $2.6 billion as compared to $2.5 billion at June 30th. Our net assets totalled $1.68 billion at September 30, with a net asset value per share of $10.29. This compares to net assets totaling $1.44 billion at June 30 and the net asset value per share of $10.15. This $0.14 net increase in NAV asset value per share for the quarter was driven primarily by net unrealized appreciation on our investment portfolio as well as from earnings and in excess of distributions to shareholders.

In addition, we had debt of $902 million on our revolving credit facility at September 30. This equates to a modest debt to equity ratio of 0.54 to 1.0 measured at fair value. Accordingly, we continue to be in compliance with all our credit facility financial covenants. As indicated in our schedule of investments, we placed certain investments in two portfolio companies on nonaccrual status during the quarter. The investments were issued by quality home brands and DSI and they did not contribute any income for the quarter. With these additions, our portfolio of 71 companies now has 6 companies with investments on nonaccrual status and they represent less than 1% of the fair value of our investment portfolio at September 30, 2009. On a cost basis, they total 8.6% of our investment portfolio.

As for operating results, gross investment income for the quarter totaled $84.4 million this compares to $82.6 million for the quarter ended June 2009 and $103.5 million for the comparable September quarter a year earlier. Net operating expenses for the quarter totaled $33.0 million, this compares to $33.2 million for the June 30, 2009 quarter and $47.1 million for the comparable September 2008 quarter. Accordingly, net investment income totalled $51.4 million with $0.34 per share. This compares to $49.3 million or $0.35 per share for the June 2009 quarter and $56.5 million or $0.40 per share for the comparable September 2008 quarter.

As noted earlier, we continued our work on the existing portfolio and existed our trimmed or exposure to selected names as Patrick will describe later in the call. Proceeds from investments sold and prepayments totalled $30 million, which reversed previously recognized net unrealized depreciation and generated net realized losses of $3.1 million. This compares to net realized losses of $98.2 million for the June 2009 quarter and $30 million for the September 2008 quarter. The Company also recognized $60.9 million of net unrealized depreciation for the quarter ended September. This compares to recognizing net unrealized appreciation of $133.4 million for the June 2009 quarter and net unrealized depreciation of $264.5 million, excuse me, for the comparable September 2008 quarter.

In total, our quarterly operating results increased to net assets by $109.2 million or $0.71 per share, versus an increase of $84.5 million or $0.59 per share for the June 2009 quarter and a decrease of $238 million or $1.67 per share for the comparable September 2008 quarter. Now, let me turn the call over to our President and Chief Operating Officer, Patrick Dalton.

Thanks, Rich. We believe that the September quarter marked a fundamental, positive change for our business. The broad economic decline has slowed significantly and we have even witnessed improvements in economic activity and consumer confidence. And while various is economic indicators evidenced things are clearly less bad, we as a lender to mid-size businesses understand what that really means to corporate America. Therefore, we continue to expect the top line revenues of many companies to improve at a more measured pace and believe management teams will likely remain somewhat cautious with regard to building large inventories and hiring many new employees. Not until broad unemployment wanes and consumer confidence and spending increases more significantly will we expect to see meaningful advances in revenues.

That said, many leading middle market companies will seek strategic growth capital which will present us with many attractive investment opportunities. Yet, as always, we will remain disciplined and selective with our capital. Our brand name and relationships with middle market sponsor clients remains as strong as ever, which has afforded us a first look at many companies seeking capital. With less competition and the value of the Apollo platform well beyond just our capital, we expect there to be a significant number of highly attractive mezzanine investment opportunities ahead. Accordingly, we are seeing the quality improve in our growing pipeline of opportunities as we remain stead fast in our approach to being a patient yet opportunistic investor.

Now, getting into our September quarterly portfolio activity, we invested $39 million in the secondary market across six existing portfolio companies. We also received $30 million in proceeds from select asset sales and prepayments. At September 30th, our portfolio stood at $2.6 billion and was widely diversified by issuer and industry. Leverage stood at a conservative 0.5 to 1.0 debt to equity as compared to 0.74 to 1.0 equity at June 30, 2009.

