Apollo Investment Corp (AINV) 2012 Q1 法說會逐字稿

Good morning, and welcome to Apollo Investment Corporation's first quarter 2012 earnings conference call. At this time, all participants have been placed on listen-only mode. The call will be open for a question-and-answer session following the speakers remarks. (Operator Instructions) It is now my pleasure to turn the call over to Mr. Jim Zelter, Chief Executive Officer of Apollo Investment Corporation. Mr. Zelter, you may begin your conference.

Thank you, and good morning, everyone. I am joined today by Patrick Dalton, Apollo Investment Corp.'s President and COO, 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?

Yes, thank you, Jim. I would like to advise everyone that today's call and webcast is being recorded. Please note that they are the property of Apollo Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release.

I would also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. Today's conference call and webcast may include forward-looking statements and projections and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these statements and projections. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.ApolloIC.com or call us at 212-515-3450. At this time I would like to turn the call back to our Chief Executive Officer, Jim Zelter.

Thanks, Rich. I'm going to go ahead and give some overall comments. And I'll pass it over to Rich and Patrick in accordance, and then we will go through question-and-answer. The quarter ended June 30, 2011 saw a capital market activity remain robust overall. A variety of strong technical factors continue to drive the near record issuances in both high yield and leverage loan markets as Investors continued their search for yield. The quarter also saw strong retail demand with in-flows remaining steady into a variety of products.

That said by June, we saw overall investor, investment demand stall, as the capital markets grew more volatile with increased concern regarding the US economic growth and the European sovereign crisis. At that time, even brewing debate over US debt ceiling caused some initial angst. By the time the quarter closed on June 30, 2011, we saw yields on our principal markets back up by approximately 25 basis points from March 31. Accordingly, these technical macro economic factors generated a nominal mark-to-market decline in the NAV of Apollo Investment Corp for the quarter. As a reminder, the benefits of investing in larger companies is offset by shorter dated market volatility. We always seek to reward our long-term value Investors. And those benefits also come with the need to understand the differences between a NAV impact from market volatility and interest rate changes, and those from fundamental credit impairment.

As we have since our IPO and in accordance with our Investment Company Act of 1940 obligations, when market quotes are readily available and are deemed to represent fair value, we use them. Again, it is important AINV Investors to understand the difference between quarter-to-quarter NAV movements affected by the volatility and changes in yield in the capital markets and longer-term NAV movements from mark downs reflecting expected or actual credit impairment.

Now let me go over the quarter and some of the highlights for a moment. We were very active in the quarter. In total, we invested $836 million in 9 new and 10 existing portfolio companies. We also received prepayments totaling $570 million and sold select assets totaling $163 million during the quarter. Some of the more substantial portfolio highlights include the restructuring of our non-performing investment in Play Power, which we now control. Patrick will take you through some additional details later in the call, but we believe Play Power's Management Team and its prospects to provide shareholder value over the long-term.

Other notable changes were the successful harvest and reinvestment in Asurion and Ranpac, 2 of our larger portfolio investments during the quarter. Each company had generated consistently strong free cash flow, grew its earnings, and it successfully deleverd over the last few years. We were delighted to use our legacy visions to reinvest in those successful companies. Companies we have monitored closely for years and grew to know well. For Asurion, we were pleased to reinvest at a higher spread to LIBOR as well as at a LIBOR floor, all while improving our [attachment] point and moving up the capital structure on average. For Ranpac, we chose to reinvest in the company at a lower blended yield, but did so significantly higher up in the capital structure on average than our original investment.

Ultimately, ended June 30, our portfolio investments closed the quarter totaling $3.12 billion measured at fair value. And was represented by 72 distinct portfolio companies, diversified amongst 31 different industries. At June 30, 2011, the weighted average yield on overall debt portfolio declined to 11.1%, as compared to 11.6% at March, as the quarter saw our continued focus on principle preservation and risk adjusted returns. Since the initial public offering of Apollo Investment Corporation in April 2004, and through June 30, our invested capital has now totaled over $8.1 billion in 155 different portfolio companies and transactions with more than 100 different financial sponsors. With that, Rich, why don't you take them through some of the financial highlights for the quarter.

