Apollo Investment Corp (AINV) 2012 Q3 法說會逐字稿

Good morning and welcome to Apollo investment Corporation earnings conference call for its third fiscal quarter ended December 31, 2011. At this time all participants have been placed in 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 Elizabeth Besen, the Investor Relations Manager for Apollo Investment Corporation.

Thank you, and good morning, everyone. I'm joined on the call this morning by Jim Zelter, Chief Executive Officer; Eileen Patrick, Executive Vice President of Corporate Strategy; and Gene Donnelly, our Interim Chief Financial Officer. I would like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Investment Corporation, and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release.

I 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. At this time I would like to turn the call over to Jim Zelter.

Thank you, Elizabeth. As you have probably seen, we issued our third-quarter earnings press release and filed our quarterly form 10-Q with the Securities and Exchange Commission this morning. In today's release, in addition to our quarterly earnings, we have made some important announcements that I will discuss. Following my remarks, Eileen will provide you with an overview of some of our new strategic endeavors. Finally Gene will discuss our third quarter portfolio performance and financial results, and we will then open the call to your questions.

As I step back, Apollo Investment Corporation was one of the first sizable business development companies, or BDCs, prior to credit crisis of 2008. During the period of time, BDCs such as AINV generally played an auxiliary role in the financial services landscape, primarily providing credit to middle-market sponsors for leveraged buyouts. However, as we strategically review the BDC industry and financial services environment in the aftermath of the global credit crisis and during a period of continued economic and regulatory uncertainty which persists today, we believe BDCs can play a more significant role in the current financial landscape. We believe BDCs can fill the sizable gap left by numerous banks and other financial institutions that have dramatically altered their business models, reduced their balance sheets, or disappeared altogether.

Unlike many other debt providers, the attribute of permanent capital is a distinct BDC advantage that is relatively unique in a credit market consumed by investor liquidity and a multiple of the fund products sensitive to that dynamic. More specifically, we believe BDCs such as AINV are well positioned to evolve in the current environment to become private market debt solution providers. Historically, we have been almost singularly focused on providing acquisition finance to financial sponsors. We need to broaden our product across the capital structure, and in order to capitalize on this opportunity, we are methodically working to broaden our portfolio and in turn our product offering to provide a wider array of proprietary debt solutions, and we are also striving to enhance our proprietary origination efforts. Eileen will elaborate on this point during her remarks.

Given the opportunities that we believe are available to us in the broad financial services landscape, the board has decided to make several changes with respect to AINV senior management, our dividends and capital base. Turning first to the senior management changes, in addition to my role as CEO, effective immediately I will serve as the company's Interim President and Interim Chief Investment Officer for Apollo Investment Management. As you may have seen this morning in this morning's press release, we are very pleased that Ted Goldthorpe, who spent his entire career at Goldman Sachs, has agreed to join AINV as President and Chief Investment Officer of our Investment Manager. He is expected to join in the next 90 days. We are confident that Ted will play a significant role in enabling us to expand our proprietary origination footprint and execute our strategic goals. We believe that his extensive background and expertise in a variety of private debt capital market special situations, Ted is particularly qualified to take on an investment leadership role at AINV.

This morning we also announced a management change at the CFO level at AINV. Gene Donnelly, who is currently the CFO for Apollo Global Management, has agreed to serve as AINV's Interim CFO and Treasurer until a permanent replacement has been appointed by the board, which we expect will happen within the next week. In addition to these important senior management changes, the board has appointed Eileen Patrick as Executive VP of Corporate Strategy and in this role-- newly created role Eileen will help us accomplish our strategic objectives of expanding our footprint and more effectively leveraging the broader Apollo platform. We are confident that Eileen will add significant value, particularly since she has been working in various roles throughout Apollo.

I would now like to briefly discuss our dividends. As you may know, for the past few quarters, AINV's dividend has exceeded its net investment income per share. For the fiscal fourth quarter, the board has declared a dividend of $0.20 per share. We believe having a dividend that is closely aligned with net investor income per share, which was also $0.20 for the December quarter, is prudent and appropriate. Finally, in order to better positioned AINV to capitalize on the various proprietary market opportunities that we have identified and to maintain an appropriate capital structure, the board is considering raising up to $200 million of additional equity capital, which may be conducted through either a traditional marketed transaction or a rights offering.

