Apollo Investment Corp (AINV) 2010 Q4 法說會逐字稿

Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Apollo Investment Corporation fourth quarter and fiscal year end 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I would now like to turn the call over to Jim Zelter, Chief Executive Officer of Apollo Investment Corporation. Please go ahead.

Thank you and good morning. I'm 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?

Thanks, Jim. I'd 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'd also like to call your you 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'd like to turn the call back to our Chief Executive Officer, Jim Zelter.

Thanks, Rich. Let me begin by saying that our management team recognizes that having a conference call today to discuss our financial performance for our quarter and fiscal year that ended two months ago can be less relevant than we would like, especially given the current velocity of change that is happening in the capital markets environment. In that light, we will endeavor to balance our financial performance discussion with comments about the current state of the capital markets and also potential opportunities for Apollo Investment Corporation.

The quarter ended March 2010 was the second consecutive quarter of record high-yield issuance in a fairly robust capital markets environment. Issuances totaled $69 billion, as compared to $60 billion in the quarter that ended December 2009. As market demand continued to be fueled by cash in-flows from a variety of high-yield mutual funds, corporate loan funds, new financing and vehicles and improved economic conditions. Two-way trading and credit remained robust which further improved liquidity and tightened spreads. In the January to March quarter, and through our fiscal 2010 year-end, these technical improvements in the capital markets generated renewed interest in the subordinated debt market. As we stand here in late May, certainly some of the technicals in the equity and debt capital markets have swung in the other direction, and overall volatility has increased. And we expect volatility to continue through the end of 2010 and beyond.

Earlier this month, we were pleased to increase the Company's capital base by closing on our most recent equity capital markets issuance, raising $204 million of additional net investment capital at a significant and attractive premium to book value. The raise was opportunistic as it strategically complemented our recent extension of the Company's mulitcurrency revolving credit facility in the fourth calendar quarter. As a reminder, the facility's amendment was completed well ahead of its maturity and was strategically important. Taken together, we believe we have significantly strengthened our Company's balance sheet, positioning it well for growth as we head into this economic recovery. For example, if we were to simply add the $204 million of capital raised to our March 31, 2010, balance sheet, we would currently have approximately $700 million of available capital for new investments. We believe that this will be a differentiating factor in the BDC sector going forward. Having substantial available capital, at what we believe is one of the lowest costs of capital in the sector, has been one of our objectives since the IPO in 2004.

Now, let me briefly go over some portfolio and financial highlights. During the quarter, we continued with our portfolio optimization strategy of selling underperforming assets and were active in finalizing certain restructurings and effective exchanges where we received equity stakes in lieu of our debt securities. While debt exchanges generated realized losses, we are hopeful that these new equity securities will generate offsetting gains in the future. Ultimately, our net portfolio activity for the fourth fiscal quarter came to $120 million, with $287 million in new core investments and $167 million in prepayments and selected asset sales. We closed the fiscal year with a $2.85 billion portfolio measured at fair market value, representing 67 different portfolio companies diversified amongst 32 different industries.

Our leverage level at March 31, 2010, stood at 0.6 to 1 debt to equity and pro forma for the most recent equity raise is now only 0.43 to 1, leaving all current valuation levels significant room to grow our portfolio and corresponding earnings over time. That said, let me remind everyone that we do not have quarterly goals or budgets for gross or net investments and, therefore, cannot provide any guidance or assurance. Therefore, our shareholders should expect a highly variable investment pace and lumpiness in earnings quarter to quarter, especially when considered together with the timing of equity raising initiatives.

Before I turn the call over to Rich, I would also like to acknowledge a situation with our investment in Innkeepers USA Trust through Grand Prix Holdings. To be clear, this is an investment that, with the benefit of hindsight, we are clearly dissatisfied with this performance. We will not look to make this type of investment in the future. Now let me turn the call over to Rich to provide more information on our financial performance and highlights for the quarter. Rich?

Thanks, Jim. Let me start off with some March 31, 2010, balance sheet highlights. As Jim noted earlier, our total investment portfolio had a fair market value of $2.85 billion. This compares to $2.82 billion at December 31, 2009. Our net assets totaled $1.77 billion at March 31, with a net asset value per share of $10.06. This compares to net assets totaling $1.83 billion at December 31, 2009, and a net asset value per share of $10.40. The $0.34 net decrease in NAV per share for the quarter was driven primarily by net unrealized depreciation on our investment portfolio. The Company also had outstanding debt of $1.06 billion on its multi-currency revolving credit facility at March 31. This compares to $948 million outstanding at December 31, 2009. Accordingly, our debt to equity ratio as Jim mentioned earlier stood at 0.6 to 1 at March 31, with it decreasing to 0.43 to 1 after taking into account our post quarter end equity raise.

As indicated in our schedule of investments, we placed certain investments in three portfolio companies on non-accrual status during the quarter. The investments were issued by American Safety Raiser, European Directories and Grand Prix Holdings. We also exited from certain investments previously on non-accrual status either through the sale of the assets or through a formal restructuring or exchange of our investments. With these additions and subtractions, our portfolio of 67 companies now has four companies with investments on non-accrual status at March 31, 2010. They represent 0.7% of the fair market value of our investment portfolio at March 31. Versus 1.5% at December 31. On a cost basis, they represent 6.8% of our total investment portfolio at March 31, versus 8.6% at December 31, 2009.

As for operating results, gross investment income for the quarter totaled $87.7 million. Up from $85.6 million for the quarter ended December 31, 2009. And $85.3 million for the comparable March 2009 quarter. Net operating expenses for the quarter totaled $39.1 million. This compares to $34.2 million for the December 31, 2009 quarter, and $34.5 million for the comparable March 2009 quarter. The increase in expenses during the quarter was primarily related to higher interest expense from our amended and extended credit facility done in December, 2009. Ultimately, net investment income totaled $48.5 million, or $0.28 per average share. This compares to $50.2 million or $0.30 per average share for the December 2009 quarter, and $50.7 million or $0.36 per average share for the comparable March 2009 quarter.

