MidCap Financial Investment Corp (MFIC) 2008 Q3 法說會逐字稿

Good morning. My name is Natasha and I will be your conference operator today. At this time I would like to welcome everyone to the Apollo Investment Corporation third quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

(OPERATOR INSTRUCTIONS) Thank you. It is now my pleasure to turn the floor over to John Hannan, Chairman and Chief Executive Officer. Sir, you may begin.

Thank you. Good morning everyone I'd like to welcome you to our third fiscal quarter 2008 earnings conference call. I'm joined today by Jim Zelter, AIC's President and COO, Patrick Dalton, AIC's Corporate Executive Vice President and CIO, and Richard Peteka, our Chief Financial Officer.

Rich, will you give some opening comments and disclosure issues?

Thank you, John. I'd like to remind everyone that today's call and webcast is being recorded. Please note that they are the property of Apollo Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Audio replay information is available on our earnings press release. I'd also like to call your attention to the customary Safe Harbor Disclosure in our press release regarding forward-looking information.

Today's conference call and 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 projections. We do not undertake to update our forward-looking statements 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 Chairman and Chief Executive officer, John Hannan.

Thanks, Rich. In light of the general volatility and uncertainty in the marketplace today especially for financial stock, I believe it's worthwhile to reiterate some of the specific business of Apollo Investment Corporation.

AIC is an investment company that seeks to generate current income and capital gain in support of its quarterly dividend to stockholders. The company is managed by its own dedicated and seasoned team of investment professionals who have deep credit and underwriting experience and strong long term relationships with middle market financial sponsors and commercial and investment banks. This dedicated team supplements their own experiences, relationships, deal flow and investment acumen with that of more than 175 professionals from our affiliates, Apollo Global Management, LLC, a global alternative asset manager.

AGM has over 18 years experience investing throughout market cycles, having invested in more than 150 companies across many different industries. Apollo Investment Corporation has the full benefit of that additional experience and insight. The investment portfolio of Apollo Investment Corporation is invested primarily in senior secured and subordinated loans and some private equity. AIC's portfolio does not contain investments in subprime or any other residential real estate. In addition, AIC does not purchase debt securities of any Apollo controlled portfolio company.

Let me also state clearly that our portfolio and investment strategy remains unchanged since our IPO some three years ago. It continues to focus on matching our assets and what we deem to be our obligation, that is our dividend to stockholders. We continue to focus on the middle of the capital structure of larger middle market companies in an effort to better protect principal and have always thought the best relative value, whether public or private, whether in the primary or secondary markets. And with many of the stocks in the financial sector trading with the press valuations, our strategy provides a relative advantage over strategies of investing at the top and/or bottom of the capital structure of generally smaller companies.

Now let me turn to our quarterly results. For the quarter ended December 31, 2007, we invested $360 million across five new and ten existing portfolio companies. This brings our invested capital since our IPO to over $5 billion in 110 portfolio companies. The quarter also sought two prepayments and other exits totaling approximately $123 million. In addition, our LP interest in GS premium co-invest LP was reduced, thereby resulting in realized capital gains and added to both our liquidity and already harvested distributable earnings. At December 31, 2007, our portfolio consisted of investments in 70 different companies and we invested 24% in senior secured loans, 55% in subordinated debt, 5% in preferred equity, and 16% in common equity and warrants measured at fair value. With that, let me turn the call over to our CFO, Rich Peteka to provide us with details on our third-quarter results. Rich?

Thanks, John. We've closed our books on December 31, 2007 with a net asset value of $17.71 per share, down $0.73 or approximately 4% from our NAV of $18.44 per share at September 30, 2007. This was largely a result of a decrease in net unrealized appreciation during the quarter due to various mark-to-market quotes. Year-over-year, our December 31, 2007 NAV increased by 8.25% or $1.35 per share from $16.36 per share at December 31st, 2006. Adding back dividends of $2.06 per share paid during the calendar year 2007, the NAV would have increased by $3.41 per share or more than 20%.

