MidCap Financial Investment Corp (MFIC) 2009 Q1 法說會逐字稿

Good morning, and welcome to the Apollo Investment Corporation's First Fiscal Quarter 2009 Earnings Conference Call. (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 First Fiscal Quarter 2009 Earnings Conference Call. I'm joined today by Patrick Dalton, Apollo Investment Corporation's Executive Vice President and Chief Investment Officer; 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 is also available in our earnings -- information is also available in 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 Web site at www.apolloic.com, or call us at 212-515-3450.

At this time, I'd like to turn the call back to our President and Chief Operating Officer, Jim Zelter.

Thank you, Rich.

The widespread volatility in both the credit and equity markets continued throughout the quarter. It has been more than a year now since we advised on the technical pressures that had forced liquidity to the sidelines. And while the markets rallied briefly after the Bear Stearns bailout and throughout May, the broader market in June backed off due to appropriate concerns about fundamental credit and reports of more evidence of the weakening economy.

Clearly the consumer continues to experience stress from higher energy and food costs, and this stress has impacted top-line revenues of many companies broadly across the economy. That said, our strategy of transitioning our investment portfolio into exponentially larger companies ahead of the credit crunch has better prepared us for the challenges that an economic slowdown will bring.

As we noted on last quarter's Conference Call, we believe that many high-quality companies would be patient under these market conditions; that is, waiting for more favorable market conditions before accessing the market for financing or M&A. This has indeed played out, and we expect to continue until the economy and/or broader markets show more signs of reliable or steady improvement. Again, these are typical companies that we strategically invest in.

Given our strong commitment of preservation of capital and our objective of capturing only those opportunities with appropriate risk-adjusted returns, we continue our patient approach. Furthermore, we believe we understand market cycles and continue to manage our portfolio and capital with the purpose of preserving our dividend to shareholders and growing it over the long term.

Since our last call, we have seen many diligent commercial investment banks continuing their efforts to work off the majority of the corporate LBO loan and bond inventory. We have also seen them seek and raise more than $175 billion of much-needed liquidity from new equity and debt investors. We expect them to utilize [the accumulated in such] liquidity to prudently rebuild and strengthen their balance sheets, while rationalizing their businesses and other commitments.

At such time when the banks shore up their balance sheets, we would expect the capital markets to regain some constructive momentum. We do not expect linear movement but do expect high variability, with both fits and starts.

While we don't know how deep or how long the journey, we are generally indifferent. These are times when those with strong conservative balance sheets and those with significant capital to deploy have many advantages and fewer distractions. These companies, like Apollo Investment Corporation, can focus on improving their position and increasing their presence in the marketplace.

And from a historical perspective, with the second-lien primary market apparently dissolved and with the high-yield market stalled, we expect demand for our opportunistic mezzanine capital to rise significantly over the next 12 months. We believe these opportunities will certainly have improved pricing and better terms and conditions, all at more attractive leverage levels.

Before I turn the call over to our Chief Financial Officer, Richard Peteka, I want to highlight that the quarter ended June was filled with several successes on different fronts. In May, we closed on what we believe to be the largest overnight common equity takedown ever for a business development company. We raised $382 million in gross proceeds overnight.

In June, our investment performance, infrastructure and control environment was recognized, with a BBB investment-grade rating from the Fitch rating agency. We were extremely pleased with that outcome, given the current market environment.

Also in June, we established the Apollo Investment Corp. Credit Opportunity Fund, which we will expect to capitalize on a handful of unique and opportunistic investments. With some interesting opportunities identified during the quarter, we ultimately structured and closed on two investments, each with highly attractive additional financing offered only to select investors such as Apollo Investment Corp.

Again, we expect the near-term utilization of AIC Credit Opportunity Fund to be limited to capture only unique and opportunistic investments that complement our overall investment portfolio, and to accrue to the benefit of AINV shareholders. Our Chief Investment Officer, Patrick Dalton, will discuss the AIC Opportunity Fund in more detail in a few moments.

In addition, let me express that we are encouraged with the current dialogue we are having with some financial sponsors, including their acknowledgement during these challenging times of how important it is to know and have a relationship with their capital providers. They also acknowledged how important our scale and credible, consistent, no-surprises capital commitment process is to them.

Accordingly, and with primary market activity significantly muted for more than a year now, we expect these and other financial sponsors to reenter the market over the upcoming months and begin work on prospective investment opportunities. Apollo Investment Corporation remains ready as a preferred provider of capital.

With that, I'll turn the call over to Rich, who will provide us with some additional details on our quarter. Rich?

Thanks, Jim.