Also during the quarter, the Company had sales and prepayments which reversed out previously recognized unrealized appreciation and depreciation and generated net realized losses totaling $219.7 million. This compares to net realized losses of $152 million for the December 2009 quarter, and $20.4 million for the March 2009 quarter. The Company did receive a $42 million US dollar equivalent distribution from GS Prysmian during the quarter. This distribution along with the $36 million US dollar equivalent distribution in the December 2009 quarter, reflects the realization of virtually our entire position in the Company. Since our original investment in September 2005, GS Prysmian had paid out over $310 million US dollar equivalents on a $25 million US dollar equivalent initial investment. And a 300% IRR. The Company also recognized net unrealized depreciation of $161.3 million for the quarter ended March 31. This includes the reversal of previously recognized unrealized depreciation through realized losses and compares to recognizing net unrealized depreciation of $181.4 million for the December 2009 quarter, and net unrealized depreciation of $0.6 million for the comparable March 2009 quarter.

In total, our quarterly operating results decreased net assets by $9.9 million, or $0.06 per average share for the quarter, versus an increase of $79.5 million or $0.48 per average share for the December 2009 quarter, and an increase of $29.8 million or $0.21 per average share for the comparable March 2009 quarter.

Now let me turn the call over to our President and Chief Operating Officer, Patrick Dalton. Patrick?

Thank you, Rich. The three months ended March 31, 2010, were extremely active for Apollo Investment Corporation. And, subsequent to the quarter end we raised additional equity capital to take advantage of a growing pipeline of opportunities. We believe that with the backdrop of a reported $450 billion to $500 billion of available private equity capital, a more stable economic environment in the US, and a receptive capital market, the beginning of a more active investment environment has emerged. In fact, during the quarter we began to witness an aggressive appetite for subordinated debt by retail investors, which began to drive credit spreads to a level that we believe was premature for this point in the economic recovery. However, and fortunately, we have seen a recent and appropriate pullback in the credit markets that is creating what we believe is a more rational marketplace and an even larger set of accretive investment opportunities for Apollo Investment Corporation and we believe that we are in an excellent position to take advantage of this.

With respect to portfolio activity during the March quarter, we made investments in three new portfolio companies. In addition, we continued our portfolio optimization strategy and also completed certain restructurings and affected debt for equity exchanges where we believe it was prudent to do so. As an obvious reminder, it certainly has been a challenging credit cycle and challenging fiscal year ended March 31. This cycle has been long and deep but we have endured. And now as we head into this recovery, we believe that we are well positioned with an improved portfolio of investments and significant capital available to deploy. And, while we are aware that certain economies around the world may continue to have their challenges, we are cautiously optimistic about the US. As we are beginning to see general improvements on average across our portfolio.

As for investment activity during the quarter ended March 31, 2010, we added three new positions to the portfolio. We also added to or reinvested in several of our existing portfolio companies. Please recall that when we reference that we have added to existing portfolio companies, this has generally been through opportunistic secondary market purchases, not necessarily additional direct investments.

Now let me take you through some specific information on portfolio changes for the quarter. The new companies added to our portfolio were Ozburn Hessey Logistics, Intelsat and NEW Customer Service. Ozburn Hessey is a contract logistics solutions provider that was acquired by Welsh, Carson and Stowe where we invested $35 million in a second lien bank debt. Intelsat is the largest provider of fixed satellite services worldwide where we invested $77 million in the senior notes. And NEW Customer Service is the nation's leading independent provider of extended service contracts where we invested $40 million in a term loan. Actually, NEW was a former portfolio Company of Apollo, between 2004 and 2007, and was one of our most successful investments. As for additional investments to the current portfolio, we purchased an additional $27 million in a second lien bank debt of BNY Convergex from a third party seller. BNY Convergex is an institutional agency only broker and financial technology provider.

We also purchased smaller secondary market add-on investments in several other existing portfolio companies including Garden Fresh, Altegrity, and Hub International among others. Furthermore, we participated in the recapitalization of Square Two Financial, formerly known as Collect America, investing $54 million in senior notes. Square Two is a leading purchaser of consumer credit card receivables owned by KRG Capital Partners. As part of the recapitalization, our existing mezzanine investment in the Company was paid off at a premium. We also participated in the recapitalization of Sorenson Communications investing $32 million in the senior notes. As part of the recapitalization, our existing second lien bank debt was repaid at par. We continue to retain equity stake in the Company.

We also entered into select asset sales during the quarter which included all or a portion of our investments in Travelex, Infor Global, Associated Materials, and Oriental Trading Company, among others. In addition, our European mezzanine investment in Brantag Holdings was called away at par as the Company completed its initial public offering. The restructurings that were finalized during the quarter including DSY Renal, Gray Wireline, Penta Media, and Generation Brands, which is formerly known as Quality Home Brands.

Lastly, and as Rich mentioned earlier, we are pleased to have received an additional $42 million US dollar equivalent distribution from GS Prysmian during the quarter, which virtually extinguishes our remaining indirect ownership in Prysmian Cables and has produced substantial gains of 12 times invested capital. Our investment portfolio at March 31, continues to remain diversified by issuer and industry consisting of 67 companies in 32 different industries. The total investment portfolio at fair market value is $2.85 billion, which was distributed 30% in senior secured loans, 59% in subordinated debt, 1% in preferred equity, and 10% in common equity and warrants. Again, measured at fair value. The weighted average yield on our overall debt portfolio at our original cost at March 31, 2010, was 11.8%, versus 11.6% at December 31. The weighted average yields on our subordinated debt and senior loan portfolios was 13.5% and 8.5% respectively at March 31, 2010. Versus 13.4% and 8.2% respectively at December 31, 2009.

Please note that Apollo Investment Corporation's floating rate asset portfolio remains closely matched with the Company's average floating rate credit exposure. Furthermore, at March 31, the weighted average EBITDA of our portfolio of companies continues to exceed $250 million, and the weighted average cash interest coverage of the portfolio remains over two-point -- over two times. The weighted average risk rating of our total portfolio improved to 2.3 from 2.6 measured at cost and 1.9 from 2.1 measured at fair market value at March 31, 2010.

