Apollo Investment Corp (AINV) 2011 Q1 法說會逐字稿

Good morning and welcome to the Apollo Investment Corporation's Earnings Conference Call for first fiscal quarter ended June 30, 2010. (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 to everyone. I'm joined today by Patrick Dalton, Apollo Investment Corporation's President and Chief Operating Office 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?

Thank you, 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 of this 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 or projections unless required by law. To obtain copies of our latest SEC filings, please visit our Web site 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.

Thank you, Rich. Early in the quarter we saw continued strength in the capital markets, with strong high yield issuance and active investor demand. However, in May and through the end of the quarter, the markets became more volatile and ultimately ended weaker as investors had heightened concerns over sovereign risks in Europe and the overall global economic recovery. In addition, there were several reports of inconsistent economic data that kept many investors on the sidelines as they continued to assess the potential contagion of perceived issues that arose out of the sovereign debt crisis in Europe. These concerns, among others, also drove high yield credit spreads wider during the quarter by approximately 70 basis points among reasonable, steady two-way trading. High yield issuance for the quarter ultimately remained strong, totaling $44 billion, as compared to the record $69 billion for the quarter ended March, 2010.

As we've said, we believe that periods of increased volatility present windows of opportunity for our company as volatility provides greater potential uncertainty on deal execution and pricing for larger companies that seek to issue high yield debt. Accordingly, and as evidenced on our commitment on the Altegrity-Kroll transaction, financial sponsors place additional value on the stability and the certainty on the mezzanine market place, especially from capital providers of scale who can be relevant-- who can be a relevant solution like Apollo Investment Corporation.

Currently, there is an active debate in the overall marketplace on the state of the economy. One group of investors is positioned for a double dip, as they expect a decline in economic activity. The other group grounds their view on a recent earnings season that has surpassed expectations. Irrespective of that debate, we continue to find interesting risk reward investment opportunities.

Now, let me briefly go over some portfolio highlights. During the quarter we were active investors. In total, we invested $221 million in three new and eight existing portfolio companies for the quarter. We also received prepayments and sold select assets totaling $114 million. Accordingly, our net investment growth for the quarter totaled $107 million. At June 30, our portfolio of investments totaled $2.85 billion measured at fair market value, and was represented by 68 distinct portfolio companies, diversified among 31 industries.

At this time, I'd like to remind everyone of what we have told investors repeatedly going back to our IPO In 2004. We are long term investors that invest selectively in long term assets, seeking superior risk adjusted returns over time. We do not view ourselves as a specialty finance company, and therefore do not approach our investment operations as a quarterly business, with quarterly goals and budgets. Accordingly, we do not provide quarterly guidance on our growths or net portfolio growth or how the timing of such net growth may impact quarterly results. That said, we do believe that our results are more representative if viewed on at least a rolling four-quarter basis, and our business strategy remains the same as we laid out at the time of our IPO.

As a reminder, we were able-- we are pleased to further grow our company's capital base during the June quarter by closing out our most recent capital markets issuance in May, raising approximately $204 million of additional capital at a premium that was accretive to book value. As is typical, that capital initially reduces the outstanding balance of our revolving credit facility until we fully invest the proceeds. Accordingly, the company had approximately $566 million currently available for new investment and operations at June 30, 2010. Our outstanding leverage measures as a ratio of stockholders' equity stood at .54 to 1 at June 30. We believe this relatively low leverage level and the amount of currently available dollars to invest remain a significant competitive advantage in our industry. And when combine with what we believe is one of the lowest costs of capital in the sector, we believe we can continue to improve our balance sheet as well as the overall risk adjusted returns to shareholders as we head further into this economic recovery.

Before I turn the call over to Rich, I'd like to take a brief moment to again note the ongoing difficult situation with our investment in Innkeepers USA Trust through Grand Prix Holdings. As previously noted we are currently-- certainly disappointed, and at June 30 our entire investment in Innkeepers USA Trust is now deemed to have fair value of $0. At this point, the situation is fluid and remains complex. And as described in publicly-filed documents, we potentially have an option, and if that option becomes an investment we will have a discussion about it on our next call. Now with that, I'll ask Rich to take you through some detailed financial highlights for the quarter and then on to Patrick for some portfolio discussion as well. Rich?