Let me start off with some balance sheet highlights. We closed our quarter end on June 30th, 2008 with an investment portfolio of $3.3 billion, up from $3.2 billion at March 31st. Our stockholders' equity totaled $2.3 billion at June 30th, with a net asset value per share of $15.93. This represents an increase of $0.10 per share from our NAV of $15.83 at March 31st. Furthermore, with only $966 million drawn on our revolving credit facility, LIBOR plus 100, our conservatively leveraged balance sheet now has a debt-to-equity ratio of only 0.4 to one.

As for operating results -- gross investment income for the quarter totaled $91 million. This compared to $88.9 million for the comparable quarter a year earlier. Net operating expenses for the quarter totaled $44.6 million, of which $27.6 million was management and net performance-based incentive fees, $13.9 million was interest expense and $3.1 million was general and administrative expenses.

For the comparable June quarter a year earlier, net operating expenses totaled $34.2 million, of which $23.8 million was management and net performance-based incentive fees, $7.6 million was interest expense and $2.8 million was general and administrative expenses.

The increase in quarterly expenses year-over-year was driven primarily by the growth of our investment portfolio. Accordingly, net investment income was $46.3 million, or $0.35 per share for the quarter; compared to $54.8 million, or $0.53 per share for the comparable June quarter a year earlier. The decrease in net investment income year-over-year was primarily attributable to a $10 million upfront fee we earned last year for the public-to-private acquisition of Innkeepers USA/Grand Prix Holdings.

As a reminder, net investment income can vary quarter to quarter based on many factors, including the timing of investments made, as well as when investments are sold or repaid. Apollo Investment Corporation's GAAP net investment income also continues to represent only a portion of our taxable earnings included in quarterly dividends. Taxable earnings also include structuring and commitment and other upfront fees we receive on investments, as well as net realized capital gains.

Our investment sales and prepayments for the quarter total to $89 million. Net realized losses totaled $29.8 million as compared to $20.7 million for the comparable quarter ending June 30th, 2007. Realized losses taken in the current quarter were driven primarily by our exit of American Asphalt & Grading, where we recognized approximately $26 million in losses.

Also during the quarter, we recognized unrealized gains of $55.3 million. This compares to unrealized gains of $143.7 million for the comparable June quarter a year earlier. In total, our quarterly operating results increased net assets by $71.8 million, or $0.55 per share; versus an increase of $177.7 million, $1.72 per share for the quarter ended June 30th, 2007.

Let me just finish up with some performance figures. Since the IPO on April 8th, 2004 and through June 30th, 2008, Apollo investment Corporation has generated cumulative and average annual total returns based on net asset value of 70.2% and 13.4% respectively. The cumulative average annual total returns based on the market price of AINV shares for the same period are 35.8% and 7.5% respectively.

Now let return the call over to our Executive Vice President and Chief Operating Officer, Patrick Dalton.

Thanks, Rich.

During the quarter ended June 30th, we continued our primary focus on managing and optimizing our existing portfolio and remain prudent with our capital, investing only when and where we saw the best relative value. We reviewed several new opportunities in both the primary and secondary markets. But once again, with the volatility of the overall credit markets, many of the higher-quality companies continued to sit on the sidelines for M&A or new capital raises.

With our focus on larger, more defensive companies with more liquid securities, we expect to have the added benefit of taking certain gains and trimming and/or avoiding potential losses where we see potential for future underperformance.

During the quarter, we exited our $34 million investment in American Asphalt & Grading, a grading and paving business operating primarily in the Las Vegas housing market. The sale reclassified our previously recognized unrealized loss to a realized loss of $26 million, which had no impact on NAV per share.

We also took advantage of the mid-quarter market rally to sell our full position of $18.5 million in Yankee Candle, a consumer products retailer; and also trimmed our position in Associated Materials, selling our discount notes, realizing a 16% internal rate of return.

Lastly, we saw the full repayment of our successful $34 million investment in Norcross Safety Products, realizing a 15% internal rate of return. We close our first fiscal quarter having invested $185 million across six new and eight existing portfolio companies. The quarter also saw repayments in other exits, totaling $89 million. Since our IPO in April 2004, our total invested capital now exceeds $5.3 billion across 118 portfolio companies.

Let me take you through some of the activity during the quarter. We at Apollo have the benefit of a broad sourcing network that sources very unique and proprietary deal flow. As an example, there are certain large banks that are trying to sell assets to relieve pressure on their own balance sheets. For select investment platforms like Apollo, these banks may also be willing to provide additional debt capital to finance the purchase of these assets.

During the quarter, we were approached by two banks about purchasing securities of First Data and Energy Future Holdings, which is the parent company to TXU, at significant discounts. Moreover, the banks were also willing to provide additional attractive financing to Apollo to support the purchase of these assets.