Gross investment income for the quarter totaled $92.9 million; this compared to $86.1 million for the quarter ended December 30, 2007 and $71.1 million for the comparable quarter a year earlier. Accordingly, our gross investment income increased 8% for the quarter and was 31% higher than the comparable quarter a year earlier. Net operating expenses for the quarter totaled $49.7 million, of which $32 million was management and net performance-based incentive fees, $16 million was interest expense, and $1.7 million was G&A expenses. This compares to the September quarter of $24.4 million in net operating expenses, of which $7.5 million was management and net performance-based fees, $15.1 million was interest expense, and $1.8 million was general and administrative expenses. For the comparable quarter a year earlier, net operating expenses totaled $32.4 million, of which $18.1 million was management and net performance-based incentive fees, $12.8 million was interest expense and $1.5 million was G&A expenses.

The increase in expenses from the prior quarter was primarily driven by an increase in base management fees and interest expense due to the growth of our investment portfolio and an increase in the net realized capital gains based incentive fees due to significant realizations during the quarter. In addition, excise tax of $1.7 million were accrued during the three months ended December 31st, 2007 as compared to $0.7 million for the three months ended a year earlier in December 31st, 2006.

Accordingly, net investment income was $41.5 million or $0.35 per share after deducting the accruals for the net realized capital gains incentive fee and excise taxes during the quarter. As compared to $61.6 million or $0.58 per share for the quarter ended September 30, 2007, and $38 million or $0.46 per share for the comparable December quarter a year earlier. As a reminder, net investment income can and usually does vary significantly quarter to quarter based on the quarter's accrual for the capital gains based incentive fee, which is generally derived from changes to unrealized and realized gains and losses that are below the net investment income line on the company's statement of operations.

Apollo Investment Corporation's GAAP net investment income also continues to represent a portion of our taxable earnings included in quarterly dividends. Taxable earnings also includes net realized gains and commitment in other upfront fees received from investments that we are amortizing over the respective terms of our loans, among others.

As John mentioned earlier in the call, our investment sales and prepayments totaled $123 million during the quarter. These sales and prepayments together with the reduction of our LP interest in GS Prysmian Co-Invest LP generated net realized gains totaling $80.5 million for the quarter as compared to net realized losses of $0.9 million for the quarter ended September 30, 2007. And net realized losses of $0.5 million for the comparable quarter ended December 2006.

Also, during the quarter we experienced a net decrease in unrealized appreciation of $147.6 million. This was largely due to the reversal of significant unrealized depreciation into realized gains, as well as the various mark-to-market quotes mentioned earlier. This compares to a net decrease in appreciation of $83.9 million for the quarter ended September 30, 2007 and a net increase of $19.4 million to the comparable December quarter a year earlier. At December 31, 2007, our overall portfolio had net unrealized appreciation totaling $4.4 million versus net unrealized appreciation of $152 million and $117.8 million, respectively, at September 30, 2007 and December 31, 2006. As a reminder every one of our portfolio company investments is valued each quarter using independent third parties.

All totalled, our quarterly operating results decreased net assets by $25.6 million or $0.21 per share versus a decrease of $23.3 million or $0.22 per share for the quarter ended September 30, 2007 and an increase of $57 million or $0.69 per share for the quarter ended December 31, 2006. Now let me turn the call over to Jim, who will take you through the current market conditions and our portfolio activity during the quarter. Jim?

Thanks, Rich. As seasoned credit market investors, the current environment comes neither as new nor unexpected to the entire Apollo team. What began as a technical overhang in senior debt and high-yield bridges in early summer of '07 has now developed into a full credit crunch. The primary lending environment over the last five years has virtually stopped. And while the Fed has acted quickly and vigilantly, we believe there are significant opportunities in the current market. We are convinced that our access to long term capital continues to be a strategic tool that we will expect will benefit our shareholders in the long run.

We clearly outlined three strategies in the fall that we believe this current environment brings to our company. They are -- one, opportunistically making secondary market purchases in current portfolio companies at meaningful discounts to long term value as many mark-to-mark participants altered their short-term strategies. Two, investing in the committed debt deals that are stocked on many of the financial institution's balance sheets, and three, traditional sponsor driven mezzanine investments priced to reflect the current lending environment. We had executed on all three strategies in the last quarter and intend to continue to do so in this quarter and in quarters ahead.