Thank you very much, Jim. I'll start off with some June 30 balance sheet highlights. As Jim noted earlier, our total investment portfolio had a fair market value of $2.85 billion, which is essentially flat with our portfolio value at March 31, 2010. Our net assets totaled $1.94 billion at June 30, with a net asset value per share of $9.51. This compares to net assets totaling $1.77 billion at March 31 and a net asset value per share of $10.06. The $0.55 decrease in NAV per share for the quarter was driven primarily by a change in net unrealized depreciation on our investment portfolio. Negative contributors to performance for the quarter included our investments in First Data, Sorenson, LVI Services and Play Power Holdings, and were due to a mix of both credit issues and technical mark to market. One notable item on the liability side is our revolving credit facility, which had $993 million outstanding at June 30 as compared to $1.06 billion at March 31. This left our debt to equity ratio at a modest 0.54 to 1 at June 30 as compared to 0.60 to 1 at March 31.

As indicated in our schedule of investments, we placed one investment on non-accrual status during the quarter. This investment was issued by LVI Services, a provider of integrated remediation, demolition, restoration and emergency response services. Our portfolio of 68 companies now has five companies with investments on non-accrual status at June 30 versus four companies at March 31. These investments represent 0.2% of the fair value of our investment portfolio at June 30 versus 0.07%, I'm sorry, versus 0.7% at March 31. On a cost basis, they represent 8.1% of our investment portfolio at June 30 versus 6.8% at March 31.

As for operating results, gross investment income for the quarter totaled $78.2 million, down from $87.7 million for the quarter ended March 31 and $82.6 million for the comparable June, 2009 quarter. Expenses for the quarter totaled $47.4 million. This compares to $39.1 million for the March 31, 2010 quarter and $33.2 million for the comparable June, 2009 quarter. Ultimately, net investment income totaled $40.8 million or $0.22 per average share, which includes the increase in average shares from the May equity raise mentioned earlier. This compares to $48.5 million or $0.28 per average share for the March, 2010 quarter and $49.3 million or $0.35 per share for the comparable June, 2009 quarter.

Also during the quarter, we received proceeds from an investment sales and prepayments totaling $114 million. Net realized gains totaled $3.9 million, and this compares to net realized losses of $219.7 million of the March quarter and $98.2 million for the June, 2009 quarter. The company also recognized net unrealized depreciation of $129.0 million of the quarter ended June. This compares to recognized net unrealized appreciation of $161.3 million for the March, 2010 quarter and $133.3 million for the comparable June, 2009 quarter.

In total, our quarterly operating results decreased net assets by $84.3 million or $0.45 per average share versus a decrease of $9.9 million or $0.06 per average share for the March, 2010 quarter, and an increase of $84.5 million or $0.59 per average share for the comparable June, 2009 quarter. Now, let me turn the call over to our President and Chief Operating Officer, Patrick Dalton. Patrick?

Thank you, Rich. As Jim noted earlier in the call, we were active investors during the June quarter, investing in three new and eight existing portfolio companies. We were successful in making investments in certain existing portfolio companies that we know and like, and in other cases we were able to recycle out of certain lower yielding securities into slightly higher yielding securities where we believe we are well positioned.

Now, let me take you through some specific highlights on the portfolio changes during the quarter. The new companies added to our portfolio were American Tire Distributors, a leading replacement tire distributor in the U.S. that was acquired by TPG Capital. We invested $30 million across the capital structure, primarily in senior and senior subordinated notes along with a $3.1 million equity co-investment. We also invested in Sedgwick Holdings, a leading third-party administrator in the U.S., operating in the workman's compensation, disability and liability claims outsourcing markets, where we invested $25 million in second lien bank debt to back the acquisition of the company by Hellman & Friedman and Stone Point Partners. Lastly, we invested in U.S. Renal Care, a dialysis and ancillary services provider, where we invested $20 million in subordinated debt. As for additional investments and existing portfolio companies, we elected to reinvest $50 million in the second lien bank debt of Advantage Sales and Marketing in support of the refinancing of their mezzanine debt. We were refinanced out our original mezzanine position at a premium. Advantage Sales is a leading sales and marketing agency providing outsourced services to its customers. We also purchased $15 million of Intelsat bonds in the secondary market. Intelsat is a fixed satellite service provider.