At this time, I'd like to again go into more specifics about our portfolio activity for the quarter. Our remaining $14.6 million investment in the subordinated debt of [ProMac], a designer and manufacturer of packaging machinery was repaid by the Company at par during the quarter. This investment originally took place in 2004. We retain a common equity position in the company. We also continued our important portfolio optimization strategy and used the improvements and increased liquidity in the capital markets to selectively sell down certain positions. For example, we exited our remaining position in Net Rental, an equipment rental company. We also modestly trimmed certain position in general nutrition centers and Service Master.

During the quarter, we also made some add-on investment to portfolio companies. We purchased $5.1 million for senior notes and $7.1 million of senior subordinated notes of Catalina Marketing Corporation, a media and marketing services company and we also purchased a $15.1 million second lien bank debt block in American Safety Razor at an attractive level and subsequently sold a small piece of this block at a gain. We also made additional investments to current portfolio companies including IPC systems, BMY Convert Checks, Fox Co., and Sorenson Communications. As a reminder we are a proactive and assertive investor and monitor our investments very closely. Furthermore, you should expect us to be working with with all our portfolio companies to provide whatever assistance and support as appropriate to ensure an optimal outcome for our shareholders.

Ultimately, our investment portfolio at September 30th consists of 71 companies with a market value of $2.6 billion it was invested in 26% in senior secured loans, 57% in subordinated debt, 4% in preferred equity and 13% in common equity in warrants measured at fair value. The portfolio continues to be diversified by both issuer and industry. The rate of averaged yield in our overall debt portfolio at our original costs at September 30 was 11.5% versus 11.8% at June 30th. The weighted average yields in our subordinated debt portfolio and C&L portfolios were 13.2% and 7.9% respectively at September 30th versus 13.4% and 7.9% respectively at June 30th. Please note in our floating rate debt portfolio is well matched with our floating rate credit facility

With borrowing capacity at LIBOR plus 100, our net interest margin remains highly attractive for future investments. Furthermore, at September 30, the weighted average EBITDA of our portfolio companies continues to exceed $250 million and the weighted average cash interest codes remains over two times. The weighted average risk rating of our total portfolio is 2.7 measured at cost, but 2.1 measured at fair market value at September 30.

Before I open up the call to questions, I'd like to reiterate, as I said earlier in the call with regard to opportunities that lie ahead for those with capital. We continue to be encouraged by the quality of transactions we are seeing develop in our pipeline. Together with the reception we are getting from sponsor clients that care more than ever about having partners in their capital structures and given our objective of protecting your capital, we expect to remain disciplined in our due diligence and structuring as we work closely with our relationships in deploying our available capital. In closing, I'd like to thank you to our shareholders and dedicated team for the continued long-term support and confidence in Apollo Investment Corporation. And with that, operator, please open up the call for questions.

(Operator Instructions). Your first question comes from Sanjay Sakhrani of KBW.

Hi, good morning, thank you. I was wondering if you guys could talk about that pipeline of investment opportunities. Are you guys closer to any deals than other? Just trying to think of portfolio growth from here on near term.

Hey, Sanjay, it's Patrick. Certainly every day we get closer to new investment opportunities. When we raised our capital, it was mid to late August. When the markets come back in September, we have been having a lot of dialogue. It's not our practice to commit capital before we have sufficient capital and are comfortable to investing, so we've been very actively speaking with sponsors. There are a number of opportunities that we find interesting and each week they're developing more and more. The timing of the closing of those transactions depends on a lot of features. Number one, do we actually get there day to day on our due diligence and structuring and when does the company actually find itself for sale? And the closing that have sale is not dictated by us but rather by the sponsors who are buying those companies. We may commit our capital or be prepared to allocate committed capital in advance of an opportunity but will not show up into our financials until it actually closes. But it does take some time. We go back to the last cycles, there's definitely a period of rebounds followed by new M&A opportunities which hit the pipeline which take three to six months to go through the process. Our very diligent process of understanding and identifying which companies of appropriate to invest and they just take time. We're very confident and happy we have the capital. We're confident those opportunities continue to emerge. And that's why historically, you've seen a very variable investment pace quarter to quarter. But we are encouraged by what we're seeing develop not only the number but quality especially as we start to see the beginnings of an economic recovery, more companies will be able it sell themselves and more buyers will put capital forth to buy companies.