Certainly. Thanks, Jim. I will start off again with some June 30 balance sheet highlights. As we noted earlier, our total investment portfolio had a fair market value of $3.12 billion. This is up slightly from $3.05 billion at March 31, 2011. Our June 30 net assets totaled $1.91 billion with a net asset value per share of $9.76. This compares to net assets totaling $1.96 billion and a net asset value per share of $10.03 at March 31. The decrease in NAV for the quarter was driven primarily by net realized and unrealized depreciation on our investment portfolio. During the quarter, we restructured our nonperforming loan in Play Power and realized a loss of approximately $60 million. This realization reversed out a previously recognized, unrealized loss of $58.7 million, as reported for March 31, 2011. As such, the net impact from this restructuring was minimal for the quarter.

Positive contributors to performance of the quarter, included our investments in Pro Mach, Penton Media, US Renal Care, Asurion, and Delta, among others. While unrealized depreciation, this primarily generated from our investments in TL Acquisitions, Cengage, Play Power, AIC Credit Opportunity Fund, Ceridian, and inVentiv Health, among others.

On the liability side of our balance sheet, we had total debt outstanding of $1.25 billion at June 30, compared to $1.05 billion at March 31. Therefore, the companies leverage ratio at June 30, ticked up to 0.65 to 1 debt to equity compared to 0.54 to 1 at March 31.

No new investments were placed on nonaccrual status during the June quarter. With the restructuring of our investment in Play Power, our portfolio of 72 companies now has 1 investment on nonaccrual status. That's Grand Prix Holdings. And that is down from to 2 last quarter. This 1 investment represents 0% of the fair value of our investment portfolio at June 30. First, is the 2 investment representing 1.8% at March 31. On a cost basis, the 1 investment represents 3.0% of our investment portfolio at June 30, first is the 2 investments representing 6.5% at March 31.

As for operating results, gross investment income for the June 2011 quarter, totalled $94.6 million, a marginal decrease from $94.7 million for the quarter ended March 31. And up from $78.2 million for the comparable June 2010 quarter. Expenses for the June 2011 quarter, totalled $46.9 million. This compares to $44.7 million for the quarter ended March 31, and $37.4 million for a comparable June 2010 quarter. Ultimately, net investment income totaled $47.7 million, or $0.24 per average share. This compares to $50 million, or $0.26 per average share for March 2011 quarter, and $40.8 million or 22% per average share to the comparable June 2010 quarter. Also, during the quarter of June, we received proceeds from the sale of investments in prepayments mentioned earlier totalling $733 million.

Net realized losses totaled $45.9 million. Again, as mentioned earlier, these were primarily related to the realization of previously recognized unrealized losses on our investment in Play Power. And partially offset by net realized gains, received from a combination of several sales of other select investments. These quarterly results compared to a net realized loss of $1.6 million for the March 2011 quarter, and net realized gains of $3.9 million for the June 2010 quarter. The Company had a change in net unrealized appreciation of $1.7 million for the quarter ended June 30, 2011. This compares to net unrealized appreciation of $63.6 million for the March 2011 quarter and net unrealized depreciation of $129 million from the comparable June 2010 quarter.

In total, our quarterly operating results increased net assets by $0.1 million, or $0.00 per average share versus an increase of $112.1 million, or $0.57 per average basic share for the March 2011 quarter, and a decrease of $84.3 million, or $0.45 per average share for the comparable June 2010, quarter. Now let me turn the call over to our President and Chief Operating Officer, Patrick Dalton. Patrick?

Thanks Rich. The June 2011 quarter was one of our most active quarters in over 7-plus year history. As Jim noted earlier, we invested in 9 new portfolio companies as well as in 10 existing ones. On a gross basis, these investments totaled $836 million. We also received proceeds from select sales, prepayments and other exits totaling $733 million. For a positive net investment of $103 million for the quarter. This unusually high volume of activity reflects what we believe is a combination of improved market opportunities for us, as well as a healthy and growing pipeline. It also includes the successful prepayments for, and reinvestments in, Asurion Corporation and Ranpac Corporation. 2 of our larger portfolio company investments, as well as the restructuring and reinvestment of Play Power that Jim noted earlier. Our other activity reflected significant new deal closings and our ongoing portfolio optimization and rotation strategy, which we expect will ultimately garner incremental yields while continuing our focus on risk-adjusted returns.