Lastly, as I mentioned earlier in the call, Apollo Investment Corporation's leverage ratio is a nominal 0.43 to 1 debt to equity pro forma for our post quarter end equity raise leaving approximately $700 million available to invest. March 2009 to March 2010 was an important and productive year for Apollo Investment Corporation. We dedicated our time and resources over the last year and through the cycle to emerge in the best position possible. Accordingly, we believe that the worst may be behind us. As experienced credit investors, we know we must be relentless in our pursuit of finding the best risk adjusted returns and that there will inevitably be a a degree of losses incurred in the fixed income portfolio through a cycle. What we can say is that we believe we understand and appreciate cycles. We take our investment performance very seriously and spend an extraordinary amount of time focused on our existing portfolio in an effort to maximize returns for our shareholders. We also continue to spend significant time optimizing our balance sheet, our sponsor relationships and our investment team so that we can move forward into this recovery well positioned to take advantage of the significant opportunities ahead for Apollo Investment Corporation. In closing, we'd like to thank our dedicated and long-term shareholders for your continued support and confidence in Apollo Investment Corporation. With that, Operator, please open up the call to questions.

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

Couple of questions. First, obviously handful of non-accruals this quarter and some restructuring. And Patrick, you mentioned the worst may be behind you guys. I was wondering if you could just talk about the health of the portfolio as it stands today and how comfortable you feel with the companies on the watch list and maybe you could just address that as well. And then second, clearly you have a lot of dry powder to work with and I was wondering if you could talk about the kind of opportunities out there to deploy the capital, both in terms of size and pricing. Thank you.

Thank you, Sanjay. As far as the non-accruals, the portfolio's in far better shape than it's been in a while so we're very pleased to report that. Having said that, we cannot give any assurances that there won't be a surprise in the portfolio Company going forward but we do feel quite good about the portfolio. The watch list is much smaller than it once was. The general health of the portfolio is improving. And so we're happy to report that. But again, we can't give any assurances that there won't be a surprise that comes along but overall we're feeling better. As far as the question on dry powder and what the opportunities we see ahead for us, Jim did mention in the call the concept of volatility that we expect to remain in the marketplace.

The backdrop of a lot more opportunities and M&A activity against a credit market that's volatile really provides us with windows of opportunity. Where our large size investment capacity, our certainty of capital, our strong investor and sponsor relationships, affords us an opportunity we hope to get outsized returns and be scalable and productive when other more high velocity capital comes in and out of marketplaces or windows close and we want to remain open. Our capital raises have been timed to the near to medium term where we expect to deploy that capital in what is accretive to our business.

Your next question comes from -- I'm sorry, go ahead.

I'm sorry. Just Patrick, you mentioned the pipeline. I was wondering how should we think about the timing of any investment from that pipeline? Are any of them kind of imminent or closer than others?

There's always imminent opportunities for us. We never really report that we've got a pipeline or a number of commitments because a deal doesn't close until it actually happens and money gets wired. There are certainly changes in the marketplace. There are negotiations between the seller and the buyer. There are competitive dynamics in the marketplace. We may or may not like an investment at the end of the day at its price or structure or terms so we want to be cautious in reporting that, if there's anything imminent. We are very comfortable that the amount of opportunities hitting our pipeline in the near to medium term is much more robust than it's been in a long time and with that backdrop or that $450 billion to $500 billion of unspent private equity capital that needs to get spent in the next couple of years, we're quite confident that there will be windows of opportunity but the markets do change very quickly as Jim mentioned so we don't want to falsely lead folks but we wouldn't raise the capital if we didn't think that there were opportunities.

The only thing I would add is I think that when you see windows and pockets like this, there was a lot of damage done in the financial markets in the last 36 months and I think people, some providers of subordinated debt capital we compete against, we compete with and we partner with investment banks and I think there has been a desire to make commitments higher up the capital structure going forward than there may have been historically. So I think we're going to share in that industry desire to not making commitments down the lower part of the capital structure which fit into us. I would echo Patrick's comments. I think the amount of dialogue we have going on in due diligence and a variety of deals, it's probably been at the greatest level of activity we've had in some, some time. I just think we're cautious about giving a firm commitment about what actually hits this quarter.

Thank you.

Thank you.

Thanks a lot.

Thank you. Your next question comes from Faye Elliott of Banc of America-Merrill Lynch.

Hi. Thanks for taking my call. The net investment pace going forward, I wonder is it going to have to shrink or at least not grow, given your credit line appears to be the limiting factor in terms of how leveraged you can get. And to that end, are you finding that the banks are loosening up in terms of their willingness to lend? What do you think the possibilities are for you to eventually extend or increase the size of your facility or get another facility?

Great question, Faye. It's Patrick. I'll answer your first part. I would like Jim to sort of talk about where we are on the capital raising because it's something we spend a lot of time on. As far as our opportunity set, a couple of quick comments. We did see some harvests come through in the early part of the cycle when the credit markets are hot, things do harvest and recapitalize out of our portfolio. That has slowed down recently. That's good news for us. We like to keep the good credits in the portfolio. We have a tremendous amount of liquidity in our portfolio. By selling assets at or above where they're held in our portfolio which are held at pretty good prices these days, so we have enough to be open for business. We've got $700 million in our credit line. So that we remain open and we are going to be a relevant player in the market going forward. Our ability to raise capital has been demonstrated and extend capital has been demonstrated. On the debt capital let me turn it over to Jim to comment on it because we did spend a tremendous amount of time on that and are pretty optimistic.

Taking a step back, there's a variety of ways for us to raise capital. There's equity capital. There's our facility which we were proactive in extending and getting the right structure for us and that worked. But besides that certainly, we have investment grade ratings which we're very, very proud of and the ability for us to secure long-term debt, fixed rate financing is an option to us. We also have an option to other varieties of the institutional term loan B market. We have had other folks propose to us similar financing that we have towards the Apollo Investment AIC opportunities fund. So we have a number of irons in the fire. I think the banks and the market are receptive to us. They see where our cost of capital is and we believe that we will be able to augment not only through our revolver and through an accordion feature, but also through other debt structures, so that's certainly a goal we have of 2011 and we have an active dialogue and there's a lot -- I think there's a great deal of reception for what we've been ail to do thus far, that we will be one of the folks that will be able to access and expand that.