So we created the AIC Credit Opportunities Fund to house a select number of these types of investments. We believe that this creates additional benefit to AINV shareholders of increasing our debt capacity beyond our current revolver and also takes advantage of the market dislocation to purchase what we believe are high-quality assets at significant discounts.

Ultimately, we invested $39.5 million and $11.4 million respectively, and the finance transactions are First Data and TXU. Financing costs in the debt were between LIBOR plus 150 and 200 basis points. At this point, we only expect a select number of high-quality investments to be placed into the AIC Credit Opportunities Fund, and its assets and liabilities will be transparent to our shareholders.

We also invested $24 million in the senior notes of U.S. Food Service. U.S. Food Service is the second-largest food service distributor in the U.S. U.S. Food Service is owned by Clayton, Dubilier & Rice and KKR.

We also began adding NCO Group to our portfolio during the quarter. NCO is a leading global provider of business process outsourcing services, with a primary focus on accounts receivable collections and customer-relationship management and is owned by 1 Capital Partners. We invested $7 million in [the high ode] notes to the secondary market.

We again selectively added to our position on the bridge loans for First Data Corporation during the quarter, investing an additional $32.8 million at a significant market discount to original-issue price. First Data is the dominant global transaction-processing franchise, providing payment-processing services and electronic commerce to merchants and card issuers.

In addition, we invested approximately $44 million in the secondary market in names that we currently hold, such as Alliance Boots, Penton Media, US Investigation Services, TransFirst and Hub International, at substantial discounts to original-issue price.

We also identified attractive investment opportunities in the BB tranches of three extremely well-managed CLOs during the quarter. These investments totaled $23.4 million as we acquired them at substantial discounts. Two of the CLOs are managed by Babson Capital, who we believe is one of their premier managers in the CLO space. The other CLO is managed by Shankman Capital Management. Shankman is an independently owned investment advisory firm dedicated to investments in leveraged companies with a conservative and prudent management style.

These investments are another example where our broad originations platform and relative value investment strategy allow us to prudently and selectively invest in assets that we believe offer an attractive risk return and where we do not have to rely exclusively on an active primary market for compelling investment opportunities.

Ultimately, our investment portfolio at June 30th consisted of 74 companies, with a market value of $3.3 billion. And we've invested 23% in senior secured loans, 54% in subordinated debt, 7% in equity and 16% in common equity and warrants measured at fair value. The portfolio continues to be diversified by issuer and by industry.

The weighted average yield on our debt portfolio at June 30th was 12%, unchanged from the previous quarter. The weighted average yield on the subordinated debt and senior loan portfolios moved slightly to 12.9% and 9.7% respectively, versus 12.8% and 10% respectively in the prior quarter. We continue to closely match our floating-rate assets with floating-rate liabilities and maintain a balanced net interest margin on our portfolio.

The weighted average EBITDA for our total portfolio continued to increase during the quarter and remains well in excess of $200 million per company. After observing the management teams of our portfolio companies since the credit crunch began more than a year ago, we are even more convinced that the experienced management teams of larger companies are much more intuitive and far more prepared for and capable of handling ongoing and future challenges of managing their companies through economic cycles.

Accordingly, and as of June 30th, the weighted average risk rating for our total portfolio remained at two. And the weighted average cash interest coverage also remained over two times.

We did not have any loans default on their interest payments during the quarter, and there were no new loans placed on nonaccrual status. Lexicon Marketing remains the only nonaccrual on our books.

Furthermore, there are no past-due interest or dividends receivable. Ultimately we remain comfortable with the fundamentals, the resilience and the overall credit quality of our portfolio.

Importantly, and before I open up the call to questions, I'd like to note that over the last several quarters we strategically expanded our dedicated portfolio monitoring team to continue its value-added comprehensive and proactive approach to monitoring our investments and working closely with our financial sponsor partners. This is over and above the rigorous monitoring obligations and practices of our investment teams. We have always believed that what we own is much more important than the potential next investment.

Furthermore, we believe significant value can be realized by staying ahead of potential problems. As we mentioned earlier in the call, our portfolio of quoted investments has significant liquidity. And our proactive monitoring for prospective issues offers us the added option to more easily exit our investments and preserve shareholder value.

In closing, I would like to thank all our shareholders for your support, as well as thank our highly dedicated and growing investment team for all their hard work and commitment to Apollo Investment Corporation.

With that, operator, please open up the line to questions.

(OPERATOR INSTRUCTIONS) Sanjay Sakhrani, KBW.

Thank you, good morning.

Patrick, you talked about credit quality. Maybe, could you elaborate on that a bit? What kind of trends did you see across your investment companies? And was there anything discernible, and kind of where do you think we're headed?