Let me take you through more specifics of the portfolio activity. Investments were made in the following new portfolio companies; Sensus USA, Wall Street Systems, British Car Auction, Burlington Coat Factory, Clearwire Communications, inVentiv Health, Kindred Healthcare, SeaCube Container Leasing, and Texas Competitive Electric Holdings. Of these investments, some of the larger investments included $160 million in the senior notes of inVentiv Health. inVentiv Health, a TH Lee portfolio company, is a global provider of outsourced services to the pharmaceutical, life sciences and healthcare industries. We also invested $50 million in the senior unsecured notes of SeaCube Container Leasing. SeaCube is one of the world's largest container leasing companies.

Another $50 million was invested in Texas Competitive Electric's senior secured notes. We also invested $55 million US dollar equivalents in British Car Auctions holding company notes. British Car Auctions, a CDN&R portfolio company, is a leading provider of used vehicle remarketing services in Europe. Other larger investments included $25 million in both the second lien bank debt of Sensus USA and Wall Street Systems. Sensus USA is a provider of advanced utility infrastructure systems. While Wall Street Systems is the market leader for treasury management, central banking and FX trade process solutions.

Investments in existing portfolio companies were made in the following names; Advantage Sales and Marketing; Asurion, Ranpac, Avaya, Exova, Intelsat, Play Power, TL Acquisitions, US Food, and US Renal. Of these names, some of the larger investments include $151 million US equivalent in the first and second lien bank debt of Ranpac. Ranpac, an Odyssey Investment Partners portfolio company, is a provider of paper-based protective packaging systems. Coinciding with this investment are $81 million position in the holding company PIK notes was [repaid] at a premium to par. Our existing position from second lien debt were also redeemed at par.

As noted earlier, Play Power holdings underwent a comprehensive restructuring this quarter in which the existing holding company notes and bank debt were converted into common equity and operating company notes. We made an additional $45 million investment in Play Power to a mix of new holding company notes and additional common equity. Through this restructuring we now control Play Power and hold $35 million of notes in connection with the restructuring investment. Play Power is a provider of traditional playground and container play systems. A $114 million investment was made in Asurion second lien bank debt, replacing $150 million harvest from this refinancing transaction. Asurion is the world's largest provider of wireless phone handset protection insurance. Lastly, we invested $30 million in additional senior subordinated notes of US Renal as part of a recapitalization of this dialysis service provider.

Let me go through some general portfolio statistics at June 30. We continue to be well diversified by issuing in an industry of 72 portfolio companies investing 31 different industries. The companies total investment portfolio had a fair market value of $3.12 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 measured at fair value. The weighted average yield on an overall debt portfolio at our cost at June 30, 2011, declined to 11.1% as compared to 11.6% at March 31. The weighted average yield on the subordinated debt and senior loan portfolios were mixed at 12.3% and 9.2% respectfully at June 30, 2011 versus 13.1% and 9% respectively at March 31, 2011.

At June 30, the weighted average EBITDA of our portfolio companies continues to exceed $250 million and the weighted average cash interest coverage of the portfolio remains over 2 times. The weighted average risk rating of our total portfolio was 2.3 at June 30, that is unchanged from March 31 measured at cost. And is rated 2.0 measured at fair market value at the June 30, up from 1.9 at March 30, 2011.

While the June 2011 quarter was an extremely active one for us, we believe our investment pace will likely remain highly variable. And with the perceived global sovereign debt crisis unresolved, we believe volatility -- volatility and uncertainty, will continue to affect the global capital markets. These market conditions could create substantial investment opportunities for Apollo Investment Corporations. Therefore, our pipeline is active and continues to grow. We also continued to be pleased with the performance of our existing overall portfolio.

Together, we believe our emphasis on principal preservation and risk adjusted returns will serve Investors well. Lastly, we expect to continue with our portfolio optimization strategy at least in the near term. We also expect such strategy will initially generate modestly lower earnings before then yielding higher earnings over time. As such sale proceeds are redeployed in higher yielding assets as we seek to grow our balance sheet. In closing, we'd again would like to thank all of our Investors and Apollo Investment Corporation for a continued long-term support and confidence in us. With that, operator, please open the call for questions.