And we're going to be very disciplined around the price of that and cost of our capital.

That's fantastic. In terms of the liquidity you mentioned in the portfolio, can you comment on the level at which you're able to redeploy relative to what you're selling out?

It's our -- we don't sell out for just the sake of selling out or trying to capture an IRR. If we're selling an asset it's either for redeployment to a better risk adjusted return, and/or if we feel there's a credit issue, an impairment in the credit we think it's better off to sell today. But certainly what we're really focused on is trying to get interest income, that's sustainable interest income and par at maturity and convert that into earnings and convert that into distributions to our shareholders. So keeping good assets on our balance sheet and derisking them over time if they generated cash flow and paid down debt is a good thing for us to keep in the portfolio which is one of the reasons why we fight so hard for call protection and when credit markets improve a lot of folks would like to venture capital, be able to take it out into the future but we are really trying to get as much a return and grow our business when it makes sense by putting new assets on top of good assets, not just recycling our portfolio for fees or velocity of capital.

Okay. And then in terms of -- this is my final question -- the opportunities that you are seeing out there in the pipeline, where are the most attractive opportunities right now, given what's been going on in the market? It sounds like you might be seeing them closer toward the top of the capital structure. Is that still the case or are they throughout the capital structure?

When Jim's mentioning, we're moving off the capital structure, does not necessarily mean we're going to be at the very top of the capital structure. There's a concept we talk about internally here, our attachment point. Where's our first dollar as well as our last dollar. And we're pushing that first dollar up the capital structure. It may still be junior to some level of bank debt but fewer dollars of bank debt ahead of us puts in a more fulcrum position should the Company get into a situation and not stretching to the last dollar in the back end and let someone else do sort of the most junior if we don't think the risk adjusted returns are appropriate for that.

Because of our cost of our capital, we're disciplined in driving down, we're afforded the opportunity to not be the last dollar equity preferred convertible or wholesale. We can be at the operating Company with nice risk adjusted returns and have a good credit quality by having a higher first dollar attachment point as well as a lower -- a higher last dollar in our securities. That may come in the form of a second lien. It may be a term loan. It may be senior. It really comes to each Company on its own merits, we think the best place to play, as long as it's accretive to our business.

Okay. Terrific. Sounds great. Thank you very much.

Thank you, Faye.

Your next question comes from [Don Sendetti] of Citigroup.

Get your sense on where you think pricing has been in the second quarter here in your part of the business. Obviously, the large leverage loan market pricing has some back a bit. Can you talk a little bit about what you've seen?

Sure. Jim and I will go back and forth here because Jim has to make some comments on the general market tone. In our fiscal fourth quarter which is the first quarter, calendar quarter, the markets did get more and more improved throughout the quarter, spreads did tighten in the quarter, yields did drop a little bit. We were biased towards floating rate investments given where rates were. That's obviously been accretive for us since then with rates rising, LIBOR almost doubling in that time frame. So we were very cautious about doing low yielding, fixed rate investments so on balance we would accept more floating rate exposure if spreads or yields may have looked more modest but on a swap equivalent basis were very accretive to our business.

Since then we've seen the high-yield market pull back, the tune of 4 points or so in the last month of May which has now afforded us better opportunities. A bigger selection that are accretive. First we have to start with what's accretive to our business on an earnings basis and then where we get the best risk adjusted returns so we as I mentioned in my comments, we're happy that there's been more rationality, it looks like pullback because that creates more opportunity for us. Right now it becomes one of those windows in a secondary market that may not have been there. It's a window in a primary market when certainty of capital in an uncertain environment is very, very important to sponsors and they're willing to pay a premium perhaps for that which is appropriate for that. That commitment. So we are excited about what's happened, giving more opportunities for us.

I would just say, we do look -- I don't want to get too focused on the high-yield market because we have to be cognizant of where the high-yield market is. Spreads have widened out a good 150 basis points in the last several weeks. But if you look where subordinated debt commitments, i.e. bridge commitments are being underwritten by banks now and the caps that would be on those, I think it's fair to say they probably start at 12%, and they go up several hundred basis points from that. And in a variety of discussions, we provide an alternative for a sponsor to not choose that path, but get certainty of what we are offering.

So that's just a general parameter. So if you think about where the high-yield market is and then where acquisition financing certainty would occur, this is what when Patrick and I talk about the opportunity for a firm like ours, it's in these kind of markets where some of the large investment banks either are trying to ratchet up their caps on bridge facilities, because they want to make sure they're appropriately pricing risk because they're not the long-term holder. They're an intermediary. We're the long-term holder and can price ourselves competitively to that, which is a yield that really works for our model. So that's just -- that's how we see the world. I mean, it's very interesting. Our perspective is we need to know where bank debt is. We don't buy LIBOR plus 375 or 300 bank debt, typically, but we want to know where that's priced. That will lead to where subordinated debt gets priced and then the primary and secondary market have an interaction which allows us to find good primary commitments that we're in the process of doing due diligence on or secondary opportunities of either names we own or names we find.

So obviously you may not be able to comment on this, but if you think of your NAV on a core basis today versus the March 31st period, is it fair to say you might be down a little bit or more kind of flattish?

I think we've -- I hesitate to get into that because I think we've got names that we're very, very comfortable with. We have some that are more beta names but some have no real effect. So I think that with the transparency of our K and all the assets, move up and move down, but I don't want to pin down a number on that.

Okay. Fair enough. Thanks.

Your next question comes from Chris Harris of Wells Fargo Securities.

Thank you. Good morning. I guess I'll go ahead and start with the -- I guess the hardest question first. Clearly everyone had their share of losses through this cycle and I know you guys talked about this a little bit in your prepared remarks. But as you sit here today with significant capital to deploy, is there anything you are doing differently, whether it be a change to investment process or maybe investment selection that might help reduce the risk of the portfolio on a go-forward basis.