Permanent capital and liquidity are strategic tools as I mentioned earlier in today's marketplace and we will not be daunted by short-term mark-to-market challenges if we believe we are investing in strong companies at a discount to future value. Patrick will discuss our portfolio in more detail, but now, let me discuss this quarter's activity.

As John noted earlier in the call we closed our third quarter having invested $360 million across five new and ten existing portfolio companies. The quarter also saw prepayments and other exits totaling $123 million. Since our IPO in April of '04 our total invested capital now exceeds $5 billion across 110 portfolio companies and has yielded a gross IRR exceeding 19%. We were active investors in the quarter and opportunities came from both new and existing middle market sponsors as well as from commercial and investment banks. Our investments during the quarter continue to focus opportunistically on larger companies. Accordingly our average investment in new portfolio companies exceeded $45 million during the quarter and our overall portfolio company investment continues to exceed $47 million as of December 31, '07.

Let me take you through a few of our larger investments made during the quarter. We invested approximately $75 million across the capital structure of Ranpak Corporation. Ranpak, a former AIC portfolio company, is a leading manufacturer and marketer of paper based in-the-box protective packaging systems that compete as an alternative to materials like bubble wrap, peanuts and foam packaging. Ranpack was purchased by Odyssey Investment Partners. We invested over $80 million in the high-yield securities to support the buyout of Ceridian Corporation by THV and Fidelity National Financial. Ceridian provides a broad range of human resource outsourcing solutions and is the number one issuer of proprietary business-to-business payment cards in the transportation, retail, restaurant, and government segments.

Catalina Marketing Corporation is a leading media and marketing services company focused exclusively on delivering customized, targeted communications to consumers at the point of sale. We invested over $30 million in subordinated bridge loans and this loan was supported -- take private of Catalina Marketing by Hellman & Friedman and was originated by underwriters, Bear Stearns, Morgan, and Goldman. Energy Future Holdings Corp., formally TXU, owns and operates electricity generating assets across the Texas market. TXU Corporation was purchased by a leveraged buyout by a consortium of PE firms led by KKR, TPG, and Goldman Sachs. We invested over $24 million in the debt securities of the company.

We invested approximately $20 million in the debt securities of Generix International, formerly Qualitest Pharmaceuticals. Generix International is an integrated developer, manufacturer and marketer of generic pharmaceuticals for the US market and provide a variety of prescription medicines -- medications in both solid and liquid semi-formats. Apax Partners acquired this company. We invested an additional $39 million in the common equity of Grand Prix Holdings, the holding companies for Innkeepers USA Trust, increasing our overall investment to around $247 million across the common and preferred of that company. And lastly, we opportunistically invested approximately $130 million in the secondary market in names that we currently hold such as Asurion, Brenntag, IPC Systems, KAR Holdings, Laureate Education, the ServiceMaster Company, Thomson Learning, Travelex, and World Directories at discounts to original issue prices.

Ultimately, our investment portfolio at December 31st consisted of 70 companies with a market value of $3.3 billion. And while we experienced a decrease in net unrealized appreciation during the quarter due to various mark-to-market quotes as the overall bank and bond markets traded off, we are comfortable with the overall fundamentals and credit quality of our portfolio. By the quarter end, the weighted average yield on our portfolio is 12.6% as compared to 12.7% at the end of the previous quarter, and the weighted average yield on our subordinated debt and senior loan portfolios were 13% and 11.6%, respectively, down from 13.1% and 11.9%, respectively, in the prior quarter.

The nominal impact of our debt portfolio yield during the quarter was derived primarily from prepayments of higher yielding assets, increasing credit risk premiums and declining market and bench mark rates.

Before I turn the call over to Patrick, let me say that we believe that we currently have a significant opportunity in this challenging environment that we have not seen in over five years. Of course, we will continue to navigate our way with discipline and a strong focus on principal protection. With that I'll turn the call over to our Chief Investment Officer, Patrick Dalton.