Apollo Global Management has informed the company that it intends to support an equity capital raise by AINV, which in the case of a rights offering could include the exercise of over-subscription rights as a backstop for up to $50 million. Apollo Investment Management has also informed the Company that it intends to waive its management and incentive fees associated with any shares issued through such an offering. Additionally a Apollo Global Management may purchase shares of AINV in the open market. These statements of support demonstrate that Apollo Investment Corp has been and continues to be an important flagship vehicle for Apollo Global Management.

On a final note, we know that some of our shareholders are disappointed with AINV's performance in recent years, and we share some of those views. We believe the significant changes I just highlighted will enable us to capitalize on the meaningful opportunities we see in the current landscape and will help us generate attractive risk-adjusted returns for our shareholders. With that I will now turn the call over to Eileen to further elaborate on some of the competitive positioning and how we intend to capitalize on the current landscape.

Thanks, Jim. As Jim indicated, we have spent a significant amount of time analyzing AINV's current competitive position and strategy. During the financial crisis, AINV embarked upon a strategy to move into larger cap credits where we felt we could provide investors with the best risk-adjusted relative value return. We also believe that larger corporate credits would be best positioned to survive the global credit crisis. That strategy proved to be sound, and AINV successfully emerged from the crisis as a leading BDC.

However, one of the consequences of building exposure to larger names is that these names are subject to greater volatility as evidenced by the recent performance in AINV's net asset value. This volatility serves as a sound reminder that as markets change, so must relative value portfolio allocations. We intend to expand portfolio allocations to match demands for capital within the lending landscape as many other BDCs are doing today. Consequently, as Jim mentioned during his remarks, we intend to broaden our investment footprint to provide a more diverse array of private market debt solutions.

In addition, we believe our proprietary access to Apollo provides us with a distinct competitive advantage, and we intend to leverage the broad Apollo platform to generate proprietary yield-oriented product more effectively. Specifically, we have the unique opportunity to source investments across Apollo's credit platform, which after accounting for the pending Stone Tower acquisition will be north of $40 billion. Our core strategy, which is to provide financing to middle market companies, remains in place. However, we intend to logically expand that strategy. For example, we recognize we need to have greater exposure to proprietarily originated middle market senior secured debt, assuming the availability of cost-effective financing.

We also recently established an energy team in Houston. We are very excited to have this present and believe their industry expertise can leverage Apollo's natural resources platform. We will continue to look for additional investment opportunities that maximize the benefits associated with the permanency of our capital, and we expect to provide you with additional updates regarding our progress on our upcoming quarterly calls. I'll now turn the call over to Gene Donnelly who will provide you with additional details regarding our portfolio and financial performance during the fiscal third quarter.

Thanks, Eileen. For the quarter, we invested in three new and six existing portfolio companies. On a gross basis, these investments totaled $95 million. We also received $95 million of proceeds from selected sales and $80 million from prepayments. Here are some details regarding portfolio activity. Regarding new portfolio companies, $19 million was invested in the senior notes of National Healing Corporation to support the Company's acquisition of Wound Care Holdings. National Healing is a leading provider of specialized services and advanced products to the rapidly growing and under penetrated US wound care market. $19 million was also invested in the senior debt of Grocery Outlet to support a dividend to the current sponsor. Grocery Outlet is an extreme value grocery retailer operating 156 stores primarily on the West Coast.

During the quarter, investments were made in the following six existing portfolio companies - Advantage Sales & Marketing, AIC Credit Opportunity Fund, ATI Acquisition, Avaya, Exova, and Generation Brands. Of these names, some of the larger investments included $25 million in the mezzanine notes of Advantage Sales & Marketing, $13.9 million in the senior unsecured notes of Exova, and $9.9 million in the senior PIK toggle notes of Avaya. Notable exits during the quarter included our investments in Grand Prix in conjunction with the Company's exit from bankruptcy. In addition, we exited our investment in FleetPride Corporation, as the company refinanced its existing data.