Sanjay, thanks for the question, and welcome to the call.

Certainly in this credit environment, we are very focused on performance of every one of our portfolio companies. We definitely -- as Jim mentioned, I think, in his part of the presentation, that all companies across most industries these days are feeling stresses on the top line. Where the rubber really meets the road is when you can't ultimately put your business at the risk of just the demand side, what can you really do on the cost side.

And what we've seen is most of our companies -- and we're encouraged by this -- have taken aggressive steps early in this cycle to cut their costs, without cutting service, without affecting customers. And over the last few years, many companies have had the benefit of putting probably a lot of cost structure that was somewhat redundant. And we're seeing a lot of that action.

We are pleased with the company that we're investing in because they are, for the most part, market leaders. And they are taking market share away from some of the smaller companies that maybe can't perform as well through cycles.

We are very focused on the credit quality of all of our companies. And it's a tough environment out there. We don't know how long it's going to last. But we see companies improve their liquidity positions, improve their cost structures and make significant changes to their own organizations should they need to, to right size their businesses in line for what we think will be a tough couple of quarters ahead of us. And we can't say how long it's going to last.

But we're pleased with where we're seeing our companies, but we're also very focused and are not optimistic at what the environment's going to bring, at least the next few quarters.

Okay.

And then just on that Opportunity Fund -- how big can that get from a relative standpoint from where we are today?

I'll jump in, and Jim should chime in as well here.

The answer is we don't quite know yet. We're really being selective. Number one, it's really about the assets themselves. Are these companies that we want to invest in? And will we invest in them without having the added benefit of leverage? We don't look at leverage as a reason to do the investments; we look at it as an added benefit. So the names in this portfolio are only First Data, which we have a meaningful position; and TXU, which was already an existing position.

Should, towards the end of the year, some banks (inaudible) even lighten up the balance sheets more so -- we expect there may be some opportunities, but we're not counting on it. If the fund ultimately is two investments where we've got additional leverage, that's fine. It was the right thing to do at that time.

Yes, I would just say, Sanjay, we feel -- we've talked about this before -- we feel -- if we use a baseball analogy -- I don't know if we're in the fifth, sixth, seventh inning. But certainly, as the LBO backlog has gone from plus or minus $400 billion to less than $100 billion, there are still some institutions that want to provide interesting financing for you to be able to purchase assets. And we wanted to make sure we had the opportunity to do so to benefit our shareholders and our dividend. And that's why we created it.

But it's not -- I don't want you to get the wrong idea -- it's not -- we're not changing our business model. This is apparently incremental. Our business model has not changed, nor has the underlying attributes of our portfolio construction. It really is business as usual.

And the last thing I would say on it -- it's really a testament to the platform of Apollo. Because these opportunities wouldn't necessarily come to everybody. And so, we benefitted Apollo Investment Corporation by the access to Wall Street in them showing us these types of transactions.

I tend to agree with you. I just -- and from an economic standpoint, I'm assuming any distributions off that debt would flow through the P&L of AINV. So they'll make -- the fund will make a distribution to AINV?

That's correct. This is 100% for the benefit to the shareholders.

Okay, great.

And then, just one last question on the spillover, or kind of the excess income that hasn't been paid out yet -- could we get that number? Rich?

Yes, on a tax basis, it's reported once a year on our 10-K. So at March 31st, it was $137 million.

Okay, great. Thank you very much.

Jim Ballan, J.P. Morgan.

Great, thanks a lot.

Just staying with the Opportunity Fund for a second -- the First Data investment -- tell me if I'm wrong, Patrick, but it looks like there's First Data sub-debt that you had on the balance sheet at 3/31 that's no longer there. Was there some sort of a swap involved here, or was that a separate transaction?

It was a separate transaction. But what we were able to do is to take that $100 million face and basically convert it into this fund with getting additional financing post the quarter end, that didn't exist at quarter end last time. So effectively, it was a sale and a repurchase with leverage of those same types of securities.

Okay. So you essentially kept your exposure to First Data similar; you just changed the structure [of that]?

That's correct. That's correct.

Okay.

The other question I had was just regarding the Babson and Shankman CLOs. Can you give us a little more color on that -- the types of securities that are in those CLOs, maybe what the vintage is, and maybe what the leverage in those CLOs are?

Sure. On the Babson CLOs, they're new-issue CLOs. And they consist of the current environment of bank loan to current prices. And we know the Babson guys extremely well as a firm. We have diligenced and audited what they do. They are a premier player in the CLO space. We have a view into what their portfolio is today and what their expected ultimate portfolio will be post the closing of those transactions. We like all the companies in those portfolios. We as a firm, Apollo broadly, have looked at all those credits as well. That's very important for us, knowing what's in the underlying portfolio.

