MidCap Financial Investment Corp (MFIC) 2008 Q4 法說會逐字稿

Good morning, and welcome to the Apollo Investment Corporation's fourth quarter and fiscal year 2008 earnings conference call. At this time, all participants have been placed on a listen-only mode. The call will be open for a question-and-answer session, following the speakers' remarks. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the call over to Mr. Jim Zelter, President and Chief Operating Officer of Apollo Investment Corporation. Mr. Zelter, you may begin your conference.

Thank you and good morning, everyone. I'd like to welcome you to our fourth quarter and fiscal year 2008 earnings conference call. I'm joined today by Patrick Dalton, Apollo Investment Corporation's Executive Vice President and the Chief Investment Officer at Apollo Investment Management, and Richard Peteka, our Chief Financial Officer. Rich, before we begin, would you start off by disclosing some general conference call information and include the comments about forward-looking statements?

Sure. Thanks, Jim. 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 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 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 would like to turn the call back to our President and Chief Operating Officer, Jim Zelter.

Thank you, Rich. As we entered 2008, the overall credit markets remained significantly dislocated, and in January and February, we saw continued volatility and further depreciation in the global capital markets. As in 2007, these dynamics were mostly due to further technical pressure and the lack of liquidity in the overall credit marketplace. However, beginning in mid-March and post the Bear Stearns bailout, the market began a technical rally that has continued through today. Both the bank loan and high yield market indices are up over 500 basis points from the March 17 trough. And it would be reasonable for you to assume that our quoted portfolio, which represents a majority of our assets today, has also appreciated since the quarter-end.

With ongoing Federal Reserve actions and the market's confidences returning, we have also seen a significant action by the large commercial and investment banks to aggressively work off the overhang of LBO loans and bonds that have have plagued their balance sheets for the last year. We believe that the overhang of loans and bonds have been reduced from approximately $375 billion at it's peak to under $100 billion today. In summary, we see the last nine months as a period of repricing of systematic risk, combined with a large technical overhang in credit.

For the quarter ended March 31, we were highly selective and we saw lower volume of high quality, primary market opportunities for the larger credits that we generally focus on. As we expected, the most high quality companies can afford to be a bit patient and wait until the more favorable market conditions to access the market for financing or for M&A. So, we continued our strategy of investing our capital where we saw the best relative value. During the quarter, that remained in the secondary market where we made a handful of select investments.

Approximately two weeks ago, Apollo Investment Corporation completed a strategic and opportunistic follow-on common equity offering where we had significant demand for our stock from both current and new investors. This strong demand afforded us the added advantage of allocating and placing stock with those we believe to be long-term buy-and-hold investors, as are we. Ultimately, we announced the closing of our overnight deal that raised $382 million in gross proceeds. This positive news then floated into the secondary market and was supported by additional demand. During the transaction, we were pleased to hear how our investors understood and valued our differentiated, consistent, and unwaivering business and investment strategy. We were also pleased to hear how our overall transparency has generated significant credibility in an inconsistent marketplace. Lastly, we were excited to hear about how investors have come to understand and distinguish Apollo Investment Corporation's portfolio composition, including our investments in larger companies.

We believe our continued focus on investing in larger companies offers many superior benefits, especially the significantly more experienced portfolio management teams that better understand managing a leveraged company across and through credit cycles. Also inherent with investing in larger companies, is the added benefit of valuation transparency and liquidity. But those benefits come with a need to understand the current market's volatility and temporary day-to-day effects on our NAV from marking to market. As a reminder, and as we have since our IPO, when market quotes are available, we use them. It is therefore important for all investors of our company to understand the difference between marks affected by the volatility that permeates today's marketplace, and marks reflecting expected or actual credit impairment.

Let me add a few other reminders while I'm at it. The investment portfolio of Apollo Investment Corporation is invested primarily in senior-secured and subordinated corporate loans. We then complement this fixed income portfolio of investments with a modest amount of select private equity and expect to generate sufficient capital gains to strategically offset the inevitable losses one has in a fixed-income portfolio. Since our IPO and to date, I'm pleased to say that this overall portfolio strategy continues to work well. Since we began making investments in April 2004, we have made investments in approximately 112 companies and have had two defaults.

We have also generated approximately $200 million in realized gains that has more than offset any such losses, and has provided a significant harvest of taxable income in support of our objective of delivering a steady, stable, and growing dividend stream to shareholders. Our portfolio does not contain direct investments in mortgage related securities, nor does it contain debt or equity investments in any portfolio companies controlled by Apollo Global Management. At March 31, 2008, our portfolio consisted -- contained investments in 71 different portfolio companies and was invested 22% in senior secured loans, 57% in subordinated debt, 6% in preferred equity, and 15% in common equity and warrants, measured at fair value.