I would now like to review some general portfolio statistics at December 31. We continue to be well diversified by issuer and industry with 67 portfolio companies invested in 28 different industries. The Company's total investment portfolio had a fair market value of $2.78 billion with 29% in senior secured loans, 60% in subordinated debt, 1% in preferred equity, and 10% in common equity and warrants measured at fair value. The weighted average yield on our overall debt portfolio at our current cost at December 31 rose to 11.7% compared to 11.6% at September 30. The weighted average yield on our subordinated debt portfolio was 12.6%, unchanged from the prior quarter, and the weighted average yield in our senior loan portfolio rose to 9.7% compared to 9.4% at September 30. Since the initial public offering of Apollo Investment Corporation in April 2004 and through December 31, 2011, our invested capital has now totaled $8.6 billion in 164 portfolio companies in transactions with more than 100 different financial sponsors.

At December 31, the weighted average EBITDA of our portfolio companies continued to exceed $250 million, and the weighted average cash interest coverage of the portfolio remains at over two times. Regarding our risk rating system, as some of you may have noticed in our most recent registration statement, we have revised our system to more clearly characterize and monitor the risk related to the expected levels of returns of each investment in our portfolio. We also believe this new system is more consistent with the methodology employed by our industry peers. Under the new system, the weighted average risk rating of our total portfolio was 2.3 measured at cost, and 2.2 measured at fair market value at December 31, 2011.

I would now like to briefly discuss AINV's financial performance for the fiscal third quarter. I will begin with some December 31, 2011 balance sheet highlights. Our total investment portfolio had a fair market value of $2.78 billion, down slightly from $2.83 billion at September 30, 2011. At December 31, net assets totaled $1.61 billion with a net asset value per share of $8.16. This compares to net assets totaling $1.59 billion and a net asset value per share of $8.12 at September 30. The slight increase in NAV for the quarter was driven primarily by unrealized depreciation net of realized losses. On the liability side of our balance sheet, we had $1.21 billion of total debt outstanding at December 31, down slightly from $1.22 billion at September 30. Based on our total net assets at December 31, the Company's leverage ratio decreased to 0.75 to 1 debt to equity from 0.77 to 1 at September 30.

No new investments were placed on nonaccrual status in the December quarter. Accordingly our portfolio had two positions in ATI on nonaccrual status compared to three positions across two companies at the end of September. During the December quarter, we exited our investment in Grand Prix, which was on nonaccrual status. At December 31, nonaccrual investments represent 0.2% of the fair value of our investment portfolio, which is unchanged from September 30. On a cost basis, these investments represented 1.7% of our investment portfolio at December 31 versus 4.5% at September 30.

As for operating results, gross investment income for the December 2011 quarter totaled $83.8 million, a decrease from $94 million at the September 2011 quarter and down from $94.3 million for the comparable December 2010 quarter. Expenses for the December 2011 quarter totaled $45.3 million. This compares to expenses of $48.4 million for the quarter ended September 30 and $44.2 million for the comparable December 2010 quarter. Net investment income totaled $38.5 million or $0.20 per average share. This compares to $45.5 million or $0.23 per average share for the September 2011 quarter and $50.1 million or $0.26 per average share for the comparable December 2010 quarter.

Also during the December quarter, we received proceeds from the sale of investments and prepayments totaling $175 million. Net realized losses totaled $275 million, which included $274 million associated with the exit of our investment in Grand Prix, which is a reversal of unrealized depreciation previously recognized. This exit had no net impact to net asset from operations. These quarterly results compare to net realized losses of $20.2 million for the September 2011 quarter and net realized losses of $64.9 million for the December 2010 quarter. The portfolio's change in net unrealized depreciation totaled $300.2 million for the quarter ended December 31, 2011. This compares to net unrealized depreciation of $292.6 million for the September 2011 quarter and net unrealized appreciation of $99.3 million for the comparable December 2010 quarter.

Other notable contributors to the unrealized depreciation for the December 2011 quarter include our investments in AIC Credit Opportunity Fund, TL Acquisitions, and Intelsat Bermuda, Avaya, and Generation Brands among others. Contributors to unrealized depreciation for the quarter included our investments in PlayPower, Altegrity, and NEW Holdings, Angelica and BCA Osprey II among others. In total, our quarterly operating results increased net assets by $63.7 million or $0.32 per average basic share versus a decrease of $267.3 million or $1.36 per average basic share for the quarter ended September 2011, an increase of $84.5 million or $0.43 per average basic share for the comparable December 2010 quarter.

That concludes our prepared remarks. And with that, Operator, please open the call to questions.