One more thing, as we talked about one of the challenges that we saw three to nine months ago was the what was going on in the loan market and if the loan market has certainly traded up and there is greater secondary prices that moved up, banks are much more willing to engage in lending on the senior part of the capital structure. And there's been some clarity on there. There's been some recent M&A announcements that led to extensions of bank deals. We see that not being an overwhelming issue right now. We are seeing product. As Patrick said, we're patient, but our pipeline is very buoyant right now and there will be some opportunities that will result from that after we go through the entire process.

Okay. Great. Well, maybe then you could just touch on that gap that you guys talked about between current income and the dividend. How should we think about it going forward? Is there that gap just there to give you flexibility to you don't have to stretch for the growth or I mean, could you just elaborate on that? Thanks.

Sure. We're one of the few BBC, Sanjay, that are paying out -- we're earning significantly more than our dividend right now, so you no know it allows us to be the patient investor that you heard from Jim and Patrick. So again it's really -- mezzanine private equity is not a quarterly business and our pipeline is building as they described and you know, we're not looking to put any amount of dollars to work on any given quarter and that really provides a strong cushion not only for investment pace but also for our shareholders as they look out for long-term dividend visibility.

That's really important because when you're force to do put your money more quickly we thought how badly that can end. Because we have the flexibility to be patient and selective, that's our long-term approach to investing.

All right. Just one final one. On those two nonaccruals that you guys had, specifically on DSI, one part that have investment is on accrual. Could you just go through kind of the die unanimous there?

Sure. And most capital structures there's senior bank debt and junior capital and equity. Think of cash as a water fall. There's enough cash to keep the senior debt covered maybe the second lien is not covered or maybe it is covered further down the chain. Each time would he look at an investment and look at the profits, do would he believe we're going to get collect liability of that interest on that loan in that coming quarter. So you may have higher up in the capital there's enough cash to satisfy those obligations but low on the capital structure they may not or we may not believe there is. And on those two situations that are currently in a restructuring process that is uncertain. We think there's great value to be captured over time. Time will tell, but each quarter we have to go through that analysis.

Okay. Great. Thanks a lot, guys.

Thanks, Sanjay.

Your next question comes from Faye Elliott-Gurney with Merrill Lynch.

I was just curious if given your capital, stronger capital positioning, if you would be interested in any M&A activity involving maybe selling your -- a weaker competitor?

Great, thanks, thanks for the question. I think this is a good time to communicate, our policy about making statements regarding any potential or pending M&A transactions by Apollo or any of our competitors. As a policy, we do not make specific comments about any pending or potential M&A or other deal, and are really our highest priority is to provide long-term value to our shareholders and that may come in a variety type of transactions or actions we take on. So you should expect that we Apollo have looked at, are currently looking at and will always look at every pending and potential opportunity that is available in the marketplace. And if and when we decide to take any action, it will be because it makes both long-term economic and strategic sense for our shareholders and it really, this is a highlight it really must not overly burden our company with unexcessive undue credit risk, any finances risk that may impair the long-term value. We have a game plan. We've executed it from day one. We won't comment publically but that's what people should expect as to how we will operate.

Great. Thanks.

Your next question comes from Vernon Plack from BB&T Capital Markets.

Patrick, looking at two of your larger investments, Grand Prix and Assurian and Grand Priz had a writedown during the quarter of $22 million and Assurian was written up, I believe. I was hoping to get a quick update on how both of those companies are doing.

Assurian's a publicly quoted and traded security, the company did release earnings this past week and again knocked the cover off the ball. EBITDA is double where it was when we invested. The company is performing extremely well. We are very encouraged. We'd like to invest in this company for the long haul.

On Grand Prix, obviously the environment, commercial real estate continues to be challenged. Fundamentally at the company, we are seeing month over month and quarter over quarter improvements. Things are less bad in each quarter they get even less bad. However, major team is working very diligently. We at Apollo are very experienced with capital structure management. We'll be assertive whether it makes sense to be assertive. We are in a very strong capital position That is very small position in our portfolio. It's been marked down roughly 85% on total cost, so it's deminimus on a value basis on our portfolio, however we are spending a lot time trying to recovery as much of that capital for potential gain in the future that is available to us and our management team is doing a terrific job every day with our 75 plus hotels working generating more revenue. REVPAR on the industry is getting better than it was, but it's still far away from where it was a couple years ago.

Okay. So things are getting better but you did write it down?