(Operator Instructions) Sanjay Sakhrani; KBW.

I was wondering, Patrick, if you could talk about how much of that portfolio is out there to optimize? And in terms of that timing comment you just had, could you elaborate about that a little bit? And secondly, a pipeline of investments that you have currently, how robust is it and what the pricing is?

Sure. Thanks. On the portfolio optimization strategy we are constantly looking at what we believe are -- first, it's about credit, number one, about yield, number two, and about duration, number three. So obviously if we think there's a credit either opportunity for us to rotate out of something that's performing fine but something could perform better, we'll do that. If we think we can mix from fixed or floating or floating to fixed depending upon our view on rates, we will do that. Looking at the curb and looking at what we expect rates to rise and we don't think it's a near term opportunity where rates will rise. But we want to make sure we're positioned defensively if they do rise over time. We think that there is, because of some investments we made a couple years ago where there were no LIBOR floors, but the credits have performed very well. We can get out of those investments at or above our cost, at or above our mark, and redeploy that capital into either the primary market or some more complex credits like a day like today might provide.

Obviously, we want to stay ready with additional capital. We look at the portfolio having liquidity, existing investments that we could recycle. We've got a target list. We update that list daily for both buys, sells, and holds. We've got traders who are very active in the markets across our funds and many other funds giving us color and context as to what opportunities are out there. It is a dynamic process. One that we as manager team sit around and talk about every day. We get the portfolio liquidating analysis every day and that is really something we are going to continue to look at. Again, credit, yield, and duration.

From a timing perspective, right now we are in August. Our pipeline is active. We certainly think that in a market like today the seasonal technicality of investments usually August is a lower period. We are really looking at investments in our pipeline for new issue that'll probably come in the fourth quarter or at the end of last quarter post-Labor Day. We don't know which ones will close, we don't know which ones will be pushed back. We don't know if the current state of the equity markets will delay some closings. But that generally provides more opportunity for us. Where Wall Street firms were prepared to back stop and price deals in the public high-yield markets, or the second [lien] markets. We are seeing many, many more sponsors coming to folks like us looking for a certain permanent solution to an acquisition that they'd really like to make.

Having said that, the markets are more dynamic than they have been in a long time. You've seen what's happened in the equity markets down nine out of the last 10 days. Today it's a pretty dramatic movement in the marketplace. We look at that as opportunity. That's why we want to make sure we have access to excess capital, both from the revolver that's unfunded plus liquidity in our portfolio. We are not a panicked buyer. We are not a panicked seller. But really, we think our primary market opportunity for new issue will be strong as we get into the fourth quarter. Albeit, the economic backdrop will determine when deals will actually close and we can't determine that.

Thank you. How about repay rates. Do you feel like you're going to have a strong quarter of repayments again this quarter? Or are those slowing?

We've definitely seen a significant slowdown. The issue is that we are performing well enough and we took advantage of credit markets have been open for the last year, before you get into the summer. The markets were very robust and most people who have had the opportunity to have done so, opportunistically refinancing in their capital structures like a Ranpac or Asurion, because they've done well through the cycles. We think that the repayments will probably come more from M&A transactions where there is a change control. Then they'll pay us back. We don't know which ones that will affect. We definitely have companies in our portfolio that could sell themselves. It is really not up to us but we've seen a dramatic slowdown. We wouldn't expect the last quarter kind of activity to recur. We think we've got most of that behind us.

I'd add one thing. Patrick, if you think about last quarter, can you distinguish between the headline numbers and what we think about really when we think about what we really invested. I think it may be helpful. Obviously, there is the headline numbers of all of the activity but some of it was just in-and-out refinancing and I would differentiate that from what we think is the core activity.

That is a very good point. We see a number like $836 million of gross investments. It's really comprised of three buckets. One, is where -- new investment opportunities. Ones we looked at, we wanted to buy. We were looking at our excess capital to invest in. That was about $450 million. That is really a like-for-like basis 450. We did between Asurion and a Ranpac that makes up another 260-ish of ins-and-outs. We're going into the same company, a different refinancing event. Then, the restructuring of Play Power made up the balance. And then a couple other ins and outs. Really on a core basis, it's about a $450 million net new investment pace for the quarter.