(Operator Instructions) Your first question comes from the line of Greg Mason with Stifel Nicolaus

One of the questions I am scratching my head about and I think one of the reasons why the stock is down 12% today is the commentary about raising capital. And given that you guys have significant liquidity in your portfolio from liquid loans and given where the liquid loan markets are, it would seem to me that you would have the capability of raising capital pretty quickly internally to fund some of these new strategies. So can you talk about why at these prices you would even consider raising additional equity capital versus raising it from your portfolio?

Sure. Greg, thanks a lot for your question. I think that we have seen what is going on in the last few weeks with several of our peers. We've seen-- we've been indicated that folks came in to us with a desire that they thought we should go out and raise capital. What you're seeing today is nothing that we need to do. We do have liquidity. But we thought in the current context of some of the opportunities that we were seeing, in terms of the backlog as well as the opportunity to prudently have a capital structure that we thought was the right amount of leverage. We think it is an option that we are considering from the board.

But what you're seeing here is not any final decision to do so. And certainly there are levels where we will not issue equity because we understand the cost of the equity. We understand the dilution of the equity. So what you are really seeing here is really the comprehensive announcement we put out today. It is really the result of a comprehensive review by the board to really have a holistic repositioning of our business and our portfolio allocation going forward. And if it does make sense for us to issue equity, we want to make sure that our investors understand that that is part of our arsenal right now. But by no means, if the response is such that we don't believe it is being done at the right price or we don't have the widespread support from our investors to do so, that will be a path we don't follow.

Okay, great. And can you guess or give us some color on what you expect the yields from these new potential strategies could have given the stock at $7.00 today? It's an 11.4% yield on the new dividend, so those have to be pretty robust new opportunities.

Yes, I think so. I'll have Eileen talk about it, but certainly whether it is some of the things we're looking at in the energy space, whether it is some things that we are looking at strategic relationships in the senior secured lending space, or we can provide capital to our relationships as the market leader. Those returns are all in excess of that dividend. We wanted to reset our dividend, and we certainly believe that if our stock is trading with an 11% type of yield at 0.85 book, we can go out and source opportunities from our platform that will be in excess of the cost of capital and that will (inure) to shareholder benefit as the bottom line.

Okay. And then finally, and then I'll hop back into the queue, you talked about doing some proprietary middle-market originations, kind of getting back to your roots. We have had the perception, and maybe it is a misperception, that there isn't the kind of manpower on the ground at AINV to do these proprietary originations and a lot of the work that needs to be done to find and source and underwrite those. Is there a change that you need to do to add firepower, manpower at AINV to focus on this new potential segment?

Sure, again let me just add what I said before is, we have a view that the folks out there that have an infrastructure that we have a strategic dialogue with and a relationship with, that we believe is a market leader, that we can combine some of our capital in a relationship, in a partnership that may be more formalized over time. But certainly that's something we would like to do the very short term without committing capital to that. So I think what you are hearing us say is, we recognize the need to succeed and the resources needed to succeed in that business. We certainly have the analytical talents, but there is a sourcing dynamic as well. And we believe this relationship that we have at the final stages with, we'll be able to exploit that in a very meaningful way.

Your next question comes from the line of John Stilmar, SunTrust Robinson Humphrey

Good morning. Really quickly going back to your discussion of a potential relationship. That seems like that is kind of one of the newer catalysts that's shaping your strategy in the future. Is there anything that you can talk to us about? Are they typically equity providers for which you are going to be providing the debt capital for? Is this a debt capital relationship in which you will be sharing (carry plus two) within the cap structures? Is there anything more that you can give us at least in terms of this relationship which seems like a catalyst, if you will, for shaping your strategy for the future? And then have a follow-up.

I think would be inappropriate right now to get into any details. But certainly I think what you are hearing us say is, and this was very clear in my comments, historically we have been what I would argue, and when you look at the breadth of BDCs out there, we've had more of a monoline subordinated debt portfolio for larger buyouts. There is clearly a variety of other strategies that are credit dominated, but certainly the capital that we can provide is the same skill set and analytics, but is either smaller companies, i.e. this middle-market partnerships or their enterprise loans or dip loans or a variety of other structures.

So I think it is important it be-- certainly as the prior question alluded to, we understand the need to have a relationship with a partner that has that type of front end. And certainly that is the partner you'd want to do with. I would also add that there is a reason why with our management change, we brought in somebody that has a long history of being able to source, analyze, and invest in this space. And that is why the broad change that you are seeing today were put forth by us.