Thanks, Jim. During the quarter, we were patient yet opportunistic investors. Again, as a relative value investor we reviewed a wide range of opportunities from a variety of different sources. First, we were shown several investment opportunities from both new and existing middle market sponsors. We also saw extraordinary value developed in the secondary market for subordinated debt of larger companies and as a result accessed our strong relationships with investment and commercial banks to partner with a few of these institutions that we are seeking to free up capital by selling selected high quality bridge loans and high yield securities of larger companies to us at significantly discounted prices.

As part of the Apollo franchise, we are generally afforded the benefit of Apollo's overall relationship with these banks, including the business leaders within the capital markets and leveraged finance groups to source both primary and secondary market opportunities. Furthermore, we continue to focus on industries where we believe Apollo's expertise offers us an edge. Since the very beginning, we have had this flexible and unique sourcing model where we source deal flow directly from financial sponsors as well as from investment in commercial banks.

We have built a large portfolio of investments by directly backing financial sponsors. Like our investment in Anthony Incorporated alongside Aurora Capital back in July of 2004, as well as our recent investment in Ranpak Corp. alongside Odyssey Investment Partners just this past December and the many, many more investments in between. Additionally, we've also utilized the broad based relationships of the entire Apollo platform to create partnerships with leading investment and commercial banks to obtain access to upcoming transactions and to assist in structuring and underwriting of these investments alongside these banks where we can truly add value.

For example, in 2004 we invested in the high-yield securities of portfolio companies like Language Line Services and in Vista. Also, in the late summer of 2006 when we witnessed a brief dislocation in the high-yield market, we took advantage of that opportunity to invest in the high-yield securities of Neilsen. Neilsen is a well known market research company with over $1 billion of EBITDA. We were able to work closely with the underwriters and invest $50 million at 12.5% coupon with five years of call protection. In January and in February of 2007 when the high-yield market rebounded, we sold roughly a third of our position at approximately 125% of accreted value for an internal rate of return of more than 70% on the securities we sold. Now, once again, we believe we are seeing these same kinds of opportunities.

We continue our steadfast strategy of investing in mezzanine and subordinated debt securities with a focus on increasing our investments in larger companies with strong free cash flow. Accordingly, our average investment in new portfolio companies exceeded $45 million during the quarter. More importantly, the weighted average EBITDA for new portfolio company investments added during the quarter exceeded $600 million per company. And the weighted average EBITDA for the total portfolio is now well in excess of $100 million. We believe that a focus on larger companies, especially during this current economic climate, is a more prudent, less competitive and ultimately more attractive investment strategy. We believe that larger companies are better able to manage through less robust economic climates.

The dislocation in the credit markets which began last summer and the subsequent exit of liquidity throughout the global capital markets is now providing firms with access to capital like Apollo with the ability to make investments in even larger companies than in previous markets at what we believe are attractive yields. We are also pleased with our strategy of making selected co-investments in private equity. We believe this strategy has worked. We are happy we are realizing another substantial capital gain from a secondary sale of our equity interest in GS Prysmian during the quarter.

Due to the nature of our investment strategy, we do have a larger portion of our portfolio that is subject to mark-to-market than most of the other BBCs. As such, we have experienced mark-to-market declines in certain of our portfolio evaluations. It is our strong belief that the market should distinguish between transparent mark-to-market unrealized gains and losses and actual credit impairments. During the quarter, we reinvested in many portfolio companies at prices below our initial purchase prices. In these companies, we have no underlying credit concerns. We just now expect to have a better return for the same risk. We see this as an opportunity presented to us by the current market dislocation. Our portfolio remains highly diversified by issuer and by industry. As of December 31st, our weighted average risk rating and the total portfolio remained at a rating of a 2, and our weighted average cash interest coverage was over two times.

