MidCap Financial Investment Corp (MFIC) 2009 Q4 法說會逐字稿

Good morning, and welcome to Apollo Investment fourth quarter and fiscal year end 2009 earnings conference call. (Operator Instructions). It is now my pleasure to turn the call over to Mr. Jim Zelter, Chief Executive Officer of Apollo Investment Corporation. Mr. Zelter you may begin your conference.

Thank you, and good morning. I'm joined today by Patrick Dalton, Apollo Investment Corporation's President and Chief Operating Officer, and Mr. 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.

Thank you, Jim. I would like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release. I'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 statements and projections. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.apolloic.com or call us at 212-515-3450. At this time, I would like to turn the call back to our Chief Executive Officer, Jim Zelter.

Thank you, Rich. The world is a very different place today than it was a year ago, or even a quarter ago. I mention this to remind everyone, that we will discuss our last fiscal quarter and year-end results through March 31, 2009 on this call. And while we will touch upon current developments, we will generally leave that discussion for the Q&A portion of the call. Thinking all the way back to our business plan pre-IPO we were committed to a business plan that would with stand the test of time. We wanted to be extremely thoughtful, understand and learn from history, think about where others may have stumbled and respect cycles, and to the extent possible always be prepared for them. In addition, we wanted to consider an appropriate asset-liability matching investment strategy, given the regulatory structure and ensure our strategy included a liquidity ladder. Again, thinking back to early '04, we, like most in the financial industry did not forecast a recession this severe or one that would be as prolonged as this one may be.

That said, we have been relatively pleased with how our business plan has endured so far. The quarter ending March 31, 2009 saw our nation's second consecutive quarterly 6% economic decline. And it was broad based. Top line revenues remain stressed for many businesses as their managements continue their prudent and serious efforts to operate much leaner. Accordingly, companies continue to reduce spending and cut costs, including making additional rounds of staff reductions and working aggressively to reduce inventories. In addition, consumers remain highly sensitive to spending, as their anxiety grew spurred on by increasing monthly unemployments reports. At the same time government policies to keep interest rates low has unfortunately not had its' usual immediately -- immediate positive impact, as households have looked to save not borrow and spend during these economic times.

During the March quarter we continued our focus on monitoring the capital markets and the prolonged and seemingly unprecedented asset volatility that we witnessed during the fourth calendar quarter of 2008. We also remained focused on our liquidity, and our asset coverage requirements, and also spent time on our portfolio optimization strategy. Accordingly, we opportunistically include delevered further by raising approximately $82 million during the quarter. This ultimately deleveraged our balance sheet from 0.83 to 1 debt to equity to 0.76 to 1 debt to equity. However, the broad economic stimulus put forth by the government seems to have finally stabilized the banking and overall financial system. More recently we have seen a technical rally in the capital markets, which we believe is a net benefit to many of our portfolio companies as access to capital at lower rates becomes more readily available.

Before I turn our call back to Rich Peteka our CFO, let me say that we expect innovation and other value creation to drive the next bull market cycle, not leverage. And therefore we believe it will be slower to develop in time. In addition, banks that survive are likely to be smaller and more highly regulated, making them generally more conservative lenders. Accordingly, we believe we there will be a substantial opportunities for providers of capital such as Apollo Investment Corporation over the next few years. Lastly, we continue to be pleased with our business strategy with respect to portfolio construction, leverage, and our dividend policy. Accordingly, we remain in a relatively good position to continue to weather this current environment, and to capitalize on future opportunities for years to come. With that I will pass along to Rich.

Thank you, Jim. Let me briefly go through some balance sheet highlights to close our quarter and fiscal year-end on March 31, 2009 with an investment portfolio of $2.45 billion. That's down from $2.54 billion at December 31st. Our net assets totaled $1.4 billion at March 31st ,with a net asset value of $9.82 per share. This compares to net assets of $1.4 billion at December 31, 2008 and a net asset value per share of $9.87 per share. The slight decrease in NAV was primarily driven by unrealized appreciation on our equity portfolio, including our equity investment in GS Prysmian whose value on the Milan stock exchange fell by more than 32% during the quarter. Since March 31st and through the end of May, that stock has appreciated by more than 35%.