Okay great. One other final follow-up question, on the economy. Is there anything you're seeing in the portfolio that leads you to be concerned about the same things the broader equity markets are concerned about?

From our portfolio perspective, we do have a slight lag between the financial statements that we receive as investors and what we put into our financials. Because copies have time as well, post quarter, but we are in constant dialogue. I think what we commented on least the last couple of quarters, we definitely have seen -- pleased that revenues have grown consistently since March '09. EBITDA has grown consistently since March '09, in general, for the portfolio. The rate of increase between revenue and EBITDA. Revenues are growing a little bit faster than EBITDA. We think that comes mostly from inflation on the cost of goods sold lines for the portfolio companies. But we are pleased, based on the information to date that in general, the portfolio continues to grow. We think it's hopefully, the companies we've chosen. We are not sitting here expecting that we need growth to pay us back. If it goes sideways for a time that's fine but we haven't seen any profound trends reversing that. Albeit we are looking at the markets every day. We see what is going on with the ISM manufacturing services data, suggesting that the economy is growing but at a slower pace.

Thank you.

Rick Shane; JPMorgan.

Following the most recent quarter, leverage is up, back to the normal range. You have a reasonable pipeline. Stock is actually now trading below NAV so equity issuance becomes more problematic. Where do you feel comfortable in this environment taking leverage, and does that start to enter into your capital deployment plans at this point?

It does. That's a good question. I think that we are going back to the seven years we have gone anywhere from like 0.45 to 0.85. We are in the middle right now. I think what we are seeing, we don't have the intention of raising equity right now. I think there are things in our book that in a new capital deployment era, which we believe we are right in the middle of right now. There's better ways for us to optimize our portfolio, add a new name, and optimize it with something else. With the goal of really making sure we're thoughtful and pragmatic with capital, it's probably better for us to increase the overall yield on our existing portfolio, and then grow in a steady pace. But we are not anxious to do things that would cause us to have to go out and raise equity tomorrow.

Got it. Okay. That's helpful. And given your unique approach to the market, which is really partnering almost as a alternative to 144A type deals. I suspect, given the depth of your relationship with sponsors, you have almost more uncertainty about what the pipeline will look like. You don't know if your sponsors' going to win, but given the relationships, if they do, you have a strong level of commitment to funding those investments. Does that create a greater degree of risk or how do you manage that?

Yes, for us, Rick, we go to market with a dual coverage model. Which is, we cover both the Wall Street firms who are across all sponsors and all auction opportunities given what products they can provide. High yield. They can provide mezzanine, on a placed basis. They can provide second liens. So we are constantly in the marketing everyday seeing deals originated by Wall Street firms. We're also covering sponsors directly. Many sponsors come to us directly and even if a deal is either finally funded through a Wall Street firm or sponsored direct, there is a sponsor on the back end of it. So we must be at a good dialogue and have a relationship. That's why we get preferred allocations. We get larger bite sizes.

We want to make sure we are tracking everything. If a deal does get done in a hot market at a rate below where we think is required. Those opportunities could come back to us in a market like today. Were the market's trade off and all of a sudden that 9% yield becomes 10% or 11% or 12% and it becomes accretive, and we can buy it later. We want to make sure we are looking at all things. It doesn't make maybe the lumpiness there. We've always talked about that.

InVentiv Health is a great example of where here's a company with existing 144A notes looking to make an acquisition. We worked with [TH Lee] for over six months. They liked our private solution, which we could provide them across a longer period to get their acquisition done. That has a lot benefits and value sponsors. We are seeing that continue with dialogue on other opportunities. But that is why our paces can be variable. But if we spend that much time and find those attractive opportunities, $160 million invest in one name, really well-documented and well-structured and well diligent. That is going to be part of our business model.

If it gets done by Wall Street, we can either if it's at a place we like it, perhaps buy it from them and have liquidity, which is a nice credit enhancement. Or if we choose not to buy it on the break, perhaps in the market like today it becomes an opportunity. And we've done that too. We want to see as much as we can and the opportunities in different markets come from different sources. That's why we can never give you perfect guidance as to what the pace is going to be.

Got it. Thank you guys.