Chris, great question. We've been doing this a long time but each year and each day we're learning more. We've learned a lot from this cycle. It's been very long, very deep. No one's underwritten the step for this cycle, no registration. Where we play in the capital structure, we know and we know going forward inevitably there will be losses. What we have done, though, from a corporate perspective is built a strategy that protects against the inevitable losses by a simple strategy that doesn't change quarter to quarter, year to year. Surprises happen in companies. Sometimes they're not good surprises. You may not be able to make a -- be a good investor and know it's going to happen. They do happen. There are general economic weaknesses that come. We are -- need to fortify our investment process. We're continuously doing that. We've learned a lot of lessons. As Jim and I commented about where our first dollar is and the last dollar and the capital structure. Hotel fixed, converts, preferreds, whatnot, being more junior securities, making sure the risks are not asymmetric. We have really moved outside the Company three years ago, which that's really done a great job for our business by moving up a more resilient company in size, very disciplined in our structure. The talent in our team we've really gotten people experienced. We've had to optimize our team. These are just natural things you go through. We're not ever going to say we're going to be perfect. It's a humbling business. We have built a strategy that's fortified, this business and its balance sheet and gotten through one of the most dramatic cycles and 0.43 times leverage today with excess capital in a recovering environment is a pretty good thing. Having said that, there have been challenge to our portfolio and we're constantly learning and constantly looking to improve our process.

Okay. Great. That's helpful. And then on the restructurings, what kind of -- I guess I'm trying to figure out here what kind of upside you think resides in the equity stakes that you guys received from those restructurings. The current fair value appears to be close to $30 million. Just wondering if all goes well, do you think you could ultimately capture value that's significantly above that mark?

We sure hope so. I think the companies for which you see us make that conversion from debt to equity are companies we believe there's much better visibility and there's a reason for these companies to exist and there's a reason for these businesses to recover. They're good companies and good industries with talented management that have gone you through some issues and the timing of those restructurings, we don't always control the timing but having had the visibility on the business performance and the expectations going forward has led us to do an analysis, an in depth analysis on a one-off basis for each Company and -- with our investment community making a decision, that this is the best way to get a recovery and/or return relative to where we exist currently in the portfolio Company and we're optimistic on the companies for which we do that but we'll have to see how they perform. It's really a go-forward projection the best of our capabilities to do that but the visibility is better and we hope to be able to report in the future, recoveries and maybe high returns.

Okay. Great. Last question here. Jim, definitely appreciate your comments on potential funding sources. Is the CLO something that you guys would consider? I think I read somewhere that the larger Apollo entity was in the market with a CLO. I'm not sure if you're able to do that with your portfolio of assets. Maybe you could comment a little bit on that opportunity.

My only comment would be we always are trying to get prudent long-term capital for our capital structure. And right now we are focused on the institutional high grade market and the institutional term loan B market. We have had a variety of financing structures presented to us and if we thought that it really made sense long-term with the objectives of our Company we would pursue it. We are active in a lot of things here at Apollo but I guess my answer is I don't want to say no but I think there's other priorities we have on our focus list right now.

Okay. Great. Thank you.

Your next question comes from Scott Valentin of FBR Capital Markets.

Good morning. Thanks for taking my question. Just you mentioned Innkeepers earlier. Just in terms of as we move forward what are some of the scenarios maybe that you could provide for us where you see a resolution there?

Well, as you can imagine and everybody on the phone can imagine, there's not much I can really say but we have a deep restructuring background here at Apollo. This Company will have a process in the future and certainly we're going to do what we think is the best objectives of our shareholders, but beyond that I really can't comment.

Okay. Understood. And then in terms of the risk ratings, I know they improved quarter-over-quarter. How much of that improvement was due to the restructuring, moving down the capital structure, and kind of, as you said earlier, maybe right-sizing the capital structure of the investments.

The specific number I wouldn't be able to tell you. It probably takes a couple of points of that, basis points, excuse me of the improvement where now we have a security that we feel good about. The Company is less levered. It's improved. Also we have seen some fundamental improvements within individual portfolio companies in existing structures we have come off the watch list, improve the ratings or the equity that we own in some of these companies, providing us with a capital gain, so it's a combination of all those metrics.

Okay. Thanks very much.

Thank you.

Your next question comes from Jason Arnold of RBC Capital Markets.

Hi. Yes, good morning, guys. From the private equity sponsor side of the equation, what do you see as being the more favorable big picture factors and seeing some increased deal volume here and therefore origination activity for you. And then if you could perhaps comment on what you see as being a little more challenging in getting that committed capital deployed from the sponsor side. Thank you.

Great question. The sponsor community has had incentives for at least the last year or so with the capital that people report is $500 billion plus or minus to want to do transactions. I think that there's been significant caution up until about six months ago to nine months ago where no one had a real fundamental comfort with the stability in the economy. Now, are you catching or throwing a knife, can you believe these projections. The sellers of the companies are more confident because the know the company is above the projections. A buyer doesn't want to go into purchasing a Company at a current basis of performance that they expect to improve and find out there's something they cannot control, i.e. a double dip, a European economy, whatever, that affects the business performance.

We definitely have seen much more comfort from the sponsors to be able to underwrite some base case projections. willing to accept a 20% return for their equity on a more stable company that's generating good cash and been resilient for the cycle. And the sponsors who own these companies or the corporation that's are selling divisions looking to right-set their businesses as they go into recovery. So the confluence of those activities with the backdrop of that money being there and then wanting to spend it has made people more comfortable. An opening credit market on the bank line side because the excess cash in that system, given all the refinancings that have happened through the high yield market has allowed people to get comfort that there's bank debt and providers like us as well as I mentioned some of the retail investors who at least through the first quarter were interested in the space, subordinated debt may be pulling back right now. Gives people like us with long-term capital into this subordinated debt asset class competitive advantage.