Before I turn the call over to our CFO, Richard Peteka, let me express that we are encouraged with the investment opportunities we see ahead. And with Apollo's fully integrated sourcing and investment platform, Apollo Investment Corporation is well-positioned to utilize its substantial liquidity and strong conservative balance sheet to capitalize on these opportunities. We look forward to continuing our efforts to preserve your capital while generating sufficient earnings to support our objective of delivering a steady, stable, and growing dividend stream to you. With that, I'll ask Rich to provide us with some details on the fourth fiscal quarter results. Rich?

Thanks, Jim. We closed our fourth fiscal quarter and year end on March 31, 2008 with a net asset value of $15.83 per share, down $1.88 per share from our NAV at December 31 of 2007, which was $17.71. Year-over-year, our NAV decreased by $2.04. Considering reinvested dividends of $2.07 per share for the year, the total return based on NAV, or NAV was essentially flat.

That said, these changes to NAV for the quarter and one-year period ended were driven primarily by changes in the market quotes of our assets that Jim described earlier. As a reminder, a majority of our investments have market quotes available and we use them. Also keep in mind that given the overall volatility in the market, our reported NAV largely represents a snapshot, just one point in time, where the markets were pricing assets that day. That said, let me turn to some performance numbers which include reinvested dividends. Since our IPO on April 8, 2004, and through March 31, 2008, the cumulative and average annual total returns, based on net asset value, was 63.8% and 13.2% respectively. The cumulative and average annual total return on shares of AINV since our IPO is 45%, cumulatively, and 9.8% average annual, respectively.

And moving to some operating results. Gross investment income for the quarter totaled $90 million. This compared to $92.9 million for the quarter ended December 31, 2007 and $75.3 million for the comparable quarter a year earlier. Accordingly, our gross investment income decreased by 3% for the quarter and was up 20% higher than the comparable quarter a year earlier. Net operating expenses for the quarter totaled $46.1 million, of which $27 million was management and net performance-based incentive fees, $17 million was interest expense, and $2.1 million was SG&A. This compares to December quarter of $49.7 million in net operating expenses, of which $32 million was management and net performance-based incentive fees, $16 million was interest expense, and $1.7 million was SG&A.

For the comparable March quarter a year earlier, net operating expenses totaled $53.1 million, of which $43.6 million was management and net performance-based incentive fees, $7.7 million was interest expense, and $1.8 million was SG&A. The decrease in expenses from December quarter was driven primarily by the absence of a net realized capital gains based incentive fee for the March quarter, offset by growth in interest expense, stemming from an increase in investment activity during the quarter. On a comparative basis, net operating expenses totaled $154.4 million, versus $139.7 million, respectively, for the full fiscal year ended March 2008 and March 2007. Of these amounts, $90.3 million represents management and performance-based incentive fees for the 2008 fiscal year, and $98.5 million for the 2007 fiscal year.

Interest expense totaled $55.8 million for the year ended March 31, 2008 and $34.4 million for the year ended March 31, 2007. SG&A totaled $8.3 million for the fiscal 2008 period, and $6.8 million for fiscal 2007. In addition, excise tax of $1.9 million were paid during the fiscal year ended March 31, 2008, as compared to $1.1 million for the previous fiscal year. The increase in expenses year-over-year is primarily due to the increase in interest expense, offset by a decrease in the accruals for net realized capital gains-based incentive fees. Accordingly, net investment income was $43.7 million or $0.37 per share during the quarter, as compared to $41.5 million or $0.35 per share for the quarter ended December 31, 2007, and $21.7 million or $0.22 per share for the comparable March quarter a year earlier.

As a reminder, net investment income can vary quarter-to-quarter based on many factors, including the timing of investments made by us, as well as when investments are sold or prepaid. Apollo Investment Corporation's GAAP net investment income also continues to represent only a portion of our taxable earnings included in quarterly dividends. Tax earnings also include net realized capital gains, structuring fees, and commitment fees, and other upfront fees received from investments, among others. Investment sales and prepayments totaled $103 million during the quarter. Net realized losses totaled $4.6 million for the quarter as compared to net realized gains of $80.5 million for the previous quarter ended December 31, 2007, and net realized gains of $106.6 million for the comparable quarter ended March 31, 2007.

Also during the quarter, we experienced a net decrease in unrealized appreciation of $201.5 million. As was also mentioned earlier in the call, this change in unrealized depreciation was primarily due to our continued use to marking to market, our quoted portfolio. That said, this compares to a net decrease in appreciation of $147.6 million for the quarter ended December 31, 2007, and a net decrease of $25.6 million for the comparable March quarter a year earlier. At December 31, our overall portfolio had net unrealized depreciation of $197 million, versus net unrealized appreciation of $4.4 million and $92.2 million, respectively at December 31 and March 31, 2007. All totaled, our quarterly operating results decreased net assets by $162.4 million or $1.36 per share, versus a decrease of $25.6 million or $0.21 per share for the quarter ended December 31, 2007, and an increase of $102.8 million or $1.04 per share for the quarter ended March 31, 2007.