Furthermore, we invested $14 million in the second lien bank debt of Garden Fresh, a casual restaurant chain operator. In addition we had small secondary market investments in several other existing portfolio companies, including Ozburn-Hessey, Play Power, FoxCo and Hubb International, among others. Of special note, were two additional prepayments during the quarter. One, our investment in CHI Overhead Doors, which was a 2004 vintage investment, was repaid by the company at par, while PBM Holdings, a 2006 vintage investment was called away at a premium.

In addition, it was reported in our 10-Q that we made a $231 million commitment to support the acquisition of Kroll, Inc. by our existing portfolio company Altegrity, Inc.. The combine company will be a global leader in the risk consulting and information services business, including e-discovery, federal background investigations, commercial pre-employment screening, due diligence and investigations. On a combined basis, the companies generated over $325 million of EBITDA as of March 31, 2010. The company is controlled by Providence Equity Partners. We are pleased to report that this transaction has closed. With AIC investing a total of $130 million in debt securities and $15.5 million in an equity co-investment, we reduced our initial investment by bringing other investment partners into the transaction.

As of today, our pipeline remains strong and we continue to build on our relationships with top-tier sponsors like Providence Equity Partners, where we believe our scale and certainty remain competitive advantages in the marketplace. Our investment portfolio at June 30 continued to remain well diversified by issuer and industry, consisting of 68 companies in 31 different industries. The total investment portfolio had a fair market value of $2.85 billion, which was comprised of 32% in senior secured loans, 57% in subordinated debt, 1% in preferred equity and 10% in common equity and warrants, again, measured at fair value.

The average yield in our overall debt portfolio at our cost at June 30, 2010 was 11.7% versus 11.8% at March 31. The weighted average yields on our subordinated debt and senior loan portfolios were 13.3% and 8.8% respectively at June 30, 2010 versus 13.5% and 8.5% respectively at March 31, 2010. Please note, that Apollo Investment Corporation's floating rate asset portfolio continues to be closely matched with the company's average floating rate revolving credit facility exposure.

Furthermore, at June 30, the weighted average EBITDA of all portfolio companies continues to exceed $250 million and the weighted average cash interest coverage of the portfolio remains over two times. The weighted average risk rating of our total portfolio was 2.4, as compared to 2.3 at March 31, measured at cost and 1.9 measured at fair market value at June 30, 2010 unchanged from the prior quarter.

Before I open up the call to questions, I'd like to state that as we stand here today in early August we continue to believe that the very worst of the challenging credit cycle is behind us. We also believe that the global economy will continue with its uneven progress with unusually high volatility, yet we will persevere into a more sustainable and normalized recovery beginning 2011. Along the way, we will continue to use all of our competitive advantages in striving to capture what we believe will be the best risk-adjusted returns available, especially during windows of opportunity in this highly volatile marketplace. In closing, we'd like to thank all of our dedicated long-term shareholders for your continued support and confidence in Apollo Investment Corporation. And with that, operator, please open up the call to questions.

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

Thank you. Good morning. So my first question is on this new non-accrual that you guys had in LVI. I was wondering if you could just talk about it a little bit more? And then I was wondering if you could talk about how you feel about the rest of the portfolio and whether or not there's anything that we should be mindful of that might come about in the near term. And then second, perhaps, you could also touch on the debt capacity. You know, you guys have a maturity next year in April, and I was wondering what was the thought process there as well? Thank you.

Sure, Sanjay, this is Patrick. On LVI, it is a private company, so I'll be a little bit careful on what I disclose. This is a situation that's been on our watch list for a while. And we have been working very closely with the owners of the company, the management team and it's lenders across the capital structure. It's a project-based business. The projects are lumpy. The backlog remains strong, however, covenants do over time step down, and given what the company's been able to achieve, it's been fairly impressive in light of the economy. However, it's a time for us to look at recapitalizing the company, reorganizing and we are in discussions with all parties. Nothing has been formalized yet, but hopefully, we're close to something that will provide an opportunity for recovery and return going forward.