There were also no new non-accruals during the quarter. Of the 110 portfolio companies invested in since the IPO, we only have had two investments placed on nonaccrual, and we believe that the additions to the portfolio since the market dislocation began have been advantageous and we expect these opportunities will continue. We are also pleased with the Federal Reserve's recent interest rate reductions. The Fed's rate cuts have led to a reduction in benchmarked interest rates for U.S. corporate credits. For instance, the three month LIBOR rate has decreased by over 220 basis points from 5.36% just six months ago to the current rate of under 3.14%. This will have an immediate positive impact on our underlying portfolio companies. Our companies will now have a significant reduction in their interest costs and, thus, produce more cash flow for every dollar of revenue earned.

Lastly, we are very much aware of the current economic environment that we are all living through. We recognize that what we currently own is much more important than what we do not yet own and are, as always, first and foremost, focused on the preservation of your capital. We believe that our portfolio strategy of eliminating the total number of portfolio companies to a manageable number and scaling our assets by focusing on larger healthier companies will prove prudent over time. As of December 2007, we had 70 portfolio companies compared to 54 at December 2006. Yet, our portfolio has grown from $2.25 billion at fair value to over $3.3 billion during the same time period. During this time, we've also continued to make additions to our investment professional team. We also have the benefit of working closely with all of the investment professionals, operating executives, lawyers and accountants that we have on staff across the entire Apollo platform.

Our firm has a long history of successful investing in building companies throughout market cycles. We are experienced and we are prepared to work closely with all of our portfolio companies should there be any further stress from the current economic environment and are focused on creating and preserving value for our shareholders.

Before I open up the call to questions, let me say that we remain committed to our consistent business model and are excited about the current investment environment, and as Jim stated, we will continue to navigate with our investment disciplines and our focus on principle preservation. Moderator, please open up the line for questions. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from Carl Drake of SunTrust Robinson.

Thanks for the additional disclosure on the portfolio. Thatt's helpful. In terms of maybe talking about the current portfolio, if you could talk a little bit more about certain sectors that you are seeing, perhaps weakness and there's been consumer -- and housing, there's been some -- anything directly tied, there's been softening there, of course. I don't think EuroFresh is necessarily a macro-economic problem But maybe you could touch on other sectors, if you are seeing any signs of stress in the industrial, retail, transportation sectors?

Let me start off broadly, Carl, and then I'll pass over to Patrick. But certainly since last summer, everybody was talking about the home building sector and residential real estate, it's certainly safe to say that the cause of consumer slowdown, the ensuing consumer slowdown has hit more businesses per se across the overall with the exception of probably some energy and other industries. We also see companies that are more global, i.e., the larger companies, are showing a great deal of resilience quite frankly than companies that are domestically based. So that's what the continued theme over the last 12 to 18 months larger companies with more heft, if you would. We have found that to benefit our portfolio. So to answer your specific question, we have seen a little bit of widening out to some situations in the transport sector, some consumer-oriented incidences like restaurants and retail per se, but that's my generic comment. I'll pass over to Patrick if he has anything else to add in particular.

Sure. Thanks, Jim. Hi, Carl. What we're seeing as Jim mentioned is there has been some stress in the consumer businesses -- retail, restaurants, transportation, but what we are pleased to see is that for the vast majority of our portfolio companies the budgets that we are reviewing for 2008 appear to be strong to us. We are keeping a very close eye on economic indicators by industry. We are looking at the companies we think may see some stress. We are very pleased, as Jim mentioned, the larger companies, the vast majority are showing pretty strong growth for 2008. But we are not necessarily going to agree with all that growth. We are going to manage our portfolio as if it's going to see more stress. We are in active dialogues with all of our companies, all of our management teams, and all the sponsors who control these companies and in the chance we see something, it will be reflected in our ratings as well as our valuations.

Yes, Patrick, what about year-over-year EBITDA growth? Is that something that is slowing to a kind of a flattish number for the broad portfolio?

Yes, I would say it's generally correct in that. There is less growth than there was before but we're still seeing year-over-year better performance to date. '08, I'd say on balance, we are seeing modest growth for the entire portfolio projected, but we are not necessarily behaving in a way that we are going to expect to see growth. And as a debt provider mostly, we are very happy that we don't necessarily need growth. As long as we are underwriting companies with strong free cash flow, we'll see deleveraging even at flat to slightly down EBITDA and revenue.