Now let me turn the call over to our Chief Investment Officer, Patrick Dalton, who will take us through our investment activity for the quarter as well as discuss our portfolio in more detail. Patrick?

Thanks, Rich. From day one, we have followed our consistent strategy of building an investment portfolio that is focused on a few key principles. Number one, maintaining a proper asset liability match. Number two, building a high quality portfolio of investments, primarily in subordinated debt of larger companies. Number three, making only select amount of private equity investments to help build a cushion for our dividend, and to offset the inevitable losses from a fixed income portfolio. And, number four, using only a prudent amount of leverage in keeping dry powder available at all times. This simple strategy has allowed us to be patient when we should be patient and active when we should be active, both on the investing side as well as with our own capital raising activities.

During the quarter ended March 31, we chose to continue to be a patient investor. As a long-term relative value investor, we took stock in the markets and continue to review a wide range of opportunities from a variety of different sources. However, we saw the prolonged material weakness in the technical drivers of the credit markets continue during the beginning of the quarter, and chose only to make one follow-on investment in January. Towards the back half of the quarter, the markets began to trough and we were able to make a handful of select investments at attractive prices. We are pleased with these investments that we have made during the quarter. We closed our third quarter having invested $203 million across two new and six existing portfolio companies. The quarter also saw us prepayments and other exits totaling $103 million. Since our IPO in 2004, our total invested capital now exceeds $5.2 billion across 112 portfolio companies.

Now, let me take you through a few of our investments made during the quarter. We invested approximately $118 million in debt securities of First Data Corporation in the secondary market. First Data in which we previously held a $65 million investment in the common equity, is a dominant global transaction processing franchise providing payment processing services, electronic commerce to merchants and card issuers. First Data is owned by KKR. We also invested $25 million in high yield securities to support the buyout of Goodman Global Inc. by Hellman & Friedman. Goodman Global, a former Apollo Management portfolio company, is the second largest domestic manufacturer of heating, ventilation, and air conditioning products.

U.S. Investigation Services Inc., a leading provider of security clearance, background investigation, and employment screening services to government agencies and commercial customers in the United States. We invested $6.1 million in senior notes in the secondary market at attractive prices. U.S. Investigations is owned by Providence Equity Partners. We selectively added to our position in the bridge loans of Laureate Education Inc., investing an additional $16.5 million at a discount original issue price. Laureate Education is a leading provider of international higher education through campus-based and online universities. Laureate's bridge loans have since converted into fixed rate high yield notes with five years of call protection.

Lastly, we further invested approximately $13 million in the secondary market in the names of companies that we currently own, including KAR Holdings and Dresser, Inc. at substantial discounts to original issue prices. Ultimately, our investment portfolio at March 31 consisted of 71 companies with a market value of $3.2 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. At the quarter end, the weighted average yield on our debt portfolio was 12% as compared to 12.6% at the end of the previous quarter. The weighted average yield on our subordinated debt and senior loan portfolios were 12.8% and 10% respectively, down from 13% and 11.6% respectively in the prior quarter.

The impact to our debt portfolio yield during the quarter was derived primarily from prepayments of higher yielding assets, and a declining market and bench mark rates. However, given that we roughly match our floating rate assets with floating rate liabilities, this reduction in yield, which is based on our original cost, does not necessarily reflect a one-for-one reduction in net interest margin on our portfolio. Our portfolio remains diversified by issuer and by industry. As of March 31, our weighted average risk rating in the total portfolio remained a rating of a two, and our weighted average cash interest coverage was over two times. There were also no new non-accruals during the quarter.

Of the 112 portfolio companies invested in since the IPO, we have only had two investments placed on non accrual. And we believe that the additions to the portfolio since the market dislocation began, have also been advantageous and we expect these opportunities will continue on a selective basis. We also expect the primary market will increase over the next several quarters. As seasoned credit investors, even with the recent rally in the bank and bond markets, we are not yet ready to state that we are fully out of the woods with respect to the economy at large. We are extremely focused on the underlying fundamentals of the economic climate that we are in, and expect that it will continue at least through 2008. So, we remain steadfast in our focus on our existing portfolio, as well as pursuing only the highest quality investments and larger companies with strong free cash flow.

Accordingly, our average portfolio company investment continues to exceed $45 million at March 31. More importantly, the weighted average EBITDA for our total portfolio is now well in excess of $200 million per company. We continue to believe that our focus on larger companies, especially during this current economic climate, is a more prudent, less competitive, and ultimately more attractive investment strategy. We continue to believe that larger companies are better able to manage through less robust economic climates. The dislocation in the credit markets, which began last summer, is now almost a year old and there are some signs that there is some stability returning to the bank and bond markets.