As far as other non-accruals, you know, we feel the portfolio is in great shape by and large. You know, there are always one or two situations that surprise us. We can not comment that there will be no surprises going forward, but as we've stated time and time again, we've been working very, very diligently over the last number of years to build a high quality portfolio that is positioned for growth, that is positioned to be amongst the strongest sustainable earners, and then we can find our way to growing our business and giving our strong pipeline of opportunities, taking advantage of our competitive advantages in the marketplace. We're seeing a very, very strong demand for our capital. The M&A environment is also lumpy. The timing of which closing transaction, we can't predict. So by and large we're feeling very good on where things stand today, if you look at the portfolio on a static basis. It's been a lot of work to get here.

On the debt capacity side, let me turn it over to Rich to comment on, because certainly this is top of mind, and Jim as well.

Yeah, I-- thanks for the question, Sanjay. You know, debt capital is available to us. It's always been available to us, just like equity capital has based on the transparency and the way we run our business and our track record, but we're very, very focused on our cost of capital. I think you heard some of Jim's comments earlier in the call with regard to our lowest cost of capital in this space. We take that very seriously. It's not by accident. It's something that we've been very focused on since our IPO In 2004. We did not have to, given our liquidity and given our management, we did not have to you know, raise money at extremely expensive prices in the worst of the cycle and then have to figure out how to pay for it later on. Really, what we've done is you know, managed our fund raising very, very carefully to manage that cost of capital, but at the same time, debt costs are going up. Financial institutions broadly have been, you know, impaired or stressed or strained and those entities that can borrow four, five, ten times don't mind paying 10% or 11% for their debt capital because they can leverage that up and kind of pay for it. And they're willing to do that because they're stressed. You know, we're not stressed. We're not willing to pay for that kind of cost for our debt capital, and so we're being very, very prudent. We're waiting for some of the markets to heal, the banks to heal, our relationships and right now we would have to pay for that debt capital and not have to use it right now. So we're trying to time our relationships and our prowess in fund raising even on the debt capital side to hit windows of opportunity at the right price. And so we're constantly working on that. We're looking at a number of situations. It's too early to talk about it, but I will say that we're very active in our review of the many alternatives that are available to us from the debt capital side.

Thank you.

Thanks, Sanjay.

Thank you. Your next question comes from the line of Faye Elliott with Bank of America.

Hi, thanks. Can you hear me?

Yes, Faye. How are you?

Hi, Faye.

Hi. Can you just discuss your thoughts, you know, given your comments that the worst of the credit trouble maybe behind you regarding future investment and what portion of you know, new investment dollars might go toward new investment as opposed to legacy investment?

Well, let me start out-- this is Jim. You know, certainly the transaction that Patrick mentioned, the Altegrity transaction is a great example of what our franchise can offer to the marketplace. While the high yield market is quite strong right now, you have to remember that the average high yield issuance is close to $600 million now, $575 million. So there's many, many new companies that we are looking at in our pipeline. We feel very comfortable with our pipeline. We feel that you know, that there's been periods where, again as a relative value investor, it made more sense for us to buy secondary pieces, but our primary focus is on primary origination. Now especially in light of what we're seeing right now, and with the activity which is taking place in the sponsor community, in the upper-middle market, I would expect to see, we have a very-- we have probably as active a backlog of new opportunities that we've seen the last 18 months.

Do you think that we could start seeing a shift more toward new names and away from legacy names going forward?

Yeah, Faye, that is certainly what we would expect to be the case, however when the high yield market like it back up dramatically, it provided us with opportunities that we didn't think we were going to have. We stay ready and are evaluating both the secondary market and the primary market. You know, we ended the March quarter, the credit markets were strong. We're probably one of the big buyers of secondary, you know, loans then the market backed up. Great names at higher yields that we know well is a great thing for us to do with our capital, so nice to be able to do both. We are positioned and we expect the M&A pipeline to grow as we sort of find the footing in the economy and all the capital that's been unspent to provide opportunities. But we're going to be disciplined, we're not going to do every transaction, far from that. We're going to look at every transaction on its own merits and see that it makes sense, but what we are very pleased about is even top-tier sponsors that have just as legacy have as always gone to the higher market, are choosing the mezzanine product. For those that can provide a full solution, there's only a few providers of capital that can write a commitment as large as we can, a solution away from another credit market, is a competitive advantage we have, and we've seen some very top-tier sponsors, even with the opportunity to act as public markets for debt, are coming to the mezzanine market, to folks like us. So we're excited. We're positioned well. If the markets do back up again, we may find some more secondary market opportunities. It's all a relative value investment set for us.