How should we think about investment pace going forward given the fairly tight capital out there? You all are in a good position with pretty good runway, but how should we think about investment pace? You've got some natural equity. It looks like prepays are slowing as well.

Yes. Carl, prepay, we always had the view that in a robust capital market, the average life of our portfolio would be around two, two and a half years. We think the average life of our portfolio now will be certainly north of three, three and a half years. And as I (technical difficulty) opportunities we have found that we've never been -- had a budget on investment pace but certainly we are seeing more opportunities in the first two buckets and the last bucket that we did the Ranpak investment in the fourth quarter, which we are very pleased about, I think you are going to see more of that traditional middle-market mezz as the M&A market, there's more clarity in it into the second and third quarter as the senior loan market open up and there's a little bit more clarity in the middle-market fencings, that third area will increase in size. But again we like -- we are highly demanding in what the rates we are charging right now, and we will continue to do so, but it's hard for us to translate that into a pace per se.

I understand. The best opportunities right now are in the secondary market at discounts, it sounds like. And the mezzanine market hasn't truly repriced. Is that fair?

That's an accurate statement. The first two opportunities that I pointed out, those have been actionable, which we have done and I think that third bucket is one that will -- that is our core business and again we are finding, as we've always said, there's lots of competition for $25 or $30 million mezz deals and that pricing in our mind has not really repriced quite frankly. Since we are a relative value investor, we want to find the best relative value for our dollars of invested capital.

Thank you.

Thank you. Your next question comes from Jim Shanahan of Wachovia.

Good morning. I have a question about a couple of the investments as well. I'm really curious about Arbonne Natural Products Group. It looks like over the course of the last few quarters that was being -- it was kind of on a downward trend from, say, June to September and then the fair value increased. But it looks like there was also -- there was an incremental investment there in Arbonne. Can you talk about what's happening there with Arbonne and why you elected to make an incremental investment in the company, given a downward trend?

Yes, Jim. Hi, it's Patrick. There was no incremental investment in the company; that was a result of pick interest that was received on the holding company. So we have not made any new investments in the company and that was the security we invested in.

So the pick increased your cost basis by about $4.4 million but the fair value only increased by $3.3?

That's a quoted instrument by [poker deals] and third parties so we'll just take the quote as they present it to us.

Understood. And a question about Innkeeper. Is there anything you can update us on regarding the strategy there? We are starting to hear in fact, some operators of lower end hotel chains actually reporting lower revenue per room trends. Are you seeing anything like that within Innkeepers and what is the strategy here you can update us on at this time?

Sure, Jim, and that's a great question there. Certainly, we are spending a lot of time on Innkeepers given the size of the investment. I am happy to report that as of today we are not seeing any degradation that performs for the business in total. Regionally, we are keeping a very close eye on what is going on where we have strong assets and the generation of performance, especially on the West Coast.

But as an extended stay hotel, maybe the full-service, top-line hotels will probably see pressure first. We are not seeing pressure yet. We have just finished the negotiations for group rates for corporates and we are seeing -- we're very pleased that the ADR rates are up for negotiated prices for rooms, which is always a very good sign. We are working very closely with the management team. We put in place several contingency plans should the economic environment start to put pressure on results. We spent our last week budgeting with the management team and are pleased with that progress. But we're keeping a very close eye on it. We are getting a lot of inbound inquiry on acquisition opportunities which we will prudently take a look at it if it makes sense for us to execute on or not.

Okay, and how did the opportunity to make the incremental investment in Innkeepers come about and why make another $39 million investment in Innkeepers?

This is something that was generally, part of the original plan is that we were going to acquire the company for the capital that it took to acquire the company. We have several developmental projects and pit programs, which I'm sure, Jim, you realized given your background, are improvements that are required to be made when you do a change of control with some of our brands. We are not going to decelerate those programs. We're going to accelerate those programs. We also are going to look at opportunistic acquisitions going forward and wanted the company and the management to know that we are backing them in this environment.