Next I will discuss the Apollo Investment Corporation outstanding debt and leverage ratio. As a reminder, we maintain a $1.7 billion multi-currency revolving credit facility with a syndicate of banks. It matures in April 2011. Borrowing terms continue at LIBOR plus 100 basis points. As of March 31, 2009, we had $1.06 billion outstanding, and $642 million of unused capacity. In addition, our debt to equity measured at fair value dropped from 0.83 to 1 debt to equity at December 31st, to 0.76 to 1 at March 31st as Jim mentioned earlier. Importantly, for the quarter ended March and to date we continue to be in compliance with all credit facility covenants.

As for operating results, gross investment income for the quarter totaled $85.3 million. This total reflects a few notable items. One, we have placed our investment in EuroFresh and Arbonne, on nonaccrual status for the quarter. In addition, we received approximately $5 million of dividend income for the quarter from our investment in AIC Credit Opportunities Fund. Such periodically recurring dividend income is really derived from the funds that AIC Credit Opportunity Funds underlying investments in debt, the largest of which is a semiannual cash payer First Data Corporation. Accordingly, you should expect larger cash dividends paid to us from AIC Credit Opportunity Funds in the quarters ending March and September. For more detailed information on AIC Credit Opportunity Funds, please see Note 6 within our financial statements.

And for the comparable March 2008 quarter a year earlier, gross investment income totaled 90, versus the 85.3 this year. Net operating expenses for the quarter ended March 31st, totaled $34.5 million. This compared to $46.3 million for the comparable quarter a year earlier. Accordingly, net investment income totaled $50.7 million or $0.36 per share, as compared to $43.7 million or $0.37 per share for the comparable quarter a year earlier. At March 31st, our portfolio of 72 companies now has three investments on non-accrual status, Latham International, EuroFresh and Arbonne. They represent 5.48% of our portfolio measured on a cost basis, and 1.26% measured at fair value. As Jim noted earlier, the Company exited select portfolio company investments during the quarter raising $82 million. Net realized losses totalled $20.4 million. This reversed out $20 million of previously recognized unrealized losses. Accordingly, it had no impact to EPS for the quarter.

And for the March-quarter a year earlier, realized losses totaled $4.6 million on a $103 million of sales. In addition, the Company recognized only $0.6 million, that's $600,000 roughly, of unrealized depreciation for the quarter ended March 31, 2009. This compared to recognizing net unrealized depreciation of $201.5 million for the comparable March 2008 quarter a year earlier. In total, our quarterly operating results increased net assets by $29.8 million or $0.21 per share, versus a decrease of $162.4 million or $1.36 per share for the quarter ended March 31, 2008. Now let me turn the call over to our President and Chief Operating Officer, Patrick Dalton.

Thanks, Rich. As we noted earlier in the call, the economy continued to contract significantly during the quarter ended March 31, 2009. Banks, and other financial companies continued to delever, and we expect this broad based deleveraging to continue for some time, albeit at a much slower pace than we have seen over the last year. It does now appear, however, that there is less financial systematic risk due to active governmental policies and support. Also, the velocity of the broad and steep economic declines appear to have slowed.

There has been a certain amount of encouraging news, and emerging positive trends noted since the quarter end. For example, we believe that many of the technical pressures that we have, we have witnessed over the last 24 months have waned. As a result, there has been significant increase in capital inflows into the credit markets which has triggered a rally in many credit assets, resulting in meaningfully tighter credit spreads. However, at Apollo, we are predominantly a hold-to-maturity fundamental investor, and thus we focus more on the important real economic drivers to ultimately lead us out of this cycle. During the quarter ended March 31st, job losses continued near record levels with significantly affected business and consumer confidence in spending. So, we remain cautious and will continue running our business plan. At this time, we still expect the fundamental pressures to remain for at least the near term.

Accordingly, we believe that we would only see a sustained recovery once job losses abate, and businesses and consumers ultimately gain more confidence. Until then, we believe that many businesses will continue to see some top line pressures. And we do expect the more defensive companies and sectors to continue to out perform the less defensive ones. We understand and want to convey the message again, that what we own is much more important than what we don't own. And therefore we continue working with and advising financial sponsors of our portfolio companies ahead of any potential problems. Furthermore, we continue to increase the frequency of communication with all of our management teams and senior lenders where we believe it will add value.