It was written down by third parties because of some of the assumptions they use in their models to write down the current environment for commercial real estate is still challenged. It's driven by supply and demand of capital as much as it is fundamental performance. We all see what's going on in the commercial real estate and CMBS markets broadly speaking. So that's fundamental inputs going into the cost of capital and volatility which generate value in a common equity through an options pricing model and on the fundamental return on the DCF.

I wanted to get some thoughts on your nonaccruals. There seems to be a lagging indicator. We're seeing that number and a few management teams actually expect to see that number going higher even though things in the macro picture is at least stabilizing, perhaps getting better. What are your thoughts there? Do you think nonaccrual is going to trend higher for a while?

Great question. We agree nonaccruals historically have been a lagging indicator. We are doing the best we can to avoid that. We are disappointed that there are nonaccruals. If you look on a mare market value basis, clearly we market -- our risk ratings this quarter we introduced what most of our competitors show a risk rating on competitive value. We've been running it on a cost basis because that's how we run the Company and how we feel about losing money. And so that's actually 2.1 times on a fair market value is demonstration that the fair value of our portfolio is accurate. We have measured, we believe, we may see more. There's always going to be bumps along the road. The duration of the cycle has been a couple years in now. As we talked about some of the modest and measured improvements on top line that are emerging, that's a good sign. A company has done a great job in dropping costs and productivity gains within companies. Margins should expand further as top lines come but we're not ready to call we're out of it. But we hope to see a sustainable recovery, all we can do is build a well capitalized business and a sustainable business model and do our best to limit the number of nonaccruals in the portfolio.

Okay, thanks.

Next question comes from Scott Valentin from FBR Capital Markets.

In the past I think you mentioned that targeting industries for new origination was more defensive type industries. Was curious if that's changed at all given that you sound more positive on the macro economy.

That's a great question, Scott, because I think what this will emerge in the pipeline when companies that would come for sale today, if they are cyclical companies, they're going to need to show a sustainable recovery post cycle. So probably a little early to see companies coming to the market that are IE cyclical. We are still seeing more companies that have shown strength in their ability to get through the last couple of years and didn't really suffer a significant downdraft but more resilient. And maybe a couple quarters from now when companies can demonstrate and prove and you've seen it in the high yield markets, some new originations in high yield for a company that may have been cyclical but it shows an emergence of recovery and more in the fundamental M&A environment with a company selling, buyer needs to see the business is truly coming out of the trough. So we still expect to see more defensive in the pipeline in aggregate than we do the cyclicals.

Okay. And just a follow-up question, you mentioned earlier I think some of the interest coverage ratios and EBITDA ratios. Can you compare maybe quarter over quarter from a year ago, are they stabilizing or deteriorating?

They're starting to stabilize more. We are well, higher than we were, you know, a couple years ago and the cycle started but we were please it had never really got below two and it started to show had some trending up. Net of course of the one or two situations that have been through a duration and have to go through a restructuring plan or from that liquidity that's providing these companies starts to get squeezed if you are repricing your debt capital structures, but it is an encouraging sign.

Okay. Thanks very much.

Your next question comes from Chris Harris from Wells Fargo.

Can you comment a little bit Sanjay's question from earlier about some of the new opportunities that you're seeing. Can you comment on some of the terms that you are seeing with these new opportunities and I'm specifically interested in getting an idea what yields look like?

I'm glad you asked the question because it goes to our fundamental approach to business and asset managing. We spend all of our time focusing on the portfolio and the capital structure and our cost of capital. The lower the cost of our capital, both from the debt and equity, when we raise equity, provides us with the flexibility to not have to stretch. If you're taking high yields as a means to generate earnings to pay dividends, that's risky because the risk adjusted returns of that are much, much higher. We'd rather see our yields stay the same if not even tighten because the quality of our investments will improve. We're constantly looking at our cost of capital today and in the future and as a means to be accretive in investment opportunities we see without using leverage to get return, or stretching for equity risk, we look at a risk adjusted basis. So as long as it's accretive the yields will bounce around a bit based on the underlying company itself, its structure and where we are in the capital structure, but we don't need to stretch for yields.

Then on with respect to your balance sheet here, you guys have clearly got your leverage down quite a bit on a sequential basis. Now that the economy and things are beginning to improve, how aggressive you are going to be with releveraging the balance sheet or do you feel comfortable with where you are now?

