Apollo Investment Corp (AINV) 2012 Q2 法說會逐字稿

Good morning, and welcome to Apollo Investment Corporation's Second Quarter 2012 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. It is now my pleasure to turn the call over to Mr. Jim Zelter, Chief Executive Officer.

Thank you, and good morning, everyone. I am joined today by Patrick Dalton, Apollo Investment Corporation's President and Chief Operating Officer, Richard Peteka, Chief Financial Officer and Elizabeth Besen, our new Investment Manager. Elizabeth, 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 would like to advise everyone that today's call and webcast are being recorded. Please note, 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 like to draw your attention to the customary safe harbor disclosure in our press release regarding forward looking information. Todays conference call and webcast may include forward looking statements and projections and we ask that you refer to our most recent filings with SEC for important factors that could cause actual results to differ materially from these statements and projections. We do not undertake to update date 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.

Thank you, Elizabeth. As you have seen, yesterday evening we issued our second quarter earnings press release, and filed our quarterly Form 10-Q with the Securities and Exchange Commission. I will begin my remarks with a brief review of the market environment during the quarter. I'll then provide some portfolio highlights for the quarter and discuss our capital position. Next, Rich will discuss our quarterly results, followed by Patrick, who will discuss changes to our portfolio during the quarter in greater detail. We will then open the call for questions.

During the quarter that ended September 30, 2011, we believe investors became increasingly risk averse given the escalating sovereign debt crises in Europe and the persistent worries about the US economy. S&P's downgrade of the US also weighed on the capital markets. For the period, the major US equity indexes fell between 12% and 14%. Volatility rose sharply as the mix more than doubled. With increase big risk aversion, debt spreads widened, particularly for high yield.

Given this uncertainty and volatility, investors appear to be becoming increasingly defensive and sought less-risky assets as was evidenced by rising gold prices and falling treasury yields. In addition, there was a notable behavioral change by some banks as they began to derisk in advance of the implementation of Bosal 3 and Dodd Frank, putting additional pressure on certain asset classes.

As a reminder, our portfolio investment consists in part, of larger part of companies, some of which are high yield. As a result, we believe our portfolio is relatively more exposed to market volatility than the other BBCs that invest primarily in the mezzanine market or in smaller companies. With uncertain backdrop and increased risk aversion during the quarter, high yield bond issuance fell sharply to $23 billion, a decline of 71% from the prior quarter. This was the lowest quarterly issuance level since the quarter ending March 31, 2009 and the quarter also saw continued weak demand with outflows from high yield funds of $443 million during period.

The B of A Merrill Lynch triple C index rose [472] basis points from June 30 to September 30 highlighting the bearish tone in the market and the unlevered price return for the index was negative 15.8 for the quarter. Accordingly, these technical macro economic factors contributed significantly to a 17% decrease in the NAV per share of Apollo Investment Corporation for the quarter.

As we stand here today, we believe that the vast majority of the decline is recoverable over time. Since the end of the quarter, the credit market has shown signs of improvement. From the end of September and through yesterday, the yield on a triple C index has declined 177 basis points and has an unlevered price return of 7.8%. In addition, high yield fund flows have turned positive with October posting inflows of almost $6.7 billion. Given the significant market volatility, we believe that the recent rebound in the credit markets has had a positive impact to our NAV. We also remain cautiously optimistic that our overall portfolio will continue to perform well in the near term. Given the decline in our NAV, I'll take a minute to talk about what causes changes to NAV.

First, it is important to distinguish NAV changes that result from market volatility and interest rate changes versus NAV changes caused by expected or actual credit impairment. As a reminder, a component of our core strategy is to invest in larger companies. While this allows us to maintain a liquid portfolio, it can also result in a higher relative value in our portfolio.

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. Our balance sheet reflects our valuations which are derived to what we believe is to be a rigorous process. As of September 30, slightly more than half of our investments on a cost basis were valued using broker quotes. We recognize the impact to our net asset value from the volatility associated with this strategy, but we believe that the long-term benefits of this strategy outweigh such volatility. We also believe our strategy will provide long-term value to our shareholders.

At this time, I'd like to go over some portfolio highlights for the quarter. We were very active investors during the September quarter. In total, we invested $403 million in 6 new and 8 existing portfolio companies through a combination of primary and secondary market purchases. We also sold select assets totaling $313 million during the quarter and received prepayments totaling $74 million. At September 30, our portfolio investments closed the quarter totaling $2.83 billion measured at fair market value. Patrick will discuss a change to our investment portfolio during the quarter in greater detail.