Okay, perfect. And then you alluded to potential changes in the capital structure of AINV or positioning the capital structure of the business. I was wondering if you could flesh that out a little bit more? And saying what changes do you see in terms of the cap structure of the business or are you really talking about the opportunities that might exist from things like you did the AIC Credit Opportunity Fund, which was, you showed an ability to use banks' balance sheets to structure proprietary deals and to get out-sized returns. Is that really what we are talking about? Or are we talking about the balance sheet at AINV potentially going through a little bit of capital structure repositioning? And if so, could you kind of flesh that out?

No, it is not our balance sheet. We over the last 24 to 36 months have broadened out our sources of funding. Not only our revolver, but privately placed senior debt and the convertible market. We will continue to do so in the normal course of business. Certainly there are some things that we can do that we can source financing as interesting.

But really it is the other side of the equation you brought up. It is really our ability not just to be broadly syndicated subordinated debt, which again, as Eileen said in her commentary, there was a strategy to do that basically through the crisis. Those larger credits for the most part of the very well by us and we have done well by them. But certainly they brought a degree of volatility in our book. And we just believe there is a real mismatch right now between liquidity and capital. And the duration of our capital at the BDC should be looked at in a variety of other debt-financing opportunities.

Great. And actually one final question. If we were to try to measure you over the coming quarters in terms of progress in this new strategy, what would be the one or two things that we should look for as analysts to kind of measure the pace of progress? Is it the mix of assets? Is it the EBITDA of companies that you will be looking at? What are the things that you would point us towards into how we should get your progress in the future?

Sure, that's a great question. I think the answer to that is really the detail within our portfolio over coming quarters. Seeing examples of our ability to actually source, analyze, and successfully underwrite, whether it is the names I mentioned, whether a variety of energy situations, whether it is creating this relationship that we are able to use our equity capital with a middle-market secured lender, and seeing evidence, concrete evidence that we are able to book those assets in our portfolio.

So again, we want to be very careful. When we have listened to our shareholders and we've listened to research analysts, was a broad view that we were not capitalizing broadly on the opportunities in the lending market, and we needed to broaden our front end. We are fortunate. We have a very large alternative asset platform, and in the breadth of our platform, this really is the flagship private debt vehicle. It has been to date and certainly we want to make sure that we are capitalizing on that platform to a greater degree to benefit our portfolio and in turn, our shareholders.

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

Just curious if you could comment on really how you would expect the portfolio to perhaps look over the next two or three years with increased focus on some of the diverse senior secured and different securities? Would it be a real wholesale shift in mix? Or perhaps just a little more color there would be helpful.

Yes, it will not be a wholesale shift. I think if you look at our portfolio today, with our 12% to 15% equity co-invest, we have a large portion of subordinated debt and probably a smaller portion than some of our peers in the senior secured debt. I think what you will see is over the next 12 to 36 months, every quarter we are going to certainly-- the mainstay of our book will probably remain subordinated debt. But certainly I think in the four or five areas that we are thinking of increasing our exposure, you will see the $3 billion go down to in the neighborhood of $2 billion and the incremental strategies we are talking about will fulfill this gap. So it is not a wholesale change.

Really some analysts we have talked to, it is more about a barbell strategy and making sure we are taking advantage of both the senior secured portion of that structures, as well as subordinated structures. So it is not a wholesale shift in any one quarter. But it really is opening up our front end to be more open to these as we diversify our portfolio in a prudent manner.

Okay, terrific color there. And then just one quick follow up. I would've expected a little but more of a rebound in book value given where credit market trends had gone. So I was just curious if you could talk about the moving parts here for the quarter on that note?

Sure. Nothing was dramatically up or down in the portfolio other than our (innkeepers), which is really just a geography, nothing else. Certainly when you end up paying out more than you're earning on a quarter to quarter basis, that hits your NAV that is about $0.08 or $0.09 this quarter if I remember correctly. Certainly if you were to roll forward, we've seen a nice jump in January. The markets have been very favorable to us on our portions of our book that are market oriented. If one were to just do a snapshot, and this really is just a snapshot, over in the current period or the current date, if you held our private at cost for year end and you looked at where our portfolio would be today based on our market assets going to market, it would be in the context of the 840, 850 zip code, again broadly speaking.