We believe that this is a positive for Apollo Investment Corporation. Financial sponsors of several hundred billions of dollars of capital have been inactive for almost a year as well. Financial sponsors generally only have five years to invest their capital, or they're required to return it. And we do not expect that they will return it uninvested. A rally in the secondary market generally leads to an increase in primary market activity. We believe that we continue to be well-positioned to take advantage of opportunities wherever the best relative value lies.

We are encouraged by the dialogues that we are currently having with financial sponsors and their overwhelming desire to be closer to their debt capital providers. In addition, we are also encouraged by the discussions that we continue to have with banks that are also looking to begin to underwrite new business and are in the later stages of cleaning up their own balance sheets. Additionally, the pricing, terms and conditions of these investments are better than we have seen in quite some time. It is worth mentioning that a high quality pipeline does take some time to build, but we are very encouraged by both the volume and the quality of deal flow that we are seeing emerge in our market. And with our opportunistic capital raise, we are well-positioned to take advantage of it.

We continue to benefit from the overall Apollo Global Management platform by working closely with all of our investment professionals, operating executives, lawyers and accountants across the entire Apollo platform. We are experienced and prepared to work closely with all of our portfolio companies should there be any further stress from the current economic environment, and we have focused on creating and preserving value for our shareholders.

Before I open up to call to questions, I would like to thank our dedicated and growing investment team. We all remain committed to our consistent business model and are convinced that our access to long-term capital continues to be a strategic tool that we expect will benefit our shareholders in the long term. Going forward, we will continue to navigate ahead with our investment discipline and our focus on preserving your capital. With that, moderator, can you please open up the line for questions? Thank you.

Thank you. (OPERATOR INSTRUCTIONS). Your first question is from Carl Drake of Suntrust Robinson Humphrey. Please go ahead.

Good morning. Thank you for the discussion. First, maybe we could start off with some updates on the portfolio, what you're seeing out there with respect to cash flow growth in the aggregate. And then maybe, touch on a few companies that have some marks on -- some significant marks, our bond, Eurofresh perhaps. Maybe also -- I know you don't control the timing of exits on portfolio companies, but if there's any visibility on realizations on the equity side, perhaps EXCO, MEG, or Prysmian. Thanks.

Hey, Carl. It's Patrick. Those are all great questions. First, on the overall portfolio, as we mentioned in the call, we're very encouraged that the cash interest coverage is over two times on the portfolio at a weighted average basis. That's a very fundamental part of our investment strategy going into investments, that there's significant cushion on cash flow as well as significant cushion and the equity behind our securities. We are seeing in this market, as we've been talking about since last June, that the economy is not growing as fast. If you listen to the economic reports, we're growing at less than 1% GDP. They're not quite ready to state that we're in a recession, but we are managing our portfolio as if we are.

The management teams that we are fortunate to invest in are managing their businesses as if cash flow is going to be tighter. They're taking very aggressive actions to cut costs. The last few years have been a robust environment for them so there is some opportunity that we're seeing across the portfolio, where companies that are taking aggressive action and some which companies aren't even seeing a decline yet in top line. So we're encouraged. It's really on a case-by-case, investment-by-investment basis.

Which leads me to your second question, a couple of the names in particular. [Airbon] is a company we've invested in for quite some time. The business had a fast growth and then it slowed down dramatically. We are encouraged that now we're looking at several quarters of stability, and cash flow and EBITDA for that company. Where we are today on a leveraged basis is lower than where we invested in. If the company was even to maintain its current level of EBITDA, we will seek cash flow and deleveraging and we're encouraged by that.

Eurofresh, we may have mentioned in the last call that the company was quoted down significantly, given some challenges that the company had to manage on the operating side. We are encouraged that it was refinanced. The senior debt ahead of our securities was refinanced, giving the company additional capital and additional cushion on its covenants. We expect to get our interest payments in July or next time. We're also very encouraged by the operations of the company cleaning out, which was a virus and this company produces tomatoes. The clean outs are working, and the company has time. The quotes have been increasing, so we're very happy to hear that.

The last part of your question, Carl, would you mind just reminding me?

It was about visibility on any gains, like I know you don't control the timing, but EXCO, MEG Energy, Prysmian, anything there that might be looking at in the near term.

Sure. We are very happy to see, and these are publicly-quoted securities, EXCO and Prysmian, since quarter-end which folks is available to look at, the prices of our common equity that we have in Prysmian, as well as the common equity price of EXCO, even though we own a convert. It's obviously related. We are always looking at what the right time for liquidity is. It comes down to the fundamentals of the Company.

Right now on Prysmian, we still are subject to a lock-up. It's coming close to the period where we'll be able to get out of that lock-up. But the fundamentals of the Company, if you listen to the outlook and they're publicly stated conference calls, they're seeing a very, very strong year. It's an international, global company, so we're encouraged by that. The run-up in their stock price reflects that. We've gotten significant gains from that investment to date. At the right time, the management will sit down and go through exiting of both of those securities.