Right, thanks. And then I think this is a question on everybody's mind with NOI, you know, moving down relative to the dividend, do you think that this is something that you can grow back into or is this a number you might have to reconsider?

I think, as we said before, you need to look at our earnings over a longer period of time. There are some lumpy events in our portfolio where we get paid maybe twice a year versus four times a year, like the AIC Opportunities Fund. And I think at this time, we have some spill over earnings as well. We feel very comfortable with the sizing and setting of our metrics right now. So we are moving ahead with the metrics we have put forth.

Yeah, and the good news is with the cushion we don't have to force, you know, the earnings. We have a plan. We look at it every day, and sort of find our way to improve the earnings. We understand this quarter where we are, higher share count from last quarter as well, but there will be some pockets of time where that may move up and down, but we have a plan that we're working very, very hard. And it really starts with good investments, good credit quality, good monitoring and then we can drive our earnings over the long run.

And Faye, let me add, this is Rich. Let me add that, you know, going back to our IPO, our strategy was always to have that cushion, to take capital gains during the good days, know that you'll need them for the rainy day when you do have losses in a fixed income portfolio and the strategy remains the same. I think that that harvest that we do have to support the dividend was maybe less important through the thick of things in the recession where two years people were flat to down from a portfolio sizing perspective, but really now that people are heading into the recoveries like we are, you know, people need to kind of refocus on the variability's that come back into play when you are in business. Because when you do equity raising, you know, you're going to raise shares outstanding. That's going to lower your per share amounts. And clearly, we did have a top line decline slightly. Some of it's lumpy, but I think that it's nothing that we're concerned about. There is a plan, as Patrick said, but going back to that strategy, you know, to expect that whenever there's a quarter with-- when you're growing your balance sheet and you're into a recovery, we're not that idle balance sheet anymore. We're growing again. So we're going to start growing this balance sheet from an assets perspective, irrespective of the technical mark-to-markets. And use that strategy that we've employed from the beginning. So expect lumpiness or variability in both our earnings, our net portfolio growth and that cushion is there for a reason, because it really supports a strategy of growing a portfolio, raising equity. Growing a portfolio, raising equity, that helps support the dividend through any potential short term drag in our earnings.

Fantastic. Good news. Thank you.

Thanks, Faye.

Thank you. Your next question comes from the line of Vernon Plack with BB&T Capital Markets.

Thanks very much. And there's been some discussion today about the leverage ratio, the debt-to-equity ratio, and I'm sure part of the plan is to utilize that leverage up a little bit more. Where are you comfortable with your leverage ratio being in this type of environment, and you know, looking forward?

Hey, Vernon. And what we said in calls in the past is we never want to use the last dollar of leverage. Obviously it doesn't find enough cushion. And our strategy isn't predicated on needing to use every dollar of leverage to make the returns that our shareholders would like to see us make so we can hopefully drive our dividend. You know, what we-- once we get to a 0.75, 0.8 times, historically, we then use those opportunities to go raise equity and pay down our revolver on a temporary basis and bring it down to the area where we are today. And then there's an investment, then we invest those proceeds over time and once we get to that 0.75, 0.8 times area, then we'll start really thinking about the investment pace, raises of capital. You know the thing is we wouldn't need to raise capital at that point in time, but you know, we're not really looking to drive our business into the high 9 type leverage because markets are volatile, asset prices change. We are a mark-to-market vehicle. We use third parties to value our portfolio every quarter so that we can not afford, you know, that kind of perfection on value-- on leverage, excuse me. So we-- our strategy does not command our need to leverage up that high.

Okay, so now that we're looking at things improving, we should not be surprised to see you leverage back up to the 0.75 or so?

Yeah, I wouldn't be surprised if that happened.

Okay, thank you.

You ought not to be surprised.

Thank you.

Thank you. Your next question comes from the line of John Stilmar with Suntrust.