Thank you, Patrick.

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

How much you will leverage your balance sheet in this type of environment? Where can we expect over the next 12 months your debt-to-equity ratio to go?

We have always been consistent saying we operate lower than some of our peers and yet in times of opportunity like we are seeing right now we would edge up to a higher level. I think that we will never operate close to one on one that would get us into any kind of challenging environment. I think you should expect us at this 0.75, 0.8 to 1 somewhere in that Zip code. Again if we believe that we are adding incremental assets that benefit the bottom line of our business but certainly in the past we have been under 50%. This quarter you saw it ticked up a bit and that 0.7, 0.75 is the Zip code we're probably most comfortable operating in.

Thank you.

Thank you. Your next question comes from [Dan Worth] of Bear Stearns.

Yes. Good afternoon, gentlemen. A couple of questions, if I may. First of all, do you use any hedging instruments, CDX, or LCDX, one of the European [itraxes]?

That's a very good question. We review that all the time to see if it makes sense for our portfolio. We like the investments we make in our portfolio to the extent that we saw something that was acute and we wanted to protect against it we would evaluate it. We at the firm understand those instruments and how they work but as of today we are not using any of those instruments.

Okay. Second one is of those yields you talked about, how much of those are actually in compassion pick if we strip out the LIBORs? On a spread basis, how much is pick, and how much is cash across the portfolio?

We haven't disclosed that information historically and it's one of the reasons why we don't disclose it is it is a number that -- we have had many, since our IPO, securities that have been structured as pick but they passed cash and quite frankly we needed fast cash every quarter and occasionally, they may pick. Again, it becomes a number where cash and pick is fungible and ultimately we are underwriting good credits and big companies. So it's just not a number that we've ever segregated out because the change would be hard to track because of these securities that passed cash (inaudible). Not flip flopping, but we may have cash for the first two quarters or we may say pick once, and then maybe cash all the way until the maturity or until they kick us out. So it's really hard to categorize that. That's the best I can tell you.

Okay. What part of the portfolio is marked by independent brokers or independent sources who use broker quotes?

About half of the portfolio is quoted by broker dealers or primary dealers, and the rest of the portfolio is done by independent valuation firms.

For making further valuable investments, what's the debt capacity you have on the revolver and also how much cash are you sitting on that you need to put to work?

We have approximately $600 million left on the revolver to be drawn and probably another $400 million over and above that within our leverage descriptions to the extent we need to add that debt capacity.

Okay. Lastly, a technical question. On the balance sheet what is payable for investments and cash equivalence purchased mean? Are they future expenditure you've already committed to in the form of new investments?

Yes. I would point you to our cash equivalents note 9 in our financial statements. You'll get a clear definition of what that is but largely those are open trades including some of those treasury bills at quarter end. Again, I would ask you to read our footnote 9 on our financial statements and that's been there every quarter.

Okay. Thanks a lot then.

Thank you.

Thank you. Your next question comes from Greg Mason ofStifel Nicolaus.

Hi, Greg.

On top of the $1 billion of kind of excess capital you have now, you said you have good, long-term access to capital; could you talk about some of those means you have for additional capital? And also what are your thoughts on some of the BDCs developing these off balance sheet funds like the allied mezz fund. What are your take on those kind of products and are you interested in them?

Well, as I have said earlier, as Rich said, we have our existing credit facility, which gives us ample liquidity right now for the opportunities we are seeing and certainly with our prominent position as part of Apollo, we believe that there are plenty of opportunities for us to augment that at the proper time through a variety of vehicles. So we are not concerned about having access to our full leverage capacity when that does come in the future. In terms of your second question, certainly there's a variety of paths that some BDCs have gone with how they are turning their business and growing their business. Certainly we have been -- we are very proud of our current portfolio. And if there are things we think make some sense for incrementally providing those types of vehicles underneath our business that would benefit our investors we are going to consider that in due course, but have not felt the need in the past. But again as we are in the market of a new credit environment as people want to be part of our investment structure, we'll consider those as appropriate.