To complement our core strategy, we will continue to explore investment opportunities and other areas of lending that may be less volatile and which therefore could reduce the volatility of our net asset value. We believe that the relatively long duration of our capital, especially in light of the backdrop of changes in the lending industry, since the depth of the crisis, is a competitive advantage that allows us to invest in a broader range of assets across cycles.

In addition, as part of our portfolio optimization strategy, we have been focusing on investing in cash-based securities, increasing risk adjusted returns when possible and reducing the overall average amount of pick income.

Before I turn the call over to Rich, I'd like to highlight in September, we issued an additional $45 million of senior secured notes in a private placement to new and existing lenders. As we've previously noted, we are focused on adding new long-term debt capital as we believe we will continue to have significant investment opportunities. The additional notes were divided into 29 million of new 5-year notes with a fixed interest rate of 5.875 and 16 million of new 7 year notes with a fixed interest rate of 6.25. We were pleased to raise this additional long-term capital as it further diversified our lender base and extended the duration of our liabilities. We were also pleased in September, Fitch affirmed our triple B long term issuer default rating and our stable outlook.

With that, Rich, why don't you review some of our financial highlights for the quarter?

Thanks, Jim. I'll start off with some September 30 balance sheet highlights. As we noted earlier, our total investment portfolio had a fair market value of $2.83 billion down from $3.12 billion at June 30, 2011. Our September 30 net assets totaled $1.59 billion with a net asset value per share of $8.12. This compares to net assets totaling $1.91 billion and net asset value per share of $9.76 at June 30. The decrease in NAV for the quarter was driven primarily by the net unrealized depreciation on our investment portfolio.

On the liability side of our balance sheet, we had $1.22 billion of total debt outstanding at September 30, down slightly from $1.25 billion at June 30. Based on our total net assets at September 30, the Company's leverage ratio increased to 0.77 to 1 debt to equity from 0.65 to 1 at June 30.

During the quarter, our investment in ATI, a for-profit education company, was placed on nonaccrual status. Accordingly, our portfolio of 69 companies, now has 2 companies on nonaccrual status, the other being Grand Prix Holdings. At September 30, nonaccrual investments represented 0.2% of the fair value of our investment portfolio versus 0% at June 30. On a cost basis, these investments represent 4.5% of our investment portfolio at September 30, versus 3.0% at June 30.

As for operating results, gross investment income for the September quarter totalled $94 million, a slight decrease from $94.6 million for the quarter ended June 30, but up from $91.5 million to the comparable September 2010 quarter. Expenses for the September 2011 quarter totaled $48.4 million. This compares to expenses of $46.9 million for the quarter ended June 30, and $41.3 million for the comparable September 2010 quarter.

The sequential increase in expenses was primarily driven by higher interest expenses from a higher average outstanding debt balance during the quarter together with a higher average cost of debt. Net investment income ultimately totalled $45.5 million or $0.23 per average share. This compares to $47.7 million or $0.24 per average share for the June 2011 quarter, and $50.2 million or $0.26 per average share for the comparable September 2010 quarter.

Also during the September quarter, we received proceeds from the sale of investments and prepayments totaling $387 million. Net realized losses totalled $20.2 million. These net losses were derived from exits of select investments, including from Teal acquisitions and FCS holdings, partially offset by gains received from several sales, including dsi renal and [Pro-mock]. These quarterly results compare to net realized losses of $45.9 million for the June 2011 quarter and net realized losses of $89.4 million for the September 2010 quarter.

The portfolio has changed in net unrealized depreciation totalled $292.6 million for the quarter ended September 30th. This compares to net unrealized appreciation of $1.7 million for the June 2011 quarter and net unrealized appreciation of $107.4 million for the comparable September 2010 quarter.

Notable contributors to unrealized depreciation for the September 30, 2011 quarter, included our investments in ATI Acquisitions, AIC Credit Opportunity Fund, Teal Acquisitions, and Intelstat Bermuda, and Ceridian among others. Unrealized appreciation contributed for the quarter included our investments in PlayPower, generation brands, LVI Parent Corp, renal advantage and Insight Pharmaceuticals, among others. In total, our quarterly operating results decreased net assets by $267.3 million or $1.36 per average share versus an increase of $0.1 million (inaudible) $0.0 per average share for the June 2011 quarter and an increase of $68.2 million or $0.35 per average share for the comparable 2010 September quarter.