Troy Ward; Stifel Nicolaus.

A couple of questions on the income statement. I know on 10Q you outlined some higher expense related to professional fees, legal fees and professional expenses netted out to about 3.5%. Can you give us a little bit of clarity for modeling, what was that related to? And is that something that may pop up again in the future?

Yes, hi, Troy, this is Rich. What we tried to do is point you guys to the MD&A and that expense section and what those are. And those were indeed legal and professional fees. We were very deliberate in noting that they're non-recurring to help with your modeling going forward. We really can't go into each of the line items on the P&L breakout. Those are moving around as well as we look at various things or do certain things with our business.

Okay fair enough. And one last one similarly though, on the income statement. Obviously there was a reduction in the investment advisor, due to a prior payment of unearned portions what it says in the MD&A. Is there something we need to adjust in our models with how we are calculating the investment fee going forward for this adjustment?

No, Troy, everything's as is. You don't need to adjust your model.

Okay. Great. Thank you.

John Stilmar; SunTrust.

I think we've touched on this earlier. It goes back to Rick's point earlier. You've identified Wall Street and sponsors as the two core parts of your business. With all due respect, this could be a lay-up answer. The surety of capital, how does that actually flow through at least in terms of the types of the conversations, or changes in the types of products, that you are actually able to provide today? For instance, bridge financing, are you able to now back stop larger deals that banks are more skittish with because they don't have the access to the capital market? How does that shape the types of opportunities that we should start to look for coming out of your portfolio. Because as you talked about, having capital and volatility is really a good thing for your business. I'm trying to put a little bit more of a ring fence around, what might some of those opportunities start to look like, other than doing things like secondary market activity? Just curious if you could describe for me the types of opportunities you're seeing today and how that might fit with the current market conditions?

Sure. Being careful when I talk about this quarter. I think there are names in our portfolio, whether the Altegrity, inVentiv, SeaCube. Those are all names that that business model that you've espoused and we certainly argue is the key to our business model. We think that is going to be, as we sit here right now, a large if not predominant portion of our activity going forward in this environment. The reality is, there was a very fluid bridge loan commitment marketplace by banks over the last six to 12 months. I would say that in the last six to seven weeks, you've seen a dramatic tail off in the desire to make those commitments. And when there is a tail off and a desire to make those commitments, that vacuum is filled by us and candidly, by some of our very large peers. So, we look at the high yield market as hundreds and hundreds of buyers. We look at the private high-yield market and the mezz market is a handful of buyers. It is that supply and demand dynamic that we think is good for our business. And over time, with a thoughtful approach, will allow us to get our average yield on our portfolio in the right direction, in a positive manner.

John, one of the things as you look at a bridge loan, that is a new market opportunity that didn't exist a couple of years ago. It really is post the cycle of banks seeing the downside of underrating too much risk and not looking to offload some of that risk. That created a bit of a market opportunity for us to get involved early with good companies and do a lot of work, choose to get, backstop the transaction, only required to fund that at the caps, or the high yields that we want. If it gets done at a lower yields in the market, we have the option of to buy it or not. So that's a nice place for us to be. But it really starts with, these are companies we want to own at a certain price. If the higher market is hot. The second lien market is hot. They get it done cheaper. That's fine. We've already done the work, we'll put it into our library of information so that if it does trade-off at some point in the future we have a credit view. That is really a new phenomenon. We expect that's something that is going to continue.

Okay. In terms of the velocity. That velocity is increasing pretty dramatically. Is there some parameter that you can kind of put towards the level of those conversations other than saying it's an opportunity?

When you see the high-yield market. Two weeks ago it was a $10 billion week. But really it was $3 billion to $5 billion from HCA and a couple of others. I think you'll see that activity trail off dramatically. When that trails off dramatically, those acquisitions really only have one place to go.

We'd rather have them come direct to us and we captures the fees and the yields. And we can underwrite the transaction and we can structure the documents. That's great for business If the higher market is hot, we can now participate at a different level and have that in our library for when market dislocates, like they could do on any given day.

inVentiv is probably one of the examples of that, for the past quarter. Correct?