We look -- and Shankman is an investment firm that we've known for many, many years -- has grown up in the subordinated debt space of high yields, has moved up the capital structure in this CLO, which is a secondary transaction and has very tight terms and conditions. And the asset selection in this portfolio is much more driven towards first-lien assets, away from some of the baskets others have.

And have diligenced those. And the discount margin that we pay put the yields [that's] very attractive and accretive to our investors and can withstand -- because we're buying mezzanine debt; we're not buying the equity of CLOs in our vehicle. These are the mezzanine debt tranches. So when we run our models, we can withstand significant defaults in these before we actually lose any of our expected return, unlike the equity tranches that lose the dollar-for-dollar return off the top.

So a combination of the supply-and-demand imbalance in this market for the BB tranches has created the opportunity, and why, from a relative value perspective, we like the underlying assets. But there's not a lot of liquidity. And if you're a buy-and-hold investor, like we are, we can take advantage of that imbalance of supply and demand and purchase this debt tranche of the CLO, highly diversified CLO, with strict terms and conditions, and make a very attractive return.

And should there be any issues in these loans, either the manager can trade in and out of those loans to protect their portfolio -- and we can also withstand significant losses before we actually get impaired at all.

Terrific, that's great. Thanks a lot, Patrick.

Thanks, Jim.

(OPERATOR INSTRUCTIONS) James Shanahan, Wachovia.

Thank you, good morning.

A couple of quick ones here -- the couple write-ups in the quarter -- MEG and EXCO, both oil and gas companies, totaling about $60 million in value written up during the quarter, by my math. Was this driven by strength in commodity prices, or were some other more -- some other sustainable driver of that value increase?

We'll take them separately. Because EXCO is a publicly traded company that has public stock and is a -- is in natural gas [and has] obviously benefitted from both what's happened in the energy space as well as the increasing commodity prices. But also, it's an exploration company and has some really attractive assets that have been valued significantly in the marketplace.

Clearly, given that we have a diversified portfolio, energy was very popular the first quarter. We would expect energy to be up; some other investments being down. Should that reverse its course going forward, that would be -- we'll see that play out. We will look to be opportunistic if we can, to monetize on some of that, if we can.

On MEG, it's a private security and a company that is in the oil sands business that is continuing to purchase land and move towards production. Oil sands is a popular investment place to be these days, given just the high price of oil. But I will tell you, on these vehicles, the actual assumed cost of oil to actually be in the production business is much lower than the actual spot price of oil. So we expect some -- they don't run up dollar-for-dollar; we don't expect them to run down dollar-for-dollar. If you've got high-quality assets, we think the long-term demand for oil's going to be there. And so that did get impacted by the dollar-for-dollar pricing in oil, but not on a dollar-for-dollar basis.

What typically is the required spot rate for oil to -- for this business to work?

If you look at the analyst research, it's between $75 and $85 per barrel.

Okay, excellent.

And one more question, Patrick -- have you ever disclosed the final capital stack of the Innkeepers deal? In other words, how much debt and preferred equity in common that was structured with?

I'm not sure that we've actually not disclosed it, and I'm not sure that we can disclose -- we can go through -- I think we mentioned on one of the calls, we've got fixed-rate, Ten Year money and Five Year floating-rate money. And we've got the perpetual preferred of $145 million, and our common equity and junior capital investments in our balance sheet.

The combined debt of the (inaudible) [debt] is about $1.4 billion, between the fixed- and floating-rate debt capital.

Is there just one series of preferred, or is there more than one?

There's just one series of preferred. Oh, we -- I'm sorry -- we also have a preferred security which is different than the existing perpetual preferred.

Got it.

Okay, thank you.

(OPERATOR INSTRUCTIONS) John Stilmar, FBR.

Good morning.

I hate to revisit -- going back to the CLOs, but in terms of a macro thought itself, or is it merely a micro-issue -- why now? I mean, certainly CLOs -- there's obviously been a lot of CLO paper that's been out there. What is it about the time that you guys have chosen to move into that type of asset class, or was it more of you just saw a specific opportunity? Wondering if there's any sort of more macro thought that we might be able to apply to --

Sure.

-- the assets that you've taken.

Sure, thanks, John.

Yes, there definitely -- we purposely had avoided this whole structured credit space for a long time. We had watched it. We understood the benefits, we understood the issues. And certainly by our not participating, we were voting with our feet that we were not getting compensated appropriately. Because it has been on the headlines, and it's been such a target situation, right now, as Patrick said, there is tremendous supply-demand imbalance, in the sense that there are no providers of some tranches of new CLOs.