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

Thank you, Rich. As Jim noted earlier, the September 2011 quarter was active for us. We invested in 6 new and 8 existing portfolio companies. On a gross basis, these investments totalled $403 million. We also received $313 million of proceeds from select sales from $74 million from pre-payments. During the quarter, we continued to execute on our portfolio optimization strategy as we redeployed proceeds from these investment sales into higher yielding assets.

Let me take you through some of our portfolio activity. Investments were made in the following 6 new portfolio companies-- [Casgel], Level 3 Communications, Sealed Air Corporation, SRA International, Travelport and U.S. Security Associates. Of these investments, some of the larger investments included $135 million in the senior unsecured mezzanine notes of US Security Associates to support the acquisition of the company by Goldman Sachs capital partners. U.S. Security is a leading provider of high quality, customized security solutions for a diverse range of customers across multiple industries.

We also invested $30 million in the senior notes of SRA International. SRA is a leading provider of IT services and solutions to clients, mainly in the federal government. Another $29 million was invested in the senior unsecured and senior floating rate notes of Travelport. Travelport operates a global distribution system which provides aggregation, search and transaction processing services to travel suppliers in online and traditional travel agents.

Investment in existing portfolio companies were made in the following 8 names-- Alliance Boots, AIC Credit Opportunity Fund, Avaya, Clear Wire communications, Exova, Insight Pharmaceuticals, Intelstat and TL Acquisitions. Of these names, some of the larger investments included $76 million in the senior notes of TL Acquisitions. Regarding this particular investment, we identified an opportunity to sell a more junior security at a discount and purchase another more senior security at a similar discount while moving higher up in the capital structure which we expect will result in a better expected risk adjusted return.

TL Acquisition is a leading global print in electronic publish of textbooks, reference materials and other educational resources for the higher education, professional training, library reference markets. Regarding Insight Pharmaceuticals, we invest in the recapitalization of the company as a managed strategic acquisition. Notable exits during the quarter included our investment in DSI Renal in conjunction with the sale of the company which included $11 million of subordinated debt and $31 million of equity. As a reminder, we made our original investment in DSI Renal in 2006 which ultimately went to a restructuring in early 2010 and we received both preferred and common equity positions in the reorganization.

The closing of the sale of DSI Renal this quarter to a strategic acquirer concludes our investment and results in a modestly positive IRI on our original investment in 2006. In addition, we received a repayment of $8 million on our subordinated debt investment in Angelica and a full repayment on our $10 million of subordinated debt in the Babson Ltd. CLO

Let me go over some general portfolio statistics at September 30. We continue to be well-diversified by issuer and industry by 69 portfolio companies invested in 30 different industries. The Company's total investment portfolio had a fair market value of $2.83 billion, which was comprised of 30% in senior secured loans, 60% in subordinated debt, 1% in preferred equity and 9% in common equity and warrants measured at fair value. The weighted average yield on our overall dept portfolio and our current cost at September 30, 2011 rose to 11.6% as compared to 11.1% at June 30. The weighted average yield on our subordinated debt and senior portfolios also rose to 12.6% and 9% -- 9.4% respectively at September 30, 2011, versus 12.3% and 9.2% respectively at June 30, 2011.

Since the initial public offering of Apollo Investment Corporation in April 2004 and through September 30, 2011, our invested capital has now totalled over $8.5 billion in 161 portfolio companies in transactions with more than 100 different financial sponsors. At September 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 2.4 at September 30, up slightly from 2.3 at June 30 measured at cost. And is rated as 2.0 measured at fair market value at September 30, 2011, which is unchanged from June 30, 2011.

While our September 2011 quarter was an active one, we believe our investment pace will likely remain highly variable and market-dependent. Given the continuing uncertainty surrounding the global economies, particularly in Europe and to a lesser extent here in the US, we believe that the frequency and depth of market volatility will likely continue for at least the near term. These types of market conditions could create substantial investment opportunities for Apollo Investment Corporation. We do recognize with our strategy of investing in larger companies comes at a cost of higher NAV volatility in the short run. It also provides us with what we believe to be enhanced liquidity on our portfolio.

We believe that over long-term and the post bosal 3 and Dowd Frank world, it will be many new types of attractive investment opportunities for alternative lending institutions like Apollo Investment Corporation. We expect that there will be increasing demand for long-term capital to fill the void of the more traditional sources of capital which will be forced to exit.

In closing, we'd again like to thank all of our investors for your continued and long-term support and confidence in us. With that, operator, please open up the call to questions.