So sometimes assets that we owned because they were larger are later movers. We certainly saw it in January. I don't give want to get too focused on any one day to day, but certainly as we see the market right now, we have been the beneficiary of recent rally.

(Operator Instructions) Your next question comes from the line of Rick Shane with JP Morgan.

(technical difficulty) Are you ready for a question? Jim, can you hear me now?

I can hear you now, yes.

Sorry. What I actually said was my questions have been asked and answered. Thank you. Sorry about that.

Your next question comes from Arren Cyganovich with Evercore.

I was just wondering, your new CIO that will be incoming has it looks like a bit of a distressed background. Just wondering how you are looking at that you're market? If you are considering making that a bigger portion of your portfolio relative to the typical ABL or cash flow type of loans that you usually make?

This is not meant to be a distressed portfolio. Certainly we believe that skill set of really understanding credit, understanding when you are making an enterprise loan with a nice secured position in the portfolio, you want to make sure you understand the dynamics of processes when they take place, if you are lending on assets rather than just per cash flow. So we think that is a critical aspect of analysis that needs to occur. But no, you should not expect this portfolio to turn into a distressed portfolio.

Okay. And also, how many folks do have that are dedicated to AINV right now and do you intend to make a lot more hires for your junior level team?

Sure. Our portfolio here, we have a full-time staff of over 20 people. But certainly when we look at Apollo in terms of the investment professionals in our capital markets platform, pending the news that has been out of our pending acquisitions and when those are closed, we will have well over 100 investment professionals, and the firm has over 200. And certainly what you are seeing here today is a reaffirmation of the importance of this vehicle to our long-term success. And those around the firm know the dedication of this pool of capital in terms of its duration. So we have always looked at this pool of capital as something that is broad for the firm, and we will continue to do so in addition to the dedicated folks that are focused on the day to day.

Thanks. And then lastly, with the replacement of the CFO, how much confidence should we have that the books are appropriately marked and there is no future issues that we should be uncovering in the future?

Let me start off first, and then Gene can talk about it. We're very comfortable that the changes that we made really were-- Apollo has a standard of excellence over the last 21 years of excellence and integration. And the board just felt that the track that we were on was not the appropriate track. And we needed to make the changes and therefore the new President, CIO, and CFO. But I'll let Gene talk about the actual financials in specifics.

Yes, your question was on confidence in the marks, and this entity has a very robust valuation process that has been consistently followed for many, many quarters. The team with the exception of CFO is intact. That process is overseen by the independent Board of Directors in a very active matter manner and also involves significant third-party independent valuations. So the process is very robust, and you should be highly confident that it has not skipped a beat.

Your next question comes from the line of Joel Houck with Wells Fargo Securities

A question on the potential equity offering. Rather than a rights offering raised below NAV not have Apollo Global make an investment at the BDC at NAV? Because that gives you immediate capital, it better aligns Apollo Global with AINV shareholders, and it does not dilute any of the impressions of stock price.

Joel, listen, certainly the board has looked at and will continue to look at a variety of strategies that could make sense for a broad capital structure. Certainly what we put out today is, we wanted to be transparent in terms of our communication of the things that we have been approached on and we were considering. And we thought the alignment-- we believe the alignment that AGM has put forth, whether it is a rights offering or whether it is the fee waiver on the ancillary shares, those are all things we're considering today. Certainly the board has a very active dialogue with management, and we will explore a variety of opportunities that we think are in the long-term best interest of the Company.

Would that include looking at the fee structure on existing capital or is it just new capital rates?

As I'm sure you're aware, as a (40 act vehicle), the board has a broad responsibility of every year analyzing and exploring that contract and will do so the normal course of business as they have since day one. Certainly there are a very understanding have been very involved in the strategic review of our business, all the steps we have taken. And I am a board member. I know the board shares my view, as I said in my comments. We share the disappointment, as many of our shareholders do, of where we are today. And we share the views and certainly I think what you are seeing today is the result of a broad review and a holistic response to make sure that this vehicle exceeds the standards of excellence and integration that we've tried to do for many, many years and we have done across our platform.

So we clearly understand-- we look at stock every day. We understand what the response is from our shareholders. And we are very much-- again, this is what you're hearing today from us, is a holistic response to all that inquiry coming into us and how we want to reposition our business going forward.