And we believe right now that when these assets had been massively re-priced -- and one is getting compensated to it to a great degree -- now is a time to very selectively add to our portfolio. I can't tell you if this is a market opportunity that we're taking advantage of or an overall business. But certainly, we want to be -- we are a relative value investor. And when we can get compensated dramatically as a mezzanine lender into a high-quality loan manager in this environment, it's spreads that have been never seen before in that space, and really putting draconian stress on the portfolio, and getting very, very good returns -- we want to take advantage of that.

What I would say to you is there are some folks out there that are now talking about how CLO equity is a very, very interesting investment. And we've looked at that as well. But we don't believe, in terms of the mandate that we have right now, in terms of the risk-reward, that we're getting paid for that in this vehicle. However, mezzanine right now, in a few selected opportunities -- at very, very, very high LIBOR spreads, at low discount prices -- we believe that overall package fits into what we're trying to accomplish.

And are most of these CLOs fully ramped by the time that you provide the capital, or sort of how much more --

Yes. They are --

Yes.

They're virtually -- these are newly vintage, and they're virtually fully ramped. We can see the entire portfolio. We know a lot of these names, as Patrick mentioned. So we believe that the -- again, the whole structured credit CLO market has changed dramatically in the last year. Certainly now, there is -- it's a desert in terms of new capital coming in. And the ones who can provide capital -- you can price them appropriately.

Great. That's very helpful.

And then the second thing is -- as we start looking at the Opportunities Fund -- and hate to come back to that -- but how do you guys -- I mean, by its definition it's opportunistic -- but should we start to think about Apollo maybe seeking other types of investment funds itself in its evolving strategy? Or was this just sort of an opportunity that presented itself given the time period, and we really should start thinking about more direct corporate investments that are held on the balance sheet rather than investments directly in funds?

Yes. Certainly, the core of what we do is holding investments on balance sheet. What was really opportunistic was not just the assets themselves, which we have also purchased these types of assets on balance sheet -- was the financing that came with that. It's an increase in our debt capacity. That was what was really opportunistic. Because we could buy these assets for cash on our balance sheet, and it would accretive.

But when you get the access to additional debt capital -- we're always looking at every opportunity in the market to improve value to our shareholders. It's not a -- we don't have a business plan that lays out a series of funds going forward. If something comes up that's accretive and attractive and complements the core of what we do, we absolutely will look at it and potentially do something. But this is not a new business that we're looking to roll out a series of funds tomorrow.

Terrific.

And very last question -- as I look at your portfolio, how should we think about you guys continuing to invest in, for instance, senior debt? And obviously, the implied either discount or spread that's attached to it is pretty significant, given the senior debt right now is priced right around -- according to your press release -- right around 10%. But at 10% on the marginal investment, it doesn't seem like that in and of itself covers the dividend. Am I thinking about that too myopically, like a sell-side analyst? Or is there more of a portfolio theory behind sort of having some of your investments up-market? And how should we be thinking about that?

John, it's a great question. I think one of the things that -- to be clear about -- when we show you yields, it's on the yields on our cost basis of these assets. So our senior secured portfolio is second-lines mostly. That market today -- and when we purchased those assets several years ago, they may be [at alpha 650 or 750] -- accrual on assets today would not price -- that market's really close, but if it were to be open, it would price at much larger spread than that.

We don't show you the weighted average yield based on fair market value; we show it based on what we pay for those assets. So it doesn't necessarily mean that that senior market today is at a 10% market. It's going to be a much more expensive market for the issuer. But that market really is not open today.

We may do a deal that has a second lien on it -- might be a private mezzanine structure -- we like the lien. And therefore it would be a secure investment for us. But that's really a reflection of -- when we acquired those assets, what the spreads were at that point in time and what we paid for those assets.

Excellent. Thank you very much.

Greg Mason, Stifel Nicolaus.

This is John Baugh filling in for Greg.

Just a quick question on just overall the portfolio and underlying EBITDA trends -- could you break out, maybe on a percentage basis, how many companies are reporting higher EBITDA on a year-over-year basis?

We don't disclose that. I can give you some general things, if it's helpful. We definitely are seeing some companies report below, we're seeing come companies report above, and some companies doing really well above. But for the majority of the portfolio, it's really more on a slow growth, if any. We're not expecting much growth this year. (inaudible)

[And then] on the same vein, could you provide a little bit of additional detail on just the underlying trends that are affecting the Innkeepers investment in light of a slower economy?

Sure, that's a great question, and one that we obviously spend a lot of time on, from an investment perspective.