(Operator Instructions) Rick Shane of JP Morgan

Really 2 things, 1 is that, you know, the leverage has obviously crept up, and I would describe that I think liquidity is probably a little bit tighter than it's been, which presumably slows investment activity, or at least net growth. Can you talk about, in the current environment, your willingness to exit certain investments at losses, in order to reduce your exposure to any future volatility, in terms of high yield pricing?

Hey, Rick, it's Patrick. Thanks for the question. Regarding our leverage, as you saw at the end of September, as Rich mentioned, we're 0.77 times leveraged. Clearly, that was higher than the previous quarter. Since then, and given some comments that Jim made, the recovery in the credit markets, our leverage is reduced from that level. So we are more capable and confident to deploy capital should those good opportunities exist, we will be prudent about that. Our liquidity is available to us. However, even if liquidity does become somewhat constrained, as you saw last quarter, we are active in our portfolio optimization strategy.

There are really a few main goals with that strategy. Number 1 is to provide better credit and risk-adjusted returns, and going from one investment to another. If we can do that as well as find higher yield, that's a great strategy for us. In pockets of dislocation, different asset classes have different levels of volatility. For example, the height of market was much more volatile than the second-lien secured bank market. We were able to exit some of our second-lien positions which were lower yielding, at higher dollar prices and reinvest in some subordinated debt at lower dollar prices with higher returns even for a company that we expect to be as well performing, as each other.

As a relative value investor, in the quarter, for example, for the sales and exits we made -- the purchases and exits we made in the quarter, we hold the purchase assets at about 12.8% yield, while selling assets at a 9.9% yield. Therefore, you see that in 11.1% to 11.6% weighted average yield increases. That is good, if we can do that. We're going to be very market-dependent. It's going to be about credit first. We don't like to take losses, but if we can take losses, but expect that we're going to recover those in a swap of a different security, then that is a prudent decision that we will make. We are taking all those variables into consideration as we continue our portfolio optimization strategy.

Patrick, one follow-up, too. Obviously, given the narrowing of spreads during the first part of the year as the portfolio recycled a little bit, as there was a lot of refinance activity, the gap between NII and dividends started to widen out, the way we look at it, your portfolio growth is going to be pretty constrained over the next couple quarters. How do you look at dividend in light of that wider gap right now?

This is Jim. Let me answer it. You know, for a general manner, we don't give guidance on dividends, and we look at dividends as part of a long-term strategy, between the management and the Board. Since the IPO, we've taken a much longer term view, well over 1 year of -- or quarter-to-quarter, on our dividends. And any change in that policy will be communicated as appropriate. We understand where we are, and we are -- we feel comfortable in our current position.

And Rick, just a comment on liquidity and constraints, we have debt capacity. We are fortunate, we are expanding our debt sources, our NAV and our NAV process measurement, when we use third parties, creates a little bit of volatility. So we're putting in there some cushion, but as we've mentioned, we are more available today or more willing today, to invest given the recovery we see in the credit markets. Don't let the mark to market, from a technical factor, presume that, that constrains liquidity permanently.

Okay, thank you, guys.

Thanks, Rick.

John Stilmar of SunTrust.

Really quickly, I just wanted to point out, or ask a question, Patrick. Travelport specifically, looking at the mark, do you expect that to actually pay off at par? Because it looks like to me, you bought that $0.60 on the dollar, and are those reflective of the opportunities that came to you during the quarter? I look at that, vis-a-vis stock repurchase, obviously, you have a program in place. If you're able to invest the capital at $0.60 on a dollar, for something that's yielding between 6% and 8%, that's a meaningfully accretive portfolio purchase. I am just wondering, is that an outside purchase or is that more representative of some of the types of things that moved across in the public markets, on a flow basis, or how that kind of trade, or other types of trades like it, came to fruition? Thank you.

John, thanks for that question. To put some specifics around that, [with the] dislocation in the height of the market, we saw names on our portfolio. For example, Firstdata, which was trading at around par, go down as low as the mid-60's now it's recovered to the mid-90's. There was significant swings. We can be opportunistic, hopefully, when it's down toward the lower part of that range, and unlock some value when it goes up. We don't make purchases of companies we don't believe we are going to get a par repayment at maturity. There are times where it can be more opportunistic. The yields when you're buying a security in the 60's, that might have been a 10% coupon, you are going to get significantly higher, mid-teens, if not high teens, level of returns over time as those snap back. But the technical fact is, there is a lot of weight on a lot of credit. Some are higher [baited] than others, some are lagging, some are leading, but the recovery across the high yield index, you see, will show a lot of companies went significantly down because of the risk off-trade, and many have recovered. We want to be available and opportunistic on the down side of the cycle, and then catch the return and the benefits of the recovery. But we're only making purchases in companies that we believe, over the long run, will pay us back at par.