Hi, good morning. First question, Patrick, is you've-- you guys are so plugged in to the private equity sponsor universe, especially in some of the larger, more liquid names. Can you talk to us as to really the source of backlog or types of transactions? Is this really a refinancing type environment that is driving the force in your backlog? Is this just the redeployment of excess private equity capital that needs to be put to work? What is kind of the principle motivations that really drive some of the back log that you're starting to see?

You know-- this is Jim. Let me answer that for you. You know, I think you're getting certainly a lot of activity has been refinancing to date, probably 70% to 80% of the overall activity. I think in the last three to six months that is getting-- being more balanced, and you're seeing more primary activity. Sometimes it's new transactions, sometimes it's something like we saw with our transaction with Altegrity and Kroll, where it's a strategic add on. But I think you're seeing, I think you're seeing a-- over the course of 2010 the pendulum is swinging from 75% refinance and new deals versus a 75%, by the end of the year a majority, a good portion will be new financings. You still have a big refinancing hurdle in 2013 and '14. So refinancings will always be part of the market, but the transactions that are in our pipeline right now, many of them are new transactions.

Yeah, most of them are driven by you know, folks who, you know, prior customers wanted to demonstrate liquidity in a true sale of the company, and also the lot there's $500 billion of unspent private equity capital that needs to be spent the next few years, and has been sitting on the sidelines for a while. So there's a real desire on both sellers and buyers to transact, obviously the back drop of a stable economy is what's needed and open credit market. And I think that the confluence of those characteristics are coming together, continuing to come together. You know, our pipeline is mostly made up of, as Jim said, primary market sales and purchase of companies.

Perfect. Then follow-up question with regards to the amount of equity that you guys are thinking about sort of as a long term target for your portfolio. Obviously, I don't expect for you to comment on Innskeepers, but if we were to kind of think about over the next 24 to 26 months, the ratio of sort of yielding versus equity investments that you'd consider, how should we think about your portfolio orientation because you have done such detailed planning and you are so thoughtful about your portfolio and the composition? How shall we be thinking about that over the next, let's call it over the ext, let's call it 12, 24, 36 months in equity exposure?

Great question, John. You know, it's not different than where it's been last six years. We spent you know, no more than 10% of all of our dollars in the form of equity securities since inception. That's a good balance for us. This is a debt portfolio, fixed income portfolio. 90% over time should be the average of what our-- on a cost basis, you know, you have a high cost problem sometimes if the equity appreciates beyond that to drive the overall, you know, complexion to be heavily-- more heavily-weighted equity. We think that now is an interesting time, you know, with recovery, being a recovery, interesting time to be open minded to maybe make some equity co-investments over time. When the markets get robust, we're even more selective. So I would say, from a modeling perspective, a 10% rule of thumb is not an unreasonable rule of thumb.

Great. Thanks, gentlemen.

Thanks, John.

Thank you. Your next question comes from the line of Troy Ward with Stifel Nicolaus.

Thanks, thank guys, just had one additional question to some of the others. On fee income, how should we view your ability to generate fee income, and I guess, basically in the primary market, because obviously, the secondary purchases are going to be kind of real specific. But what are you seeing upfront fees in the primary market and what you're seeing?

Hey, Troy it's Patrick, very good question. You know, our business predominantly an investment income business, however, when we are structuring transactions where we can be the solution for the sponsor and we are working to diligence to structure those deals, there are fees that are associated with that. The fees range between 1.5 and 3.5 or 4 points. Generally, it's going to be in the 2.5 to 3 point range for fees. We're an all-in-return investor. So sometimes you know, you can trade coupon for fees or call protection. It is really what drives the individual transaction if we're-- if the sponsors, what their priorities are. Certainly, call protection is something that we've been very focused on and have been for years. There's generally more value in that. So if it became a trade of between a fee and call protection, that's something that we'd consider. But every investment we go into, we factor all of those into the overall yield on that investment, making sure it meets our hurdle rates.

So in the most recent quarter the fee income was lighter than we were expecting. Can we conclude that there was some call protections on your new primary market deals?

You can conclude that. That's not an unreasonable assumption.

All right, thanks, guys.

Thanks, Troy.

Thank you, and your next question comes from the line of Jasper Birch with Macquarie Holding.

Hey, good morning gentlemen. Just starting off with MEG Energy. I know it's filed for an IPO. I think recently they downsized the guidance on that from about $1 billion to about $780 million. I was just wondering if we could get, first more color on that transaction specifically, your valuation on it and then secondly, any other visibility that you can give us on any possible prepayments or divestitures on the book?