We think there's definitely opportunity since we delevered with the equity raised from 0.74 to 0.54. Our comfort level has been historically and it hasn't changed, is up to around 0.75 to 1.0. We've got, our lenders are very important to us. I think they understand that we run the business conservatively in a very, very difficult cycle. Once we approach 0.75 area, historically we've raised equity and deleveraged and then redeployed that capital over time. Right now we got a nice cushion from where we are today and where our comfort levels get stretched.

Thanks, Patrick.

Your next question comes from Don Fandetti from Citigroup.

It sounds like the deal flow was picking up in the industry, I'm curious if you're seeing increased competitors or capital coming in.

I think probably speaking there's less competition which is a good thing. A lot of the faster money that was in the market through either hedge funds or CLOs that were doing second liens type securities have left the marketplace. New BBCs were on offer and came to market, but not have gotten done. We welcome more people in the space. We think it's a great space to be in for disciplined competitors because there is plenty go around with the right folks in the business, so we're seeing less competition. We do see competition for the companies of our size. There's a lot of excess cash right now in the high yield markets with limited supply. That's great to see because that will show the secondary markets will trade up in good levels. We'll get more discovery on where pricing should be for the larger type credits and that may get absorbed. Not seeing a lot of new money coming into credit funds or the mezzanine funds or other BBCs at the moment. So we're excited about the competitive landscape, especially with the size of companies that we are attracted to.

Okay.

Your next question sums from John [Somer] of SunTrust.

Can you provide some color on the portfolios of your existing investments? Were they purchased in secondary market open purchases or were they direct investments into your portfolio company?

In the 3rd quarter those were secondary.

Okay. Perfect. Then just --

John, doesn't mean that we won't from time to time do that in support of the companies we like. These are new money investments will look at all the time but in that quarter, these were secondary opportunistic market purchases.

Along the same line, as when we saw some early evidence of this, but can you help gauge our -- as prices start continuing to come up, can you gauge your willingness or opportunity to churn your portfolio or turn the investments by virtue of the fact that risk premiums are starting to come out of the names in your portfolio and that could potentially free up capital. Could you talk about the pace at which you are starting to look at those opportunities to free up capital for other investments and will that be more a function of the unlocking of the private equity deals that you're looking at or can you talk to me about the valuation process that you go through?

Sure. I think that right now the nice benefit is we don't have to sell anything to invest several million dollars this a market. We've got a very strong balance sheet. We've got new capital. We've got fairly attractive debt capital to use. To get to several hundred million dollars. By and large, we like our portfolio. It pays our dividends, the earnings off our portfolio. We're well matched, so even about LIBOR comes down like it has, we'll be making the same spread we made when LIBOR was 4% and 5%, so we're making good earnings, accretive earnings with the current portfolio. If we get to a point in time where we have raised I'm sorry, we've invested you know, four or five hundred million dollars and haven't accessed other capital in the equity markets or haven't gotten significant prepayments from portfolio companies, we have that as another tool. We absolutely can cycle out names into new names and that that liquidity was very important to have in the portfolio back last period. That's why we've been buying more. If we see a credit issue coming, we may sell out because of the credit reasons, but we really don't need to access that recycled capital as means to grow our business.

I think you touched on it previously with your thoughts around high yield competition and the clear resurgence that we've seen in high yield bond deals that have been supportive of the initial wave of M&A. If I understood you correctly that is correct process was going to lead to a price discovery and then potentially abate because you're not going to see new money flow into the high yield fund. Am I understanding that correctly and sort of what is your thought then around the cycle? Because it seems like the first part is that the resurgence of high yield has been attracting private equity to be able to facilitate more transactions. Can you talk to me sort that have liquidity dynamics that you see in the market over the next 12 to 18 months?

There's only been a couple of situations where LBOs have come to market. We haven't seen a regular way, LBO come to the higher market where there's a bridge loan that's taken out with the high yield. People are opportunistic (inaudible). We're very engaged and involved there. Bank market ultimately going all banks so there wasn't a high yield deal of the benefit we have with our committed capital when a bank gives a bridge loan, they're going to price it with potential pricing caps in the mid to high teens level to the issuer or the borrower and sponsor doesn't have certainty cost to capital. But I'll let Jim talk it the flow from the high yield market.