And then, second question with that,. You identified in your closing remarks, Patrick, about the structure itself being set up to benefit from what's an obvious trend in banks jettisoning, either types of businesses or types of companies, for which they provided capital to in the past, and you layer on top of that changes that are coming from the structured markets, specifically the CLOs. Can you talk about how you balance the setting up AINV, as a platform, let's call it, in the next 18 months to 24 months, to start to capitalize on those opportunities? Or, is there really nothing that you can do structurally, to change your business and the market is coming to you, and you'll take the market when it comes to you, and make the best risk-adjusted decisions, at that point in time? I was wondering if there's any kind of structural change, or how you're managing the business, until that point in which those factors become a lot more revealing in the market? And that's my last question. Thank you.

Okay, John, that's a very in-depth question. Jim and I will comment on that. From my perspective, we always have been looking at the world, at how can we build a better AINV, and how can we take advantage of market opportunities? There are many considerations on that. Obviously, we have our shareholders, our lenders, our independent Board of Directors. We have regulators. The regulatory environment, we're in constant dialogue, and believe we have really good relationships there to help us define the model. We think our model was set up in the 1980's to create lending when others are not lending, and we would like to continue that. We think that the Dodd-Frank and the Basel III outcomes are still uncertain. We think it will, based on what we believe are going to be the minimum requirements, will accrue our benefits. Having said that, we're not going to stay flat-footed and wait for the markets to come to us. We think they are coming to us.

We did some real structural change throughout last year, when we were being called by Wall Street firms, to back stop bridge commitments because they are consumed with holding loans if they can't sell them. That's a fairly new phenomenon. That has accrued to the benefit of us and our shareholders. And some fee income, as well as getting access to good assets and doing due diligence. We do think there will be other markets that have been orphaned, but we have to make sure we create an unlevered return. And not predicate the returns on leverage that has been yet to be defined on how it can be viewed by, from a GAAP perspective, or regulatory constraints perspective. So, we are in active dialogue. We think there will be opportunities, we're researching many opportunities, to benefit the AINV shareholders. But, we think the alternative lending institutions, like a business development company, should be able to, and hopefully will be able to, take advantage of a changed lending world.

The only thing I would add-- I think that's a great question because as Management and the Board, that's exactly what we're confronted with today, and we like and appreciate our model, but the backdrop of the lending environment has changed. The -- as Patrick said, we will always have a major foot in the areas that we have done to date, but it's certainly an opportunity and what gets us excited, is about, in a world that's dominated by liquidity and short duration investor mentality, the duration of our capital is the advantage that we've got to match up. It's a really competitive industry, so you can understand why I'm loathe to talk about some of those ideas right now. But we're using the breadth and the strength of the overall Apollo franchise to develop some of those and we are eagerly looking forward to executing them.

Jasper Birch from Macquarie.

Thanks for taking my question. Just 2 fronts. 1, if you guys can give a little bit more color on what your target leverage is. And also, the idea of taking advantage of market opportunities, how does that jibe with your appetite, with your liquidity given the best opportunities will probably come around when your leverage is the highest?

Yes, Jasper, our target leverage, we've been saying for years that our comfort level and the history, if you look at our leverage history, is between50% and75% to80%. That is where we have always managed Apollo Investment Corp. We do have to respect that not all of that is controllable, which is why we leave that 20% area of cushion, because you could see swings in volatility. We're fortunate to have built a portfolio that includes liquidity, so we can optimize and move to different assets where we can get a better yield or better risk to adjusted return and move higher up in the capital structure, in a down economy. We also have the benefit of looking at -- seeing many different assets we can buy or sell. The primary market, we want to make sure we're available to our customers. People look for our long term capital to provide committed financing, so it's a dynamic approach. We think that knowing that the world is volatile, building a cushion is very prudent. Diversifying your lending sources is very prudent, but we can, in pockets of dislocation, move amongst different types of asset classes. For example, second liens or high yields or private mezz, or private high yield, and get enhanced returns and improve even the credit quality of the investments. So, we're not sitting flat-footed in a dislocated market. And, as you saw in this quarter, we did improve the yields. We are very pleased with the performance of the portfolio, by and large, and we continue to look at that. But as our leverage ratio has now decreased, post quarter end, we have opened up some liquidity.