Innkeepers -- going into the year -- at the end of the last year, we sat down with our management team and spent a lot of time about what could happen in the environment and what could happen to this company. When we did the investment, extended-stay hotels had generally been more resilient in past cycles. That was fundamental to our approach. The hotel business without food and beverage are generally more resilient as well.

These are the upper end of the middle-market of (inaudible) hotel, given the Marriott Residence Inn brand and some of our other brands, which are considered very attractive brands. But these are not the high-end luxury nor the low-end economy.

If you're looking at what happens in those markets today, it's a bit of a barbell, where we're seeing performance most recently deteriorate significantly in the economy end, as well as in the luxury end. In the middle, it's more resilient; we're encouraged by that.

Specifically at Innkeepers, we do expect this year will not be a growth year on RevPAR. But fortunately, we began our cost-cutting programs late last year. And we're seeing in the June quarter the results of that come through to the bottom line; that's encouraging for us.

Year-to-date, we have performed better. RevPAR is up. We don't expect that to be the case going forward, just given the environment that we're operating in. And the management team is doing a great job managing the business as if we're not going to have any growth in the business, and potentially some decline.

We are outperforming not only our comparable set year-to-date; we're outperforming as well all the Marriott Residence Inn brands nationally, the ones that we don't own. We've outperformed them.

But we are very, very focused, and we're really bringing bottom-line cost savings to bear here. Because we don't expect that we're going to have growth in RevPAR this year.

That's great color, thank you.

I also noticed that you'd reduced some of your cyclical (inaudible) the sale of the American Asphalt, Associated, as well as Yankee Candle -- probably Yankee Candle being more like the company I'm interested in.

Natural Products Group, or Arbonne, which is on your investment -- can you give us a little bit more color as to why you would not maybe consider -- or what's driving you to hold that investment -- if you're worried about some [cyclic-hold] exposures, considering, I believe, they're high-end cosmetics?

Yes. I think what's driving that is where that is valued, which is a quoted security, we believe it's worth more than that ultimately. And so we don't -- when we exit an investment either with a gain or with a loss, it's because we think that there is some deterioration coming, and that the value that we can sell it for today is better than the value we'll get tomorrow.

We're spending a lot of time with the sponsor and what they're doing, and the management team of this company. We are encouraged with what we've seen, and some stability in that company. We think that they have some opportunity. But we don't think that the price reflects an appropriate exit price for us.

Okay. Thank you.

John Arfstrom, RBC Capital Markets.

Hi, John.

Just following up on that question -- that was the first half of my question. But is it the same answer for something like Eurofresh and Lexicon?

Lexicon is valued at zero. Certainly, we've taken what we believe is an appropriate valuation on that.

There are -- it takes time to exit some of these situations, should we choose to exit the situations. So Lexicon's a bit of a different animal, given where it's carried and some of the processes that that company is going through.

On Eurofresh, as probably disclosed, they've made their interest payment. This company makes on-the-vine tomatoes. It has benefitted significantly by the salmonella which affected the grown tomatoes that come out of the ground. Pricing is up, the company is doing a very good job of getting through some of its issues; we're encouraged by that. And again, we would not look to sell an asset for a value that we think ultimately will get a higher value.

Okay.

And then just a question on primary versus secondary market -- as we roll through this credit crunch, do you think that we're going to eventually see more primary market activity out of Apollo? Or do you think there's still enough in the secondary markets that you guys [could pick away] and to have that be a big chunk or your origination?

Certainly, it's our view that there will be -- with what's going on, taking a step back and seeing the risk profile of many institutions and other investors that provided mezzanine capital, and seeing their position being either much more diminished because of what's going on -- we certainly see a very active role for primary at some point in the future.

What we do know from our past experience is when it comes back, it will be a great vintage period from which to be a primary lender. What we don't know is whether that's going to be in the fourth quarter this year or the second quarter next year. It always comes back.

Once you have a credit washout like right now, the folks that had been the incremental providers of capital at non-economic terms -- they go back to their core business, and then it allows those who are really focused on a product, like we are, and can write the significant commitment for the appropriate terms -- we will get great terms and pricing.

So for us to say it's happening right now -- we're seeing signs of it. Only the best companies are getting access to market, and we are participating. But certainly, for us to say it's happening in massive size right now, that it's our primary focus -- it would be a bit too early. But it will come.

Okay, great. That's helpful, thanks.

Adrian Day, Adrian Day Asset Management.

I'm sorry, I tried to withdraw; my question's been asked. Thank you.

Thank you.

Sanjay Sakhrani, KBW.

Hey, guys, just a quick follow-up.

Patrick, you mentioned potential -- there may be opportunistic -- or opportunities to kind of exit certain investments. Could you just talk about the visibility on that end? I know Prysmian is on restriction. I'm not sure kind of where we are with that as well.