That's right. I would just add as Patrick said, the $140 billion of high issuance yield this year a large, large number of that has been a proceeds that have been raised to pay down banks and what's called an amend and extend. With that, you've seen your average high yield deal around $500 million. What we see happening right now is a stability in the loan market where loan prices in the secondary market are higher closer to par, low to mid 90s and so now banks will have the confidence in a mid market or larger buyout to put forth terms that make sense on the senior loan aspect of the capital structure. And then what we're seeing is we somewhat compete against the high yield market for product. And right now with a high yield market being very strong, it's our view that there will be opportunities for depending on size and conditions and there will be sponsor-driven deals with those sponsors choose to issue paper to us based on our terms and conditions because of the benefits to what they want to do long-term with their company. We go back and forth with the high yield market. The fact that it's going higher is good for some of our secondary names, but we go through periods of investing and we're constantly harvesting. I think when we -- this all ties together why we don't want to have our differ denied higher than our NII because you don't really invest and harvest. You're always going to rush to invest because you need to harvest that money. We have the right stability right now, the market is coming our way, and we certainly feel very comfortable with our standing out there right now and the fact that new BBCs haven't gotten raise, these give us great confidence.

Thank you for your time.

Thank you.

Your next question comes John Arfstrom with RBC Capital Markets.

Thanks. Good morning, guys.

Good morning.

Rich, maybe this is a question for you, I'm not sure, can you talk a little bit about your approach that you're underutilizing it and it's not due for six months, maybe talk a little bit about what we can expect on that and what you expect on pricing if you want to take a stab at that.

Yes. Jon, it's you know, we do a maturity in April 2011, so we have about a year and a half left. We've been actively engaged in talking to our lenders for the last year. Oftentimes we've found that we're too far away from maturity to really get their complete focus especially with what's been going on with banks in this credit cycles. Our conversations are always cordial. We have great relations here at Apollo as a broad asset management platform and the relationships with (inaudible) are important. Those dialogues are always involved. We're always talking. We're always seeing what the market's doing. We've gone through a part of those discussions where they really came from where listen, it's way too early, let's not talk to a conversation that segued to let's not decomp to some of the stressed players. Some of the players may have some pending maturities or other players that really have small company collateral that may not be able to be monetized, our dialogue is always ongoing. Their positions are improving. They're more open for business and we like those trends. To the extent that we ever get to a point where we are comfortable with a transaction in the marketplace where them, either extending or modifying our current facility, we will probably do that. I would tell you that we've made it a habit over the last five and a half years to always raise capital when we didn't need it. And so whether that be on the equity side or the debt side, you shouldn't be surprised that we're always in negotiations well ahead of time. And whether a deal closes or not, again we don't control the timing but we'll always look at closing on a good opportunity.

Okay.

As far as pricing goes, again it's kind of tough out there. There are a lot of guys that have just been having trouble and we don't want to be conectd to those guys.

Then maybe if I could respectfully press you on the dividend an the. And the gap and we're analysts so we tends to project things out. Has that gap become wider and wider, how do you handle it? We saw a $0.02 raise this last quarter. Is this something that's natural and obvious and needs to progress upWard?

I think there would be a couple things we would ask you to think about, we did raise equity in the middle of the last quarter, it was 20.7 million shares, there was a lot of shares issued and match that with how we are a patient investor and next quarter the average share balance will increase by you know the other 45 days or so, so you know, our average shares are going to go up next quarter. We've had some nonaccruals this quarter. As and again as you heard the team, we are fighting for maximum recoveries. That's still not predictable. We're getting better visibility. We're working hard but right now we've raised our dividend. Our cost of capital is precious to us. Our weighted average shares are going up, so you should probably expect us to remain committed to a --

One quick one for you Patrick, maybe an obvious question, the pipeline you're talking about, I'm assuming that would be new deals and not really secondary market deals you're looking at?

Yes, the pipeline that we are talking about is new type (inaudible). We identified as we have over the last couple of years anything we think we might like to buy from a credit perspective, given our platform, our traders are seeing flow every day of opportunities of stuff that we own. They very focused on it. We keep a list of where we're buying securities or sell. We're in the an IR driven shop. If it's a credit issue we may look to sell. So our pipeline that we're talking about is more proprietary of new deals coming on the market.

Your next question comes from Greg Mason of Stifel Nicolaus.

I was wondering if you could talk about the credit funds -- is there -- are there more opportunities for that found be able to take advantage of market mismatch or market opportunities?