I'd also say that Patrick mentioned it, but we had a full repayment on our subordinated debt investment in the Babson-led CLO crunch, the subordinated debt portion. Those are things we did 24, 36 months ago that have turned out very -- to be smart investments, and I think you'll see us doing more of those in more buoyant markets, when we can expand our footprint, such that when markets are much more challenging, we are not forced to sell things.

Okay. That's helpful. And then, drilling back into the portfolio rotation, or going forward, really, portfolio rotation. How much more juice do you really get out of the portfolio, without -- or earnings growth, without expanding the portfolio? I mean, you guys expanded the yield by 50 BPs in the quarter, which is obviously respectable. Do you still see similar opportunities in today's market to rotate the portfolio, or is it something where you have to sit back and wait until there is dislocation in specific asset classes?

You know, Jasper, we cannot predict what's going to happen tomorrow, with perfect vision. However, we do stand ready, and in looking all the markets, we do think, there has been and, in this quarter, you've seen a dramatic snap back in the high yield market. We can use that in a different way, to benefit our company, so we look at optimization as always being available. We do get repayments back, from time to time, when credit markets are robust, because companies are bought and sold, but we can't give you a specific, what's going to happen next quarter. But, to say that we stand ready, it is a dynamic decision. We're constantly looking at our NAV, we're constantly looking at our liquidity, we constantly want to be prudent with our liabilities, and managing to a 1 to 1 leverage ratio, in a dynamic market. But if we can find some new asset classes that are less volatile, we'll look at that as well. And, we think the world is setting up to help us benefit, down the road, as traditional lending sources are moving out of the market place.

I guess, today, is there a specific asset class that you're more bullish on or rotating into?

We've seen some benefits in the high yield market. We could sell some assets at some nice gains. We've seen some interesting primary market opportunities, to deploy mezzanine, wherein companies are looking to be purchased prior to year end, or closed after year end. But no deal is done until it's done. So that's why we can never give guidance. A lot of work and due diligence, and structuring and negotiating has to take place, but we're constantly monitoring on a daily basis our liquidity. It's really a dollar allocation question for us. Where is the best dollar for us to invest? Is it new dollars? Is it existing dollars, or existing assets that we can sell or re-deploy? And what are the implications of doing that? So it a dynamic process. It's multi-dimensional. We work in a very close environment here, with a small team of folks who make decisions on a real-time basis, and continue to look for those benefits.

Thank you for taking my questions.

Thank you.

(Operator Instructions) Greg Mason of Stifel Nicolaus.

Great, thank you, guys. Jim, in your prepared comments, you highlighted that we needed to make sure we took a look at movements in book value that were due to marks versus credit issues. And I wanted to see if you guys could give us a little more color on the $1.64 decline in book, how much of that you view was due to credit deterioration, like ATI, versus mark to market?

You know, these are always the hard ones to answer. Our port-- the great thing about a BDC, is it's a very transparent portfolio. You see it in our Q's and our K's. I think we feel as the guidance that I gave about the direction, I think we feel very comfortable with our portfolio. We obviously, had to talk about ATI, because it went on nonaccrual. But, I would say, the vast majority of that have, as I have said before, is due to market movements. As you guys had the great luxury of transparency, I'll let you decide, name by name.

And, you know, Greg, we go through a very rigorous process. We use third parties to value the portfolio. For the ones that quotes are not available, that's a process that is done once a quarter, by third parties. We can't suggest what it's going to look like in December, but we did feel that in that last quarter, when we try to recognize in our comments, that the vast majority was from technical movements.

Patrick, you gave us some new investments in your portfolio, but there were a couple that I don't see, in the schedule of investments, like Level 3 and, I believe you mentioned Capsar, if I got that correctly.

Capsugel.

Pardon?

Capsugel.

Capsugel. Where -- can you give us some comments on those new investments, if we're just missing them in the schedule of investments, or why they're not there?

As I mentioned, the structural change in the bank market last year, about us being called by Wall Street investment banks, commercial banks, to back stop high yield offerings they were committed to. And the worse case scenario, we get a fee, the best case scenario, we actually get the asset at a rate we're comfortable back stopping those loans. However, what does happen, from time to time is, a deal gets done and it gets done at a rate that we are sort of indifferent on, but we will take it. But, then the market, actually, has a real strong bid and that thing trades up a couple points. If we can capture some value at what is an indifference point on yield, and we can recycle something else and make some additional dollars, we're not a trading shop, but that's just an opportunity that we'll take advantage of. We can re-deploy that capital into more of our core of our business. So, it didn't get done at the rate we really wanted to get done, because the markets were too robust. There's a lot of demand for that paper. It trades up a security. We can get out of that security in a gain plus a fee, that's good business for us.