Sure. Hey Jasper, regarding MEG Energy it is now a public company. They did file for an IPO and they did execute the IPO last week. You know, prior to the deal getting priced, the market did contract on the pricing. You know, the price was higher than where they ultimately decided to price the deal. That was out of our control. We're a very small minority owner. We feel we are in a far better position, given the liquidity that we now have. I wouldn't make the assumption that we've sold into the IPO. Obviously, with the public equity, you know, stock holding there is volatility. PRISM was like that. While held that, we no longer hold that as a public stock. We think overall the company is a great company. We think the opportunity set for that company is tremendous. There was some more technical reasons, we believe around why the pricing insecurity at the IOP given some of the comparable transactions prior to MEG going public having an impact as a lot of folks rotate out of the stock. That doesn't seem to be the case right now, but you know, don't assume that we've sold our securities there, but we will look for the appropriate time. But we do think this is a good company.

Outside of that, there are, you know, our portfolio, the bittersweet part is we've got very good companies that have opportunity and have filed to go public. Booz Allen has filed an S1, Goodman Global files an S1, VNU Nielsen's filed an S1. Those businesses are not public yet. The IPO markets are fickle. We'd love them not to go public. We own some equity in a couple of those situations, so that's also good for one side of the ledger, but these are great investments that have performed extremely well, have provided their sponsors with an opportunity to exit, get some liquidity and you know, when and if they go public we'll be repaid, and that's more capital for us to invest in this new vintage. So we track it. We look at it very closely. It's part of our overall fundraising. We do not assume though, until we get repaid, that we will be repaid. That we don't run our company assuming that will be that liquidity.

Good. Thank you. Looking at your book value, your par-weighted book value is about 12.25 versus 9.50, the fair value is. I just wonder if you'd give some commentary on how much of that you think is ultimately recoverable, just sort of ignoring the equity transactions and what you see as recoverability on the 6% of your cost basis on non-accrual?

Yeah, Japer that's a very good question. We're going to be cautious on giving guidance on what we think the ultimate realizable value, you know, is. We don't use that concept here. The fair market value does include a lot of technical, but obviously, there's a lot of fundamental in there as well. You know, we're doing our very best to recapture as much of that over time. So that's not guidance that we're going to want to you know, give to the community to set up an expectation. We do hope that there's appreciation in there.

Great. Thank you for your time.

Thanks, Jasper.

Thank you. (Operator Instructions) Your next question comes from the line of [Robert Struggo] with [RIS Investments].

Right, yeah book value is 961 as of June 30. You had a proposal to sell stock below book value, I think it's currently before the stockholders. The stock seems to be under pressure. It's under $10 now, maybe because of that fear as well. But I was wondering, July was a great month, because you do have that proposal on the table, has your book value-- is it reasonable to assume that your book value has gone up as of today or the end of July?

Well, you know, thank you for your question. It's not been our historic precedent to really talk about our book value on a month-to-month basis. Certainly, you are correct, we had our annual meeting the other day and the shareholders did approve our ability to access the equity market at various times irregardless of the value of our stock versus our NAV. We've shown a prudent view, proved we exercised that with great caution and prudence in the past, and we'll do so with the advice of our and the counsel of our board going forward. But as Patrick and Rich said, you know, we have a high quality portfolio. There certainly is some NAV volatility because of the nature of our holdings. And really I'll let the comment go as that and you can read into what you'd like.

Well, is it safe to assume that in July was a better month than June? I mean, the markets were really resilient in July and when you price that would you price it based on the last June 30, 961 number?

Yeah, because we do follow FAS157 or ASC820, at the end of the day, our third party valuation firms do employ U.S GAAP and do look at changes in the various indices. If the indices, you know, have gone our way, our NAV would go up based on those principles.

Thank you.

Thank you. I would like to turn the call back over to Jim Zelter for closing remarks.

Well again, as Patrick said, we appreciate the continued support from a great shareholder base, and certainly take our job very seriously and we'll work hard to continue to create value, long term value for our shareholders. So thank you and we look forward to talking with you again at the end of next quarter.

Thank you.

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