We are also encouraged that the larger companies in our portfolio do get sold. SigmaKalon was sold earlier in the quarter. We refinanced from there, from that investment. We had another company that did an acquisition. We were able to refinance. We chose to go back into the company at a better price and structure, so we're happy with that. There was another company in our portfolio that was publicly announced was acquired, Norcross was acquired by Honeywell. We have $50 million holds -- pick security that was refinanced at a premium.

We're not seeing the refinancings happen, which have been frustrating for us over the last couple of years, but good companies can still be bought and sold in this market.

Okay. That's helpful. I was -- one last question on the financing side. With the recent offering, you've got about a billion dollars of potential leverage capacity and I think your revolver commitments would limit you to about half of that. What are your plans for he increasing debt capacity? And what kind of cost might you see there? Are there any plans to look at off balance sheet type arrangements as well?

Let me focus on that. Certainly, we would concur with some of your numbers. We have -- one of the benefits of being part of Apollo is having a great dialogue with a variety of financial institutions and lenders. We have a variety of strategies that we're working on right now. It would be premature for us to get into detail with those, but we certainly -- broadening out our debt capacity is one of the options that we are -- We don't feel that we have any pressure to do it tomorrow, but yet we are doing it in the time -- It's always better to raise debt capital when you have equity in place, rather than the converse of that. We feel -- that's certainly one of the strategic objectives of our company over the next coming quarters. Very, very focused on it. And we believe that we have a couple of ideas that we'll do something that is consistent with our conservative structure of our balance sheet, but will allow us greater flexibility.

Okay. Thank you.

Thanks, Carl.

Thank you. Your next question is from Sanjay Sakhrani with KBW. Please go ahead.

Thanks. If I'm doing the math correctly, there is some amount of dilution related to this past equity offering. I was just hoping if you could help us think about how you're going to manage through that. Are there opportunities to deploy the capital in a pretty efficient manner? And maybe related to that, where are the dollars expected to go? Primary versus secondary? Smaller type companies versus larger type companies? Perhaps you could elaborate a little bit more on that.

Sure, Sanjay, it's Patrick. I'll start off. We feel that with our capital raise, it was very opportunistic. It was at the right price, the right time, and we're encouraged that the market was receptive to that offering. We were patient and prudent when we chose to raise the capital, like we are when we raised debt capital or even do investments. For us, $350 million of net proceeds, that could be three deals. It could be two deals. It could be ten deals.

We're seeing the emergence of primary market activity. There has been some press on a deal that we were involved in. It's a top story of Bloomberg today about the changing financial markets, and a company called Angelica that we work with Lehman Brothers Merchant Banking as they acquired the company. It was a large investment for us. We've committed to it. It will take time to close. It's not in our pipeline, because it will close when it closes. It will show up in our investments and our assets. But that is a terrific call to get from a relationship we've known for years. It's primary market. It's certainty. It's our ability to move quickly and marshall our resource to have a view.

The pricing and terms of that structure are better. It was a direct deal. We did receive fees for that direct deal. We think that's a market we would like to be in, we want to be in going forward. We think the market opportunity, given that Wall Street is still not really back in this business. And we're hearing that this will change for at least several quarters, if not years, how Wall Street behaves, that's good for us. We like the primary market to come back.

It usually comes back when secondary markets rally. And the secondary market's rallied. You've seen us be more patient last quarter in the secondary market. If the secondary market hasn't unlugged out, we can invest more there. It's really the relative value, where it's best is where we will spend our time. But the capital we raised, we're -- if the market opportunities are there to invest at all in one or two quarters, we'll do that. If they're not there, we'll be patient.

On that Angelica deal, is there a size that's out there in the public?

It hasn't been disclosed yet, but it is sizable.

Okay. I also saw that First Data, the stake obviously went up a lot. You mentioned that in your prepared remarks. How should we think about the strategy there? Is that a hold to maturity type paper? Or would you consider trading out of that if the bids were covered on that paper?

Yes. I think Sanjay, that for us is -- we're a yield-to-maturity investor. What pays the dividend is the cash we receive off the investment portfolio. If we feel that First Data will continue to pay us the cash and it's the right thing to do, we will continue to hold it. We, going in to every investment, assume we'll be in it until maturity. If there's reason for us to believe that there's more downside coming, based upon fundamentals in the Company, and we can either take our money off the table and preserve our capital or preserve a gain, we'll do that. But we're not -- this is not a trading business. Short-term IRR doesn't pay the dividend for us, so we're going to be patient and prudent about that.

What are the IRRs on that paper that you invested in? Estimated?

They are the mid-teens on yield-to-maturity. And if you get yield-to-call, you can assume that they're higher than that.