Okay, great. Thanks, guys.

Thank you.

Joel Houck of Wells Fargo.

Patrick, on the ATI deal, last quarter, both the senior and sub were slightly carried above par, and now 1 quarter later, the subdebt is 95% of par and the senior is, you know, 66% written down. What happens, within a BDC, that you can have something within 90 days go from carrying above par to basically being written down to zero, at least in the case of the subdebt?

Sure. Joel, that was a very unique situation that happened to us unfortunately. This company is in a for-profit education space. Clearly, when you look to that space it's in the cross hairs of lot of regulators. It was in the cross hairs of Congress last year. With gainful employment, there was enhanced monitoring of all the for-profit schools. At the last quarter, it was doing fine, and then in August of this year, the company received a negative warning from the Texas Work Force Commission. And they wanted to do some investigations on some inaccurate data that they believed was being reported. The company, frankly, self-reported the issue.

This is public information, it's available, so I'm not disclosing anything we're not able to. And, with the Texas Work Force Commission rendering, and unfavorable ruling. That has since then been cleared up. But there are another set of regulators that also joined in the investigation of the Company, and from our perspective, it's had a negative effect on the Company's profitability, new enrollments, working capital, et cetera, and we thought it prudent, and our third party evaluation firms thought it prudent, given the uncertainty around the situation. We are very much still engaged in the situation working with the sponsor and the management team.

The outcomes are not certain yet, but given the uncertainty, that's here, and the dramatic effect we've seen in short term on new enrollments, et cetera, and the working capital, the profitability is lower than it once was. Sudden things can happen. Unfortunately, when you're talking about highly regulated industries, there was more regulation than there was 5 or 10 years ago, around certain specific industries. Things can happen. It is an unfortunate situation. But we took immediate steps. Our evaluation firms took immediate steps to write down those.

The robust process we go through is not going to keep things up, when it shouldn't be. And hopefully, we will see a change over time, there, but it was the right thing to do, to recognize the issue and these sudden things can happen. Joel, I know you've been doing this a long time, and things unfortunately can happen. We get some good surprises sometimes. Sometimes we get unfortunate surprises. And this, quite candidly, was one. It happened in August of 2011.

All right. I'll leave that one alone. I guess if I look at -- and this is more of a longer term question. I hear you guys -- I appreciate that you guys are marketing the highest percentage of loans to market and other BDCs aren't doing that and I get that, and obviously this quarter you're NAV reflects that. But if I look at the NAV at March of '09. 9.82, the world's coming to an end, that's the worst of all capital markets, and then the high point this year in high yield markets, your NAV is only 10.03. So it's up only up 2%, over the low point two years ago. That seems like that's substantial under-performance relative to an unmanaged high yield index. You guys are charging 2 and 20. Why would investors pay you guys 2 and 20 for that type of performance when you can go out and buy a closed-end fund at 50 basis points with no incentive fee and get the market? Has the Board really looked at the business model and decided this is the best way to go?

Joel, I'll say -- this is Jim. I think the 1 missing ingredient of your analysis is the share count. Share count is much broader and certainly, our Board takes their job very seriously, as we do, and as you look over time, 1, we've invested over $8.5 billion. We were a very large BDC, before the credit crisis. We've weathered the storm and, certainly over a multi year cycle, we've distributed a lot of capital back to our investors. Certainly the credit crisis has been a challenge. A lot of big platforms did not survive. Our platform has survived, and we believe that we have a robust platform to produce long-term investments over time. There's a lot of value-added service we provide. We're very comfortable with that.

There's a broad BDC universe out there, that investors can make choices between a variety of vehicles. But, again, I think that if you really get to the heart of your question, in the beginning of the crisis versus today, our share count went from 135 million shares to approximately 200 million shares a day, and so it's the breadth of that business over a different share count. Everything you're saying, that's certainly one view on it. But I think that we look at the long-term return what we provided for investors. The liquidity we provide, the transparency we provide, and we have created value so, in our mind, there's a justification for our broad existence. There's a justification for our broad shareholder base and everything goes along with that. So that's our perspective. We take a longer term approach and again, from our view, there's a lot to be gained from doing that.