Hey, Greg, it's Patrick. Great question. I think that what we have seen, the reason why we did the ASE credit opportunities was not just that the loans we liked were attractive and well priced but we came with those loans were the banks were so in disrepair that they needed to sell the loans and willing to put leverage on those loans. So we effectively got a low cost credit facility on each of the three loans. You know those assets have been mostly traded up so they're more cleared off their balance sheet, so there's not much left of quality that we would want to buy. We got the financing because it was such a need to move all balance sheet that. Need isn't there anymore F someone is willing to provide wuss a nonrecourse LIBOR plus -- we would be interested. We don't see many of those opportunities anymore, Greg.

To follow up on John's question about the credit facility, how do you look at view potentially looking at long-term notes versus -- and does the issues with the banks change the way you look at a revolving credit facility versus potentially longer term notes?

Well, I think, Greg and this is Jim, I think we have a long-term view of what the capital structure should look like and I think it should have a combination of both. I think we've been fortunate in the past to have great support from our banks and we've all done well together. At the same time, we have a rating. We are the only real investment grade rated vehicle right now. And I think it's our view that there are long-term opportunities for us to have a capital structure that has a nicely sized revolver as well as potential long-term debt. You know, we've just gotten news today that S&P has affirmed our triple A rating.

And stable outlook?

Stable outlook, excuse me, our long-term capital structure will consist of a we will placed well supported revolver and in time with where rates are right now for us to potential issue long-term debt, that's a great way for us between our equity capital and our debt capital as Patrick said earlier to lock in a low cost capital over all for our company and then every incremental we do comes to the bottom line. So I would expect us to be prudent. We've been prudent with the amount of leverage and we're going to be prudent with floating and fixed rate term leverage in due course.

Great. And then one final question following up on Sanjay's question on the -- it looked like the cost behaviors increased $21 million versus last quarter. Can you talk to us what's going on with that cost behaviors.

That's just to capitalize accrued dividends, Greg.

Okay, thank you.

(Operator Instructions). Your next question comes from David Chiaverini with BMO Capital Markets.

Hi.

David, are you there?

Yes. Hello. Thank you for taking my call. Last quarter you made the comment that there was a you know, with a significant tightening of spreads that the technical rally implied that value valuations were fair, 3rd quarter we saw the spreads tighten. If I read your body language you're a little more bullish now than you were in the 2nd quarter and I would wonder how you reconcile the viewpoint.

Last quarter we saw a rally that was more reflective of the fundamentals. Perhaps now they have been overbought. Our bullishness, if there is one is about the pipeline of proprietary opportunities if there are some. The more u uphoric rise over the last couple of months may be a little ahead of itself is our view.

Okay. It's just a little bit -- I know you guys are value guys, so it's just a -- when I see that the valuations have moved up and you sound like you're a little more optimistic, it's kinds of an unusual stance.

We need to differentiate. We have a portfolio we thought we believe was undervalued in the marketplace and certainly the marketplace now because we're pricing is is embrace to do valuations and we have a thorough process and we feel very comfortable with our current opportunity set what Patrick is saying or what we are saying as a company is we now see a -- you needed to go through that process to have a primary market come back and now the primary market's poised to come back. When secondary opportunities are priced in the 50, 60, 70s and 80, you needed a -- you needed to high yield which it now has and now potential financings can take precedent because they can go to a bank, the bank will feel comfortable about writing a BNG deal and we certainly have -- what we're excited about we're not levered, we have capital and this is the time to invest as well at the same time harvesting things in our portfolio that has risen to a level that don't make sense anymore. So this is continuing a business of investing and harvesting. I keep going back to the same point. You can do that when you're not very levered and you're not over your skis in paying out more in a dividend than you earn every quarter. We have the right balance of leverage, the right balance with income versus our dividend, so that -- and the back drop is the market opportunity. So that's the overall theme what you should take away for all of the questions.

Okay. Thank you.

Thank you.

This concludes the Q&A portion of the con fence forensic. I would now like to turn the conference over to Jim Zelter for closing remarks.

We want to thank everybody for attending today. We take a lot of time to prepare for these. We get a great participation from our shareholders and analysts and we look forward to speaking to you next quarter. Thank you very much.

Thank you. This concludes your conference. You may now disconnect.