All right. And the last question is a regulatory question, as it potentially relates to the AIC Credit Opportunity Fund. The SEC recently required BDCs to count total return swaps in their asset coverage test. Can you tell us if the SEC is looking at that fund as a total return swap? And if so, is that counted in the asset coverage test or do you intend to count that debt as part of your liabilities for regulatory purposes going forward?

We have a very active dialogue with PWC and our regulators in terms of that vehicle. Certainly of one of the transactions is at TRS. I believe it is a TXU transaction. But certainly overall, we feel very comfortable that we have a variety of room in our leverage today and even if the SEC chose to consolidate it, we have plenty of room.

So in our view, we believe we have been extremely conservative in terms of how we not only have treated this vehicle, but it relates to a variety of other BDCs in terms of a variety of off-balance-sheet activities. So we feel very comfortable that how we are accounting for today, whether it is GAAP or regulatory leverage limits, are appropriate, and in our daily dialogue, our ongoing dialogue with the regulators, we will make sure that if there's any changes, we would be quick to report that.

And Jim, I think the company has been very transparent in their disclosures regarding this fund. So all the information behind your question is laid out I think in great detail in the SEC filing.

Your next question comes from the line of Jasper Burch with Macquarie.

Good morning, everyone. Most of my questions have been answered but just a couple more. What is the timing of when you raise capital or get capital either internally or through an external raise, putting that to work in the new strategies? Are all the platforms in place to really be active in other areas, or what is the timeline in building out those verticals?

I think some of the strategies that we are looking at, we definitely would be able to put capital to work fairly consistently throughout the year and some even potentially this upcoming quarter.

Okay. That's useful. And terms of prepayments, they have been trending down pretty meaningfully the last couple of quarters. What is your outlook on internal capital generation, either through sales or through refinancings in the portfolio? And I'm assuming now that you have a new focus, you view those as a positive for the overall business structure?

Yes, we have been a beneficiary of a large cap mezzanine portfolio that when the market reopening last quarter, the beginning of this quarter, we are getting some names taken out. I think the pace of repayments is slowing down. A lot has gotten taken out. If you look at the calendar last year, over $1 billion was refinanced from our book. So I think you're going to see a more moderate pacing of that. And this goes back to our strategy on potentially raising equity. We don't want to have to be in a position to have to sell assets that are good performing assets that if we did so, we would maybe constructed or maybe confronted with having to sell things at or below NAV. We don't want to have to do that. So if we have plenty of liquidity in our book and the natural trend of our portfolio will continue to generate proceeds for us, so again we're turning to be very balanced in our approach. The equity is not necessary for us. But as I think we see a situation where we are having a lower degree or a lessening of prepayments, that was an option we wanted to have at our disposal.

Okay. Great. Thanks a lot, and I look forward to getting to know the new team.

Great, thank you. We look forward to it as well.

Your next question comes from the line of Christians Stadlinger with Columbia Management.

My question is, the Company just announced dividend cuts of annual about $64 million. And that contrasts to a 2011 annualized performance management fee of about $40 million. That is over and above the base performance fees. So my question is, given the decline of the NAV of close to 20% in the calendar year, what really is the mechanism to pay out the performance fee? And in that line, given the current success of the Company, what are you assuming the performance for next year should be?

I think this has probably been-- we have been very clear with what the structure of our management performance fee in our Ks and Qs. It is a bit complicated, and certainly if it means having an offline conversation or detailed accounting to go through that, this is one, as I'm sure you know, it's is fairly standard in the BDC industry. We all have generally the same broad structure of a management and a performance fee. But certainly again, these are all questions that when we construct our model going forward, making sure that we are trying to provide shareholder value and back to our board, they are cognizant of all of these management contracts in place. And certainly that is what creates our desire to create this response today of our review. So maybe we should have an offline on that, because it is a precise calculation. I think it is probably better done in a smaller arena.

That is maybe the case but just generally, is it going to be related to changes in the NAV, positive or negative? Is going to be still doable if there's a dividend cut that the shareholder has to pay that the performances still will be paid out? Just general comments like that would be helpful.

No, again, I'm not trying to be by no means evasive, but it is very clear how our-- it's very formulaic. So it really has to do with, there's a management fee that's based on our assets. There's a performance fee that is based on investment income. And it is very formulaic. So think what you've heard today is, we're not looking to shrink our book. We're looking to create a sustainable dividend. So I think if one was to model that, the numbers you have used historically would probably get be consistent.