I could talk about it broadly. Specifically, we have some confidentialities that we have to go through. I think we look at -- given that a significant portion of our portfolio are quoted securities that do trade in liquid markets, like a Yankee Candle, or Associated Materials, we have the benefit to -- when we think that either -- it's a better time to sell. But we can get liquid. If you're a purely liquid portfolio, then you take a very significant haircut and/or you can't get liquid at all. So those are always available on the debt side of our business.

And on the equity side of our business, it was announced that our preferred securities of EXCO were converted by the Company to public stock. That's an opportunity for us.

GS Prysmian -- we are obviously [subject] to a larger partnership group there, controlled by Goldman Sachs Capital Partners. And we will tag along with them at the appropriate time.

The Company's performing well. So there's no rush.

Sanjay, I want to add one more point -- what we have done also, as Patrick talked about earlier -- if we just think that an asset has some [mark-to-market] volatility to it, but we are convinced long term of getting paid back our original investment, we're agnostic to that. Where we do want to take proactive action is if we think that there's a fundamental change in the underlying risk metrics of a credit, and therefore we've heightened -- there's a heightened degree of potential impairment. Those we are not going to mark things down continually. If we have an exit, we will react proactively, like we have done selectively in the past.

Okay. Fair enough. Thank you.

John Stilmar, FBR.

Hi, guys, just a quick follow-up -- maybe going back to sort of the competitive landscape. Obviously, there's a tremendous amount of money in private equity still yet to be deployed. And there even is still a decent amount in sort of the mez market. Can you talk to me about the psychology of the buyers or sponsors that you have out there, and sort of your view for -- as we start seeing private equities start to become more meaningful part of this sort of financial workout over the next several years -- what is kind of your long-term view over the next two years about capital being consolidated, and your role -- and sort of where we are in the capital structure?

Well, let me take a shot at it first, then Patrick will have some additional comments.

You mentioned a lot of things there. You've got private equity on one side, you've got companies that are M&A valuations on the other. And then there's the litany of the capital structure, from the senior debt to the mezzanine, and obviously the equity. And it all has to work together.

I think there's a general view out there, yes. There is a fair amount of private equity that's been raised. Our target clientele have capital to which to invest. I think they would say to you that they don't believe that a lot of prices have reflected some of the current cyclical concerns that they have. And also, the ability to put together the appropriate capital structure -- whether that's senior bank debt, at the right leverage and the right terms -- and mezzanine -- it's an evolving opportunity.

And we are very bullish, in the sense that when those pieces all align properly, that the mez will be able to get a very, very well-structured return, as some of the private equity will as well, and most likely that new bank that will reflect the risks as well.

And so we look at it as an evolving opportunity; it will happen. Certainly, bottom line is we do not -- there [were] many, many providers of the large institutions that were underwriting the incomplete capital structure for smaller and smaller companies. We believe that those institutions will be much more reticent about doing so going forward. And that really is the opportunity for ourselves and a few select other mezzanine investors.

Yes, and I would just add to Jim's comments -- we've canvassed and spoken to all of our sponsor relationships. And they are, in their minds, open for business. I think they're looking for high-quality companies. Getting the certainty that they need in the capital structure is a little challenged on the senior side.

I think coming to a partner like us -- an example is Angelica, which is an investment that did close this week. We're fortunate to have a partnership with Lehman Brothers Merchant Banking, where they went the ABL route -- asset-based lending (inaudible) senior -- to get certainty [here] on the capital structure. In what we believe is a very attractive, defensive company, certainty was very important.

So you don't need a lot of those transactions to put some growth on your portfolio. You just got to be very selective. And they got to be good companies with good sponsors. And our sponsors have capital, and they are looking for good properties at attractive valuations.

Perfect. Thanks, guys.

Thanks, John.

[Lee Alfer], Hammack Investors.

Good morning, thanks.

Most of my questions have been answered. But going back a little bit on Innkeepers -- are you allowed to buy back the preferred on that? And have you thought about that, considering the discount?

We have the flexibility to do that should we choose to. Right now, we think it's not something that we're actively pursuing.

Fine, thank you.

Thank you.

Thank you. That does conclude our question-and-answer session. I would like to hand the floor over to Mr. Jim Zelter for any closing remarks.

Well, listen, certainly, from my partners and all the partners and employees at Apollo Investment Corporation want to thank everybody for participating today. We take this role very, very seriously, and we're very encouraged by the participation today in our call and look forward to a continued dialogue and your support.

Thank you very much.

Thank you.

Thank you.

That does conclude today's Apollo Investment Corporation Conference Call. You may now disconnect your lines, and have a wonderful day.