Okay. Great. Thank you.

Thank you. Your next question is from Vernon Plack with BB&T Capital Markets. Please go ahead.

Thanks very much. I just wanted a little clarification in terms of changes that we saw on the balance sheet. Cash equivalents decreased $421 million, while the credit facility increased $519 million, and the payables for investments and cash equivalents actually decreased $776 million, I believe. I'm just trying to get a sense for what dictated those balance sheet movements during the quarter.

Sure, Vernon. This is Rich. Couple of changes. I think Patrick mentioned earlier in the call, I think Jim with regards to the Bear Stearns bailout, there was a lot of uncertainty in the market in the middle of March. We saw, being Apollo with our dialogue with banks and what we see in the market, our broad views, we thought it prudent in the middle of March prior to the Bear Stearns announcement that we draw down on our revolver. We wanted to preserve our debt capital. We didn't want to be -- if there was any run on any banks, being the last guy to ask for the money that was due us, and then it not being there.

In mid-March, we strategically, in advance of the announcement, drew down on our revolver to that level that you see on our balance sheet. And invested those in very short-term treasury bills to preserve capital, and have that debt capital available to us so we could continue on in our day-to-day business without having to worry about drawing down on a revolver on a bank that may have some strain or issues, or even panic the market that shuts those legally committed dollars off. Again, we were prudent, protecting our debt capacity, drew down on it and added [Hebuild] to our portfolio of investments in mid-March. We held that for roughly a month until the market stabilized.

We then sold those treasury bills at a slight realized gain, but nothing material. That wasn't the reason for it. Again, it was preservation of our debt capacity and our ability to operate day-to-day without any problems. That had a slight, maybe a penny, impact to our top line net investment income. That was the cost of preserving that capital. But there was no management fees paid on those dollars that was drawn down for the quarter. Again, it was just to preserve that capital.

Some of that swing you're seeing, I think the other swing you need to consider is the payable for investments and cash equivalents purchased. I could help take you through the numbers at any time. But on any given quarter end, there's always open trades because as a BDC, we record things on a trade-date basis and they get funded subsequent to the quarter end. It's essentially your prior quarter's balance. There was liabilities there that needed to be funded post December 31. And then there was the treasury bill transaction that we did in March and then subsequently got out of.

All right. One other question. The portfolio turnover ratio as you define it, in '08 it was 24%, in '07 it was 44%, 39% in '06. I would imagine for '09 that ratio will be lower than 24%?

Yes. What I've described in the past today, and in the past conference calls and what Patrick has described, you have in a credit cycle as we're going right now, we would expect to hold some of our key positions a little bit longer as the M&A activity is of a slower pace in the aggregate. We've always talked about in a more buoyant market, the average life being two to two and a half years. And in a more environment like we're in today, stretching out to three to four years, so we think that's very typical. We're actually happy. Names that we like, that we are very comfortable that are clipping the coupon, we have no problem owning them for a period of time. But you're right. We would expect that number to go down as we see the engine of an M&A cycle starting to show some signs, and then developing over the next number of quarters.

Great. Thank you very much.

Thank you.

Thank you. Your next question is from John Stilmar with FBR. Please go ahead.

Hi guys. Actually my question was just answered. Thank you very much.

Thank you, John.

Thank you. (OPERATOR INSTRUCTIONS). Your next question is from Greg Mason with Stifel Nicolaus. Please go ahead.

Good morning, gentlemen. You say it was important for us to differentiate between industry volatility and credit issues. I was wondering if you could help shed some light on that this quarter, what you guys considered credit issues versus industry volatility marks.

Well listen, Greg, I appreciate the question. I think we've been historically -- have really talked about -- we have a lot of transparency in our underlying names in our portfolio. Certainly we have been very, very clear and consistent in the disclosure on this. Again, as Rich said in his comments and I said in my comments is, we have a fair amount of names that are quoted. And certainly, by no means, we always believe we outperform the index. And our numbers over the last four years would prove that out dramatically. But in terms of getting into individual line items, that's not something we're prepared to do right now. Suffice to say that with the quoted portfolio like more and more our names are, and the transparency that comes along with that, there was quite a bit of volatility.

If you look at the indexes, where they began in January, and where they trough down to in March 17, and then where they ended up, they were down 6, 8% over that period of time between the high yield and the loan indexes. If you look between January 1 and then March 31, they rallied that last two weeks in the credit markets. And then subsequent to that, today, they certainly rallied as well. Those indexes are up 500 basis points, at least, if not higher. We think that's the kind of direction I could give you. We're very comfortable with that and certainly, I think if you look where we are today, that would be a good baseline.