That's exactly right. But this is a deal that we have been working for over six months. It's not like it just came up. We were involved. We covered TH Lee very closely. They were making strategic acquisitions, and it took some time for that transaction to close. Wall Street wasn't prepared to provide level of commitment and partnership that we were. That's why we won that transaction and we look forward to the investment horizon.

Thank you, gentlemen. I appreciate your time.

Jim Ballan; Lazard Capital Markets.

I'm all set for now. Thanks a lot.

(Operator Instructions) Joel Houck; Wells Fargo.

You haven't disclosed what your weighted average yield was on new investments in the quarter?

We generally don't disclose the weighted average yields on the quarter but you can see the quarter's impact. We made some really nice investments back in 2007, '08, and '09, that were discounts in secondary markets that were dislocated. US Foods is a good example. We purchased that at a significant discount. Yields on that given the price we paid were in the mid-teens level. Even though it paid us back at a significant premium. That adds some downward pressure. The redeployment of capital, definitely was closer to the weighted average yield you see in the portfolio now. Versus some of the deals that were taken out.

Yes, we don't have the perfect information, Patrick. With the large investments in here and it looks like we are coming out a mid-nine yields. We don't see all the floors in some of your floaters. Yes I am wondering, how we should think about second lien sub-debt at a mid-nine perhaps low double-digit yield relative to where we were? Watching the capital you put to work this quarter and last quarter. How does that support the dividend yield you have right now when you consider fees and everything else, the operating expenses that dilute that gross yield?

Look, I think your number is a little bit light, from your -- given some of the [floors] that somebody out there, [OID] we've gotten these in the transactions. We are looking at the best risk adjusted returns. We want to make that our portfolio position, should rates rise, our view is not going to be immediate. But we like to balance our portfolio to the extent we can have a right risk adjusted return. We are not going to stretch for yield. We think that fundamentally that is a big mistake, if in a market is very, very robust. You're getting deals in the mid teens levels and you are probably taken more equity risk. There is real principal preservation at risk there. On balance, if we can get something that has the opportunity to increase its yield over time as rates rise with the LIBOR curve going up just a couple of years from now. That maybe a better place to be. It could be liquid securities so we can use them for optimization perspectives if yields do rise elsewhere. We are looking of the best opportunity in the marketplace. And each day we do on a weighted average cost and marginal cost to us. We want to make sure it is in fact accretive. We think looking at short-term trying to stretch for yield in a very robust market was not the right thing to do at the June quarter.

Okay and last question. Were there any properties that you traded in and out during the quarter like Del Monte last quarter?

There were a couple transactions that we were -- very small that we were perhaps back stopping a bridge commitment. The deal was done. The bonds up traded well. We got a little more incremental [fee]. That is not a real fundamental part of our business. If the market gives us that opportunity, we will certainly take that. But it is really de minimus.

Okay. Maybe comment on what you see in the secondary market here having a real time this week and last week, as we have seen what the equity market's done. But maybe some insights into the secondary market that you guys look at every day?

Look, we'll let you know next quarter what we did. But we still don't know what we're going to deal with each day

I think there's a growing market cynicism right now. Real-time certainly, a lot of eyes were on Europe and what is going on. Certainly credit is a bit wider in the last week to 10 days. It is pretty thin right now. It's gotten to be a quiet time of the year, so you are seeing some air pockets. Certainly, there's not a lot of leadership and you're seeing it in the equity market where some companies are doing well and beating earnings and the equities or other securities are traded down. We are in the middle of a dislocation. There is no doubt about it. Certainly our portfolio we feel has held up very -- in a robust manner. But certainly there were discussions a few weeks ago that if we had to reprice sales today it would be a bit higher.

My comments on our script, the optimization strategy over the near term, we think that potentially the secondary market opportunities may be there for us. A week from now it could be different. These are very dynamic markets, Joel. So there really isn't a trend emerging but we are optimistic. We have folks in these markets every day giving us good information. Focusing on the fundamentals first. If we can get something at a reasonable rate, that's good for us. We'll take advantage of it.

Thanks guys.

That was our final question. And now, I'd like to turn the floor back over to Mr. Zelter for any closing remarks.

Once again, we appreciate everybody's attention and questions today. Always important to have a dialogue with our broad shareholders. We appreciate it and look forward to talking to you next quarter. Thank you.

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