No, I appreciate the comments, Jim. And the last thing is, I think someone asked about the dividend versus NOI. Walk us through, kind of, the dynamics. I mean, obviously, spreads are higher, and I don't know how much of that spread widening you guys captured in the August-September time frame. Is this something where you guys feel comfortable that higher yields are going to move your NOI closer to the dividend? Because, obviously, dividend above NOI is also -- hurts the book value dynamic as well.

Sure, sure.

So, if you could talk about that, that would be helpful.

You're a veteran of the space and over many years, the net interest margin, I would believe for the industry, has been under a bit of pressure. With lower LIBOR and LIBOR floating rate assets, those yields have come down. Whether it's revolver or long-term terming out of debt, which we think is actually a very shrewd thing to do in a low-interest rate environment, has certainly squeezed our net investment margin, and I think that could be safe to be said about the industry as a whole. And, what our view is, is we try to be very thoughtful and strategic about our dividends and not make quarter-to-quarter adjustments. As you remember, probably 3 years ago, we were one of the first companies in the industry, to cut our dividend because we saw the same challenge that you're pointing out right now, and an industry led by a lot of the large firms had continually paid out in excess -- we didn't think that was sustainable. So, we certainly are again trying to be multi-year strategic about the dividend, and not make decisions quarter-to-quarter. Certainly we've -- I don't want to say we're at the trough of our net interest margin, but we're certainly being compressed. And, as I said, and as Patrick said before, is we've taken a bit of a path in the past, to really have a not as broad an asset management approach to the business, with things that we're really very thoughtful and experts in, which is corporate credit. What you are seeing in the book, and you will see hopefully in the book in the future, is a broader approach to bring this capital and the benefit that will bring will have a hopefully long-term impact positively to shareholders.

All right, guys. I appreciate the comments. Thank you.

Thanks a lot.

Casey Alexander of Gilford Securities.

What is your percentage of fixed to float in the portfolio right now?

It's about one-third floating and two-thirds fixed.

Okay.

And that roughly matches our floating rate liabilities.

Okay. When I take a look at your balance sheets versus your statements that the large percentage of the NAV decline, which has been taking place over years, is recoverable, I see --

That's what we're saying to you --

I understand, you're saying it for the quarter, I get that, but you have $250 million of unrealized of depreciation in your non-controlled assets, and $350 million of unrealized depreciation in your controlled assets. Shouldn't we look at this as though the unrealized depreciation in the controlled assets and investments is far less recoverable than the ones in the non-controlled assets?

Well, I think that's probably correct, but again, I think what you really -- what we're really talking about is, looking at the business on a quarter-by-quarter basis regarding this NAV adjustment. Certainly, there are unrealized depreciation on our balance sheet that will not be recoverable, and what we're talking about a certain aspect of the unrealized depreciation that we believe is recoverable. I think it would be clear to say, that we have never been public -- we never really said but we obviously believe, that the unrealized depreciation in Innkeepers is not recoverable, whereas, the volatility in some of our names this past quarter, we believe is recoverable, and that's reflected on our balance sheet, based on when we look at our NAV to date, as you know, is including the unrealized appreciation and the unrealized depreciation. So I think how the other analysts have approached it, is the right way. Certainly, as I said before, we've been in business quite some time. We've invested $8.5 billion and there are some losses that are on our balance sheet that are maybe unrealized, that we will not recover.

And wouldn't it be fair to say that you would likely have a higher degree of recovery from the unrealized depreciation from the non-controlled assets, than you might, from the controlled assets?

Outside of Grand Prix Holdings, that may not be, ultimately, the true statement. The equity holdings that we do have and other assets, we cannot as a co-investor dictate when those get exited. But a lot of those are investments in companies we'd like, and to the extent that private equity firms we are backing does exit those at a gain, there can be some gains in there. But those are -- we can't give you the crystal ball.

I guess I had one other point. Patrick mentioned it. We had a successful outcome of DSI, and if you had looked at DSI 36 months ago, that had a greater amount of unrealized depreciation, which, through a restructuring, we took back debt and equity, has recovered and has a modest IRR since the investment. So, as Patrick said, you need to really pull the onion back on the different companies within that bucket, to make that final judgment outcome.

Okay. Thank you.

Thank you for your time.

Jasper Birch at Macquarie.

Hey, guys, my question was answered. Sorry.

Well, ladies and gentlemen, thank you very much for your time and your great questions today. We appreciate it. We look forward to talking to you after the next quarter. Take care.

That concludes the question-and-answer session of today's call. Thank you for participating in today's conference. You may now disconnect