Greg, let me add -- this is Rich. Let me add a couple of key components that will get your answer. We disclosed our average rating still as a two. That's the same as last quarter and same as the quarter after that,. Quite frankly, it's been pretty steady and stable, because we're so transparent by using the quotes. Not everyone does that, but we have that transparency. Many analysts can go into the Bloomberg machine, or pull up LPC and get their quotes.

Again, we feel very good about the transparency and liquidity in our portfolio. Underlying fundamentals, that's what our investment team focusing on. That's them looking at the monthly financials, going out visiting the tours, and touring the factories, meeting with management, et cetera. If you take the points of, hey, we use the quotes, but the credit rating is a two and there are no new non-accruals. The last non-accrual we had was last September on Lexicon, and that's posted in our scheduled investments with nothing else since. Again, I think you can tell by the tone in those data points where the credit marks are versus where the mark-to-market technical liquidity drivers are that are driving these quotes.

Okay. If we took a look at the portfolio and looked at debt investments that were down, say, 20% marks from last quarter, like a Airbon, Kronos, WDAC, Avonstar, would it be appropriate to say anything over those 20% type of marks are probably more credit-related than mark-to-market issues? Volatility issues?

No, that wouldn't.

Okay.

Not necessarily. There was a tremendous amount of volatility in the credit markets in the first quarter. Liquidity had a major price on it, in terms of variety of vehicles, and so I think that -- I feel we've given a lot of transparency and color. But there's examples across the board where very good performing companies got marked down, to mark-to-market and we don't think that's reliance of what's going on in the underlying credit.

Sometimes, it's just news that comes out or rumor and that trades these things off. Remember, these marks are just for that day, for that moment. so whatever it was, if there was a news event on the 31st or the 30th that somebody grabbed on, and it just rolled. Any panic in the market will drive these things. Quite frankly, it goes both ways. Any euphoria works the same way, up or down.

For us, if you want to -- one of the bigger impacts is in our NAV in March was Prysmian. This is a company that's paid us many, many dollars of capital gains over the last year or two. It was marked down substantially. That's a quoted security. The ticker is easily looked up. Where it was in December versus where it was in March, anybody can pull it up on Yahoo. This was a substantial impairment to our NAV. That thing is daily traded. You could see where it is today. It's significantly different today than where it was on March 31.

Again, these are just quotes for us. Fundamentals are being focused on every day by the investment team. As Patrick alluded to, if there's a fundamental problem with the company, those are the ones you're going to see selling. We're trying to get ahead of that. We're trying to monitor that to make sure we're ahead of it.

Great color. Thanks, guys.

Thank you. Your next question is from James Shanahan with Wachovia. Please go ahead.

Thank you. Good morning. Just a quick one, please. What is the dollar value of undistributed income that can be used to support the dividend near-term?

Yes.

Go ahead.

That's a great question, Jim, and that's something we haven't discussed. In our press release, in one of the pages there underneath the dividend section, we disclose that number. It's $137 million.

Okay. Yes, 137. That's roughly about a dollar per share, right?

That's correct.

What is the timing for -- more importantly, the timing for paying out that distribution to shareholders? What sort of flexibility would you have to accelerate or extend those payments?

Kind of tying into the strategy discussion that Patrick described earlier in the call in his prepared remarks. Our strategy as a private equity mezzanine investor is, you know you're not going to get capital gains year in and year out in the private equity business. What we try to do is best match our assets, which are subordinated debt, doing the work up front, investing in a core asset class that's earning 12 to 16%, just the debt. We've always kept our leverage very low. That leverage is generally taking care of all the fees and expenses of the public company. And then that little bit of equity, which has had as we described earlier, over $200 million in realized gains -- realized gains, not talking about what's the unrealized to Carl Drake's question earlier. But that strategy is to harvest those realized gains, because you know one day you're going to have losses. We're not perfect. We're investors. It's a humbling business, but we think we have the strategy that makes a lot of sense.

That equity continues to build a cushion as you see. That number of $137 million is increased from or prior 10-K, March '07 number of $100 million. For the fiscal year ended March 31, 2008, our dividend cushion, what protects our dividend, the dollars have grown from $100 million to $137 million. That's a cushion to keep, to conserve and to use, to protect your dividend. To the extent one day we do have losses, we have some protection there. I wouldn't expect today that our board or management here is going to promote doing special dividends. Those are typically done at the end of the calendar years, at least that's when they're considered based on the regulated investment company tax rules. Did that answer your question?

Well, almost. The other part of the question was, what do you think -- what kind of flexibility do you have for paying out that dividend? Is there some point in time where the $137 million must be paid out? Or can you extend that, just putting some bookends around that.

Yes. Sure. As a BDC, we're a regulated investment company for tax as are all BDCs, my understanding. The way the rules work is, because those were earnings generated in the fiscal year ended March 31, 2008, you have to pay out 90% of those to maintain your risk status. The timing is really your question and that means, you have to pay those earnings out prior to when you file your tax return in order to claim the dividend paid deduction. That dividend paid deduction satisfied to the extent that dividends paid subsequent to your March 31 fiscal year-end, or designated as dividends from prior year's earnings. Again, for example, the June dividend will likely be designated from earnings from the prior year to satisfy that accumulated taxable reserve.