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

Hey Jim, could you give us an update or give some comfort on the renewal of your credit facility which is due in 14 months?

Sure. I may have Eileen talk about that, but certainly we're very comfortable with our banks. But certainly-- let me have Eileen talk about that.

I think all of our lenders are keenly aware of our renewal. And we are comfortable that we will begin that process in the very near term.

Okay. And your debt to equity ratio for your balance sheet is about 0.76. Are you comfortable at that level right now, or are you going to be deliberate about either reducing that or any thoughts there?

Yes I think we have been consistent and will remain consistent in-- there's a range of leverage that we like for this business. It goes from 0.555 to 0.7, 0.75. We're on the outer edge of where we like to be comfortable. So that is why when we think about again, in the broad response and the broad announcement today, because we have been approached and have been told that equity is an opportunity for us, that we wanted to make sure that we had talked about that.

But certainly we over time would like to have our leverage closer to 0.65 or 0.6 to broadly take advantage of some of these opportunities. And again one of the things-- it is all connected. One of the unintended consequences of having a very large liquid book is the volatility sometimes creates more leverage inherently as an on expected result of market volatility. Same assets marked down because of liquidity, your unintended consequence is your leverage goes up overnight. That is something that all the BDC's have to deal with. We happen to be one that because of the nature of our portfolio, I think we were more impacted by that.

And if you recall a couple of quarters ago, our NAV volatility quarter to quarter, where many of the BDC's were 1% or 2%, we were at excess of 15%. Now some of that is the market, some of that is a result of our broad-- the breadth of our evaluation process that occurs every quarter rather than just once a quarter annually for many of our peers. But a combination of those two things creates an unintended consequence. So broadly speaking, we want our leverage to be between 0.5 and 0.75 or on the wider end of that. We'd prefer to be in the middle of that.

Okay. And were there any nonrecurring items where you would consider them nonrecurring in interest and dividend income lines this quarter?

No, the only thing I would say, and I'll refer to Gene for a second, but as you know, the AIC Credit Opportunity Fund, that comes in not this quarter -- it does not come in the December quarter, it comes in this current quarter that we are sitting in right now. And then it comes in the third calendar quarter. So it comes twice a year. So that is the only thing that is a little bit of an outlier, if you would, in terms of the timing.

Okay. And the last question. Would a rights offering have triggered anything related to possible conversion or have any impact on your convertible notes?

No. And let's be clear about this. Again, you guys have heard where our NAV is today, or excuse me, where our NAV was as of January or December 31. And our wording was very clear in our release about a marketed transaction or a rights offering. And I think the thought behind that from management and the board was, if we were to raise equity below par, below the NAV, we understand the diluted impact of that. And if we were doing so, we wanted to make sure that potentially the market had-- the shareholders all had the opportunity to participate if they so choose. Certainly we're going to talk to our largest investors and get feedback and color on that. But certainly we want to make sure that we are trying to listen and be as fair as we can as we pursue this potential strategy.

Ladies and gentlemen, we have time for one final question. Your final question comes from the line of Mickey Schleien with Ladenburg.

My question relates to the potential waiver of the management and incentive fees if you were to conduct an offering. Is that just related to the recalculation of the assets that would be subject to the fee? Or is there something else that you're contemplating in that calculation?

I would prefer to get to that actually if it occurs, but we are just talking about the shares we raised in any kind of new offering, those shares would be exempt of any management or incentive fee. That's sort of period, full stop. What I prefer to do is if we ever came out and did that, it would be very clear in our document, which we presented, how that actually is calculated. But our goal is simplicity and clarity, which if it did occur, you and all shareholders would see clearly. But there is no intention to get paid on the additional leverage. That is not the idea. The idea is to be very much clearly aligned and be very clear and transparent about how we do it.

I would now like to turn the floor back over to Mr. Zelter for any closing remarks.

I want to thank -- we had very large group today. We are very much appreciative of our investor base. We understand the breadth of this announcement today and appreciate the time you gave us to explain it, put it forth. We also want to make sure that you have a chance to meet our management team going forward and our IR team, so please reach out to Elizabeth as so needed. But we look forward to having a continued dialogue on this recent news. Thank you very much.

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