Can you talk about the current investing period? What you are actually -- a quantifiable measure, what you are seeing spreads going out to as well as asset quality of investments out there?

Let me start out, I could pass it to Patrick if I miss anything, but certainly I use my term a credit crunch. We are asked all the time are we in a recession, are we going into a recession. As credit investors, we live and breathe the credit market every day, so it's our view that by the time the economists actually declare a recession we'll probably be six months into it.

So what we were saying earlier is we are not seeing a lot of new paper hit the markets. What you are seeing is an overhang on the senior debt and on the bridge market. So we know those credits. There's some of them are very large and some we think very highlyof, some we have issues with. But in terms of new product hitting the market there has not been a great degree of new names that have come because of the lag effect of the middle-market M&A market and the overall M&A market.

So in terms of we are seeing lots of 25 to $30 million mezz opportunities that we quite frankly think are companies that we don't think have the robust nature that we'd want to invest on the current terms that are being provided to us, i.e., that type of market we don't believe has repriced respectively to what it should relative to the other opportunities in front of us.

That will happen over the course of the year and we will see product in that space, but we would expect it to reprice by a few hundred basis points at least. And certainly not only in coupon pricing but we've always talked about and Patrick has been consistent in redemption provisions. We expect we're seeing better redemption provisions, noncall six months going out to noncall two and three, that's something we see coming back and obviously better covenants overall.

Patrick, on EuroFresh, I know that has traded down but it also seems like they are paying their cash interest. Can you give us an update there?

Sure. It's been publicly disclosed that EuroFresh was originally late on its payment but did make a cash interest payment, as some middle market companies do as they are working through challenges that they have them. We are encouraged and then you see the prices actually come back up over the last couple of days in EuroFresh. The sponsorship group is working very, very hard with its lenders across the board, including us, on ways to continue to perform over time. The company actually has good products; it's just a matter of some operational challenges that they're facing, and we're very much in a dialogue with them.

And lastly, could you update us obviously with the big writedown in Lexicon this quarter, what the future outlook is for that investment?

As you can see from our write-offs of our investment in totals, we are not confident at this point in time that they would be valued through our securities. We hope and we are still in active dialogue with the sponsor group and the lenders to give the best shot it possibly can have to come through this cycle. But at this point in time we are not confident enough to see value in our security.

Great. Thanks, guys.

Thank you. Your next question comes from Robert Lacoursiere of Banc of America.

Question on one of the strategies you talked about buying, making incremental investments in existing portfolio companies through secondary transactions. You characterized them as being made less than your original cost basis but how are they made recently relative to what you had them at fair value or marked at.

Fair value that's the price we are paying for the secondary trades that we are making on assets. When we bought them they were fairly valued in our opinion. The markets have gotten heavy. Prices have come down; we repurchased them. What you see in our fair value is the weighted average cost.

Okay, so it didn't, because you made a subsequent investment at lower than your previous cost so you're just doing weighted average, not repricing everything down.

Yes. Our cost is weighted average but the fair market value is the latest price.

Okay. Alright. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Your next question comes from Russell Green of Wunderlich Securities.

Hello?

Hello.

Yes. I'm just trying to understand just a couple from the retail side. Two things, how comfortable are you currently with the dividend policy? And the other question is concerning do you have any sort of ability to do some sort of stock buyback given the price of the stock compared to what the net asset value is at the moment?

This is John Hannan. On the dividend policy, we've been very consistent that we look at that as an integral part of our business and our policy is to have a steady, stable dividend. And we've continued to do that and that's going to be part of our focus going forward.

That's good.

As to a buyback, it doesn't make a lot of sense in a structure that we have to be going in buying back stock in these volatile markets because, basically, we want that capital to grow the business. And it doesn't make sense to spend a lot of money raising equity and then turn around and buy it back.

All right. Thank you very much.

Thank you.

Thank you. This concludes the question-and-answer portion of today's call. Thank you. This concludes today's conference call. You may now disconnect.