Sponsors want to do business and they can feel comforted about the -- the economic backdrop is really the most important because nobody wants to make a mistake early in the life cycle of a Company and may be willing to accept a lower amount of leverage and maybe a lower return but not lose money. I think the last vintage will prove that a lot of sponsors have actually lost money and then it may be hard for them to read the next fund. I think it's a relative measurement between each sponsor and its peers, and those sponsors that have picked good companies, paid a good price for them, maybe a healthy price but didn't over lever them and spent their time focusing on operations versus capital structure I think will have proven to be the more resilient models. And there will be a lot product sponsors looking to emulate that. We're fortunate to have many of those companies in our portfolio.

Terrific. Thanks a lot for the color. Appreciate it.

Your next question comes from Greg Mason of Stifel Nicholas.

Good morning. First question on the spillover dividend. I believe last March the spillover dividend was $86 million. Can you give an update of what it is at the end of this fiscal year.

This is Rich. It's nearly identical, which based on our recent equity raise done straddled the April, May, month end, that equates to $0.455 or so.

Thank you. On the interest expense with the new credit facility, in your K you talked about you had almost 50 basis points of amortized commitment fees. With the new facility, could you give us an idea of what the either dollar amount or percentage amount of the commitment fees that will be amortized over the life of the loan would equate to?

It's probably about 30 basis points more than it was. Primarily due to the undrawn amount. That undrawn amount had gone from 20 basis points to 50 basis points on that extension, that amendment. So that's probably a ballpark number for you to model off of.

Okay. Great. And then to follow up on Sanjay's question, you mentioned the watch list is down. Could you give us any type of quantitative magnitude, either number of companies or dollar amounts that your watch list has declined?

Greg, it's a great question. I think the one caution, is it's a dynamic watch list. We are required and do have iterative changes to our rating system based on information we receive throughout the quarter. We share that and we report it on a quarterly basis. But we're managing it on a dynamic basis. I hate to give you a number and then find out next week the number has changed. I will say it's down significantly in our view on numbers and dollars than it was at its peak. But I'm cautious to give you a number because it is a dynamic number but we're feeling really good about the direction of the portfolio and the direction of the watch list.

One final question. Rich, could you remind me again what the $450 million of cash equivalents in the payable for investments liabilities and the balance sheet, what that is and the reason for that again?

Greg, we basically have a footnote nine in our financials that kind of goes through that but we've actually relocated some of that to the MD&A and kind of clarified for the readers some of the reasons why we do that but it's really to build in investment flexibility under the 40 active BDCs. Because if we were a corporation with term debt and we had all the assets that we're managing on balance sheet, we would have certain requirements with regard to qualifying and non-qualifying assets and essentially US private companies. So all we're doing is we're acting as if we are fully drawn so that the money managers running this business can actually allocate their capital appropriately.

Okay. Great. But that's not fully drawn for the whole quarter where you have a cash drag; correct?

That's correct.

Okay. Great. Thank you guys.

Thank you, Greg.

Your next question comes from Jasper Birch of Macquarie.

Hey, good morning, gentlemen. Just to start off with, looks like you guys purchased about $135 million of debt in the secondary market in existing companies. Just a little more color on that. Who are the sellers and do you think that's an opportunity that's going to be continuing into the future or do you think it's mostly played itself out?

Good question, again. We did not expect that we would see this many secondary opportunities in our fourth quarter, given that the credit markets were improving. What we ended up finding out is there are motivated sellers, maybe looking to redeploy their own capital into more opportunistic opportunities and a couple situations that we're aware of and we can't get into too much specifics where there was some folks looking to -- we were a big holder of a security. There wasn't another natural buyer of that security and that portfolio manager for the seller was looking to redeploy their capital into maybe something more opportunistic and so they go through maybe an agent, an investment bank, and the bank knows that we're the holder and we're able to get a nice win-win, where we acquire those securities on a good price for us, opportunistically, because we're the only holder or the largest holder of a security and some other opportunities, we know the space very well. Satellite is a space that we as a firm have been very experienced. Telsat's a terrific Company. That for a time had traded at a decent yield for us and because of our knowledge about the industry at Apollo Global we were able to be opportunistic and acquire a nice sized asset for us in a business and industry we know quite well so those things come up.

We don't expect -- we didn't expect, excuse me, prior to last couple of weeks, there would be more opportunity there but over the last couple of weeks there's obviously shown to be more opportunity there as the markets get more volatile and some folks become more forced sellers because of their own business models and whatnot. We're always going to be looking. We keep a very close eye daily on the secondary market for names we like and levels and if they're at accretive levels for us and we can acquire them and we can use our size and scale to do that, we'll be opportunistic.

Okay. So you're still seeing both for sellers and managers trying to rotate their portfolios?

Yes, I would say the last couple of weeks maybe there's some forced sellers because the markets got very volatile. Before that maybe they were just sellers who thought it was their -- they bought it at a cheap level and thought they could redeploy it somewhere else. So they weren't necessarily distressed or forced but they just thought optimize their own portfolios that selling an asset to acquire a different asset, we can't put ourselves in their shoes but there's not as many people needing to dump because they're over-levered structures it's just as they go through their own processes internally maybe they acquired it at a $0.50 price when the markets were really disruptive and now it's at $0.80. It's a par asset in our view. But they made good return. They're IRR driven and we're not. So those confluence of opportunities come across the board to us and we've got traders at the firm who are seeing those, we're in dialogue with our own capital markets division, with Wall Street firms every day, and we want to get that call and we're fortunate we do get those calls.

Excellent. Thank you for the color. Can you give us a little more commentary on sort of the competitive landscape? I know that with the high yield market coming back a lot you're probably competing with new issuance there but what about the other lenders in the market, how do you see -- how is the competitive landscape and how do you see it going forward?

For what we do and the size we do it, we are fortunate that there really is not a lot of competition, to be quite frank. Someone could write a $100 million buy and hold check into a new investment opportunity is rare. It does get -- competition does come from high-yield, a secondary market where there's a group of buyers that come in and out of the market on those windows. On what we do, there's really a handful of folks. There's plenty to go around for those handful of folks who can write a check that large and hold it and be certain and be able to provide a committment that's three months long before it gets funded. That's a competitive advantage for us. We try to use that to benefit our sponsor clients who also need that security, that certainty, to the seller who is selling a property. We're not seeing folks that much more competition coming to that market. I think there's a desire for more people to be in that market. You have to scale your business and be around for a while to be able to have that capital base for which you can be diverse in your portfolio and have diversity but they will be scalable and relevant.