Understood. Thank you very much.

You're very welcome.

Your next question is from John Arfstrom with RBC Capital Markets. Please go ahead.

Good morning, John.

Good morning. Patrick, I know these are individual situations, but can you talk a little bit about the fundamental performance of the three and four-rated credits? Are there any general themes or anything positive or negative we can get from that?

That's a great question, John. I think there's -- stresses began about a year ago on the consumer side, in housing, and those have continued. We have now started to see what I call kind of durables and deferables, which is anything that costs a lot of money for a company to purchase and/or something a company can defer. I think if you look at the durable orders, we're a little bit better in April than people expected them to be, but they're still down. If you look at IT spending, or spending where it makes it great ROE to actually make -- to make that spending. But people are hoarding cash and hoarding capital. That will play through, even with very good products and good companies.

The key for us is to be focused on companies that have significant cushion on cash flow, knowing that they will cycle. People will defer purchases if they can or they may not have the capital to invest in expensive durable goods. And we've seen that since the beginning of the year start to take hold, and we're watching that very closely. The consumer and consumer confidence remains low. Anything building products-related is a challenge. I think we're also focusing our time looking at commodities, raw material price increases. People saw the news from Dow this morning about 20% increase in their products, because they have to. Energy prices are expensive. People understand that you have to pass them through now.

Food costs are tough. Gas prices at four bucks a gallon is causing an issue. Really, inflation is on the radar for us. And we're seeing companies really, again, hoarding cash. But if the company's in our portfolio, the larger ones and they're global, many of them are still performing very well on a relative basis, more importantly for us, on an absolute basis. The cushion we built into these companies going in is definitely something that we're happy that we have.

Okay. And then in terms of the NAV, this may be a big picture question. We obviously obsessed about the NAV and I'm just curious, other than the capital-raising issue, how important is NAV to you from quarter-to-quarter, given the fact that it seems like more and more of your portfolio is becoming quoted over time?

Listen, we obsess about a lot of things here. We obsess about free cash flow. We obsess about the dividend. The NAV is a result of all these things, a good successful investment strategy. We have always talked about and as Patrick laid out today, we believe if we invest in these great companies, the marketplace does vote every day on some quotes, we're not going to let that get in the way of our long-term strategy. And while we understand it, we see it, but we're not going to change our core investment strategy by day-to-day volatility. That's what investors -- that's how we made money for many, many years here at Apollo. We're going to continue doing that.

There's good opportunities out there that people are not distinguishing good credits from bad, large versus small, ones that will be able to be very robust participants in this credit cycle versus those that are not. We're focused on it, and agreed that we want to make sure our investors feel good about their investment. But we have a broader investment strategy that's all part and parcel with the dividend and long-term growth.

Thanks, that's helpful.

Thanks, John.

Your next question is from Jackson Turner with Fargus Research Company. Please go ahead.

Good morning. Just have a couple of quick questions for you. Looking at the balance sheet, I noticed there was substantial change in receivables. Just curious if you could give a little bit of color on why that change occurred over the last year. And then also, I estimate that you've got about half a billion dollars in dry powder, just want to make sure that's correct.

Hi, Jackson, this is Rich. Your first question, the receivables, they're really not up. It's just a timing issue of when our -- we have no -- for the record, there are no past due receivables for dividends or interest as of March 31, so it is clear on that. The size of the receivable's is really more of a function of our growing portfolio, and the timing of when these things pay. There's nothing there to read into. And I'm sorry, your second question, Jackson?

Wanted to get a figure on dry powder.

Oh, the dry powder. We disclosed in the March K and in our press release, that there was roughly $415 million available to us at the end of March, based on the current commitments on our current revolver. That's a number that we report because we should. Again, there's obviously more capacity for debt capital above that amount, up to our net assets, up to that one-to-one. That's kind of theoretical. We've never really levered our book up to that, as others might have moved closer. That's theoretically there, to the extent we wanted to access that debt capital. And then, we just -- on our equity raise, and then there's some net portfolio growth that you should assume. The number is more than the $500 million that you said if you were to add those things together, taking those publicly disclosed numbers.

Perfect. Thank you very much.

Thank you. This concludes the question-and-answer session. I would like to hand the floor over to Mr. Jim Zelter for any further or closing remarks.

Well from management team, we want to thank you for all joining our fiscal year-end 2008 conference call. And we look forward to speaking with you again throughout the next year as well, and continued success from all parties. Thank you for your time and your help.

Thank you. This concludes today's Apollo Investment Corporation conference call. You may now disconnect your lines, and have a wonderful day.