Okay. On the same token, I guess what's you're outlook on the syndicated loan market and your competitive advantage I guess right now, is the lack of execution risk? That's really driving deals?

The syndicated loan market is one where we typically invest in the companies that are -- we invest in their subordinated debt and they're accessing the syndicated loan market in another fashion. All the questions that have been in the last three or four questions about what's happening, activity is percolating up in the acquisition finance space because banks are a little bit more willing to invest in senior debt, more properties are coming for sale, and private equity sponsors want to put money to work. So a bit of a healthy primary syndicated loan market helps us because the companies that we're providing subordinated debt, they have a chance to be able to have a supplier of senior debt. Last year that was not the case, so we spent a lot of our time buying existing secondary names that we knew very well, because those were trading at discounts and there wasn't a lot of deal pipeline. So we're happy to have an open syndicated loan market. We don't want that market to go too much on fire because then it will be at pricing and terms that do not afford us the right opportunity. I think what you're hearing us say now in a variety of these questions is, it's open, but because of the volatility we actually like that because that is making sure, and keeping the people who are price centers a bit more honest.

Okay. Thank you. I appreciate that. And then before I get off, I would just like to go a little bit more granular. Could you give a little commentary on RSA, what your outlook is there? I know they lost a pretty large contract. Do you think that your position's still viable and possibly par recoverable or does something have to change there?

Just to clarify for a lot of folks on the phone. RSA is American Safety Razor. We have commented on this company and we did take a specific write-down last quarter. The business has reported that publicly it has lost a big part of its business to Wal-Mart. We are in a confidentiality agreement. That business is going through a restructuring process. It's a fluid situation. I would love to give more commentary beyond that but I'm subject to confidentiality. But we believe our fair value representations and our financials reflect our outcomes and to the extent there's something more than that, that's great but we can't overpromise.

Okay. Understandable. And then just lastly, can you give any comment on the Innkeeper's lawsuit, either what the claim amount is there, just any color?

I mentioned before, I think our K adequately discloses what our commentary should be so I will leave it at that.

Well, once again, nice job this past quarter and year, guys, and thanks for taking my questions.

Thank you very much.

Your next question comes from John Stilmar of SunTrust.

Good afternoon, gentlemen. A quick question -- or a couple quick questions for you. The first, just because we've come through a period where we looked at banks who have had to differentiate between other-than-temporary impairments versus the mark-to-market fluctuations that the capital markets has on securities. As we look at BDC's they don't have those similar rules but if we were to sort of look through the lens at your portfolio, how would you think about the percentage of the mark that is permanently impaired versus the percentage of the mark that is sort of at the whim of the capital markets with regards to the changing cost of capital?

Good question, John. I think a relevant question for today given that folks in The Wall Street Journal article this morning, the banks actually seem to be requesting the same thing we've been forced to do which is to fair value their assets. I think it's going to create challenges for the banks but it will put us on a level playing field, quite frankly. Whether or not that's appropriate I think we're long-term holders. We think that perhaps amortized costs may be the right way to go. It is what it is and we are where we are.

As far as our portfolio goes, with the volatility of the markets and because we don't run leverage high, it's going to be what it's going to be. Third parties value our portfolio. It's a yield based approach, generally provided for under 157. And if yields this week are different than last week on the snapshot date which we report 40 or 60 days afterwards, the value to cut that day a certain number, there's going to be ongoing volatility. Every name in our portfolio is subject to mark-to-market. There are names that also have credit impairment that may go beyond that or outperformance that also may sort of move that basis for value. It's across the board, John but every one of our assets are required to fair value. We hope to see appreciation but there's going to be volatility.

I think ever since 157 was introduced and a yield based approach, I think now there's going to be more discussion around fair value from the bank's perspective than maybe their own requirements and the global economies having challenges, there's going to be continuous volatility. But we're not going to -- we don't want to leverage up high enough for which we think that puts us at an issue. We're trying very hard to make money without running leverage high so we can afford volatility as we have in this last cycle and that's a strategy that we put in place in advance of knowing there will be ongoing volatility, much of which may be technical and not fundamental. Some of which will be fundamental, offsetting and/or in addition to volatility but we think our strategy of not running leverage too high affords us enough cushion and hopefully that will be the case going forward.

But there's no context around other than other-than-temporary impairment which is sort of a view of credit versus capital markets?

We are not allowed to provide that amount of detail in our financials by the current regulations.

Moving on to the second question, Patrick, you've done an especially good job of reminding us of the value of call protection in the portfolio and preserving duration. The question, though, as we kind of look at your portfolio yield on debt investments was 11.8 this past quarter and just if I look at marginal new investment it seemed that the coupon was a little bit less than that, which is probably very much to be expected given the liquidity in the capital markets. But I'm also interested can you compare and contrast to what you're seeing today versus what you put your marginal investments in relative to that 11.8 number. Should we be expecting stability or some potential contraction. And that's the very obvious point to my question. A follow up with that, you made a comment about swap adjusted yields and maybe expressing a preference for floating rate securities. Should we sort of take that as a risk management tool such that maybe not show up on the top line? Can you kind of layer your comments in with that as well. Thank you.

Absolutely. One thing that doesn't get captured -- a few things that don't get captured in the yields we report. No more than what's the price we pay. Where's the discount. What's the call protection. Were there fees associated with that. What you see is a coupon yield on our portfolio.

What you also don't see is the commentary about what our choices are. If we're looking at an asset that's LIBOR plus 900 with a 2% LIBOR floor, then day one that may be 11% return but you then have the upside for LIBOR over time. LIBOR at the end of the quarter of 0.25 to 0.3, our view is it was not going to go down much further but it's likely going up and so you're going to have an actual enhancement but we're not looking to speculate on rates. I think on balance, we would take the approach that doing a deal that may have a yield representative of 11 or 11.5, it's probably better to have it as a floating rate yield versus a fixed rate of 11.5 because you don't get the benefit of rates going up and in fact, you probably have some mark-to-market volatility as rates rise, and fixed rate assets may depreciate just because we're using -- we're required to use a yield based approach. You don't see the call protection that we're putting into these companies to sort of get the duration such that LIBOR goes up.

But on a swap equivalent basis we could take a fully run asset and enter into a swap and get paid. 250 basis points or 300 basis points, whatever that might be for however the long duration, taking what has been maybe a 11% floating rate yield and making it 13 fixed. And maybe as an inflection point at some point though in the life cycle of that asset duration for which our fixed rate yields which -- our swap yield becomes cheaper than what our floating rate yield would be. So on balance, we're willing to take more floating rate exposure but we're not looking to change our strategy of matching our floating assets with our floating liabilities but in last quarter what we saw better relative value for us was to go into floating rate assets with a LIBOR floor, gets 135 basis points of return because of LIBOR floor built in there with the floating rate protection that if rates did rise quickly, if there's inflation, that we won't have loss money two or three years from now. We don't want to get on a treadmill that we're taking what appears to be attractive rates today and find ourselves losing money in the future and trying to match that as best we can. It's an iterative process. It's a balanced process. It comes down to what our choices are in the marketplace. We do get fees if we're structuring a transaction, we do buy at a discount and we do try to get call protection which does not go into that number that you see reported in our yield in our portfolio.

Have those dynamics changed much in the past four weeks?

Absolutely. The last couple weeks in particular, we've seen a lot of names that we've been in and around looking to be potentially an investor in that were being talked at levels that we were not going to make money on, we're not going to invest in, now being maybe retalked if you will at levels that start to be interesting for us. We don't know maybe two weeks from now maybe it with be the other way. If the primary market's there, the deal comes to market and it's priced where we can make a good risk adjusted return, we'll take advantage of it. If it doesn't get done, or it gets done cheaper, we'll look for the next investment. We have a healthy pipeline of proprietary transactions, some public primary deals and some secondary opportunities that we're looking at all the time.

Great. Thank you. And then my final question has to do with available leverage. If I'm correct, the available facility that was renewed for April 2011 is approximately $1.2 billion. And I'm just -- the math that I'm coming up with implies with $700 million of available capacity, your willingness to go above that or utilize your line that's available to you today over the next 12 months, can you talk about how you think about the end point of your credit facility versus the obvious available liquidity that you have today and how you think about that relative to the opportunities and whether you would utilize that or not?

Sure. This is Jim. Let me just try. I think I addressed it a little bit a few minutes ago, but we always had a plan with renewing our facility and extending it to augment that with other financing vehicles. And again, I think when we think about that, we want to give ourselves the optionality and the runway to access other types of financing for us. I mean, certainly, what you've just put forth, we always are very cognizant of making sure we have availability and flexibility without getting ourselves too committed. So we compare that to alternatives which we can see right now in the investment marketplace and the overall spread and how accretive an investment is, and then we balance all those out.

We're always trying to asset liability match our business, John. We have a tremendous amount of liquidity in our portfolio that could more than offset in our view our entire debt capital today, should we need to do that. Obviously it's not in our best interest for our shareholders to do that because these are good assets. We're working very diligently and very hard and we're going to be disciplined about the cost of that capital. We're confident there's capital there for us. We just want to make sure it's at the right price and the right duration and not take the first dollar or every dollar that's available in the first day of a recovery because we are -- because we need the capital. We raise capital when we don't need it and we want to be opportunistic.

John, I'll add to that as well -- this is Rich -- that we talked about negative carrier earlier, 50 basis points on an undrawn, for us to increase it ahead of our needs would just be more negative carry. So again, I think the power with this broad platform is relationships across sponsors, Wall Street, commercial investment banks, et cetera. It's not a matter of when it will happen. The question is whether when is this quarter, next quarter, the quarter thereafter, et cetera and that's the balance in a multi-dimensional business. We'll access that capital when it's appropriate at the right price.

Appreciate your efficiency and flexibility there. Thank you.

Thanks, John.

Thank you. We do have time for one more question. Our last question will come from Aaron Saganavich of Ladenburg.

I'll try to be quick since this is kind of long. Just in general, what are you seeing in terms of -- we talked about pricing getting a little bit more tighter, I guess, over the first quarter. What about leverage levels and bank covenants, return of PIC toggles and that kind of stuff.

I think we've all witnessed some of those transactions. Hotel PIC dividends and PIC toggles introduced. I think that they're, we hope fleeting. We think that they're opportunistic when the capital is there and for us it's really, is a good Company, is it the right situation, is it the right first dollar of leverage, last dollar. We didn't participate in a lot of those opportunities and we're not going to. I think what we're seeing the last couple weeks is a real sincere caution and a reminder to investment banks and others who are trying to win business for transaction fees, that you've got to be really careful. And we hope that -- a lot of those deals too were best efforts so the bank wasn't taking necessarily the risk in trying to get it done and maybe that week that window was available because high-yield inflows were $1 billion in the following weeks and folks had to deploy capital because they needed to be fully invested and we've seen outflows the last couple of weeks and I think you'll see very few people willing to underwrite that type of an opportunity. But sure, people will try. We think that the success might be a little harder today than it was a month ago.

Okay. That's great. This might be for Rich. In the K there's something about tax loss carry-forwards of about $260 million, roughly. Can these be used I guess to offset potential future capital gains where you can just reinvest that capital back into the portfolio and provide a little bit of I guess extra leverage rather than pay it out to shareholders?

Perfect answer, Aaron. Exactly. We have eight years for that.

Okay. All right. Thanks, guys.

Thank you.

Thank you very much.

Thank you. I'll now turn the call back to Jim Zelter for closing remarks.

Well, thank you very much. It was a very thorough and a lot of great questions and we appreciate your continued support and look forward to talking to you over the coming months and next quarter.

Thank you for participating in today's conference call. You may now disconnect.