At this time I would like to go into some specific information on the portfolio activity for the quarter. As Jim noted earlier in the call, we worked on increasing our liquidity position utilizing our portfolio optimization strategy. Accordingly, we have investment sales of $82 million during the quarter ended March 31st net. We sold our entire positions in Language Line Incorporated, a global provider of over the phone interpretation services as well as our senior notes in VWR International, a global lab supplier. We also trimmed our positions in Booz Allen Hamilton, a government consulting firm and General Nutritional Centers, a nutritional supplements retailer. Again, these sales were undertaken to generate additionally liquidity, which reduced our leverage level, and improved the overall portfolio construction in this environment.

Ultimately, our investment portfolio at March 31st, consisted of 72 companies with a market value of $2.45 billion, and was invested 27% in senior secured loans, 59% in subordinated debt, 4% in preferred equity, and 10% 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 our cost at March 31, 2009 was 11.7% versus 12.1% at December 31. The weighted average yield in our subordinated debt and senior loan portfolios were 13.2% and 8.2%, respectively versus 13.3 and 9% respectively in the prior quarters. Please note that our floating rate debt portfolio is well matched with our floating rate credit facility, and the reduction in average yield, had no significant impact on our quarters net investment income.

With borrowing capacity at LIBOR plus 100 basis points, our net interest margins remain highly attractive for future investment. Furthermore at March 31st, the weighted average EBITDA of our portfolio companies continues to exceed $250 million. And the weighted average cash interest coverage of the portfolio remains over two times. The weighted average risk rating for our portfolio did edge higher during the quarter to approximately 2.5 rating at March 31, 2009. Before I open up the call to questions, I would like to say we continue to work closely with our equity sponsors, senior lenders and management teams of our current portfolio companies, always ready and willing to provide any necessary support and assistance. Our focus remarions on protecting your capital through this recession and continuing to position ourselves as a consistent credible and relevance provider of capital into the future. In closing, I would like to thank our dedicated team of professionals and faithful shareholders for their continued long-term support and confidence in the Apollo Investment Corporation. With that, operator, please open up the call to questions.

(Operator Instructions). Your first question comes from the line of Sanjay Sakhrani with KBW.

Hi, thank you. Jim, I think you talked about the technical rally in the market since quarter end. I guess I was wondering if you think that current levels are sustainable, and maybe you could just tie that into a discussion on how we think, how we should think about portfolio growth. Thanks.

Sure. Hey, Sanjay. Well, certainly, you know, the world as I started, I think the depths of the market were the first week in March, March 5th, March 2nd, when you go back through all of the charts. There has been a strong rally in the bank loan market, there's been a strong rally in a variety of high yield indexes. And quite frankly, if you look at a triple C index those rallies, the riskier the assets, the more they rallied since that point in time. It's covered a lot of assets around the globe. And whether it is commodities or equities, or credit they have all gotten a dramatic bid. I do think that we are back to -- if you look at where the index is now are, I think they reflect a more rational view of defaults and recoveries than they did at year-end.

And I think, while we are, what you are hearing Patrick say, and you are hearing me say, is we appreciate the tech technical rally, but it's -- we are not off to the races in a new marketplace. We are back to where we think there's appropriate value in these names and the high yield or the bank loan indexes. A lot of the distressed sales that occurred, occurred in retrospect in levels that really were indeed distressed sales. So we've, I view -- and I have been in the credit markets for quite a long time, I believe that the current levels reflect some of the realistic issues that are confronting the marketplace in high yield and loans. And I would also say that really the last six to eight weeks, you have seen a real re-opening of the high yield markets, but the loan markets only recently reopened. You still have a lot of work to be done in getting a new buoyant, a new issue loan market.

So in our mind as Patrick said, we in summary spent our time focusing on our liquidity realizing that's a crucial issue for all of the BDC's and did some optimization. We like our portfolio. We are very comfortable with a lion's share of the assets in there, and only when we really want to optimize something, we will pull that trigger. But portfolio construction going forward, we have a strategy that we are relative value investor in this space. That has proven well to us thus far. We have constantly wanted to upgrade our portfolio because we have found that the companies that are able to with stand the headwinds of this economic challenge cycle are the larger companies.

So we are, what you are hearing me say is, we applaud what's going on in the capital markets. It's good for all credit issuers, it's good for all the recovery of these companies. It gives them more optionality. But we are -- and we are looking to put new money to work certainly, but we are doing so in a -- with moderate caution, because we still think that there are fundamental challenges to the underlying economy and commercial real estate which will take some time to deal with over the next 12 to 36 months.

Okay. Great. And then a question on one of your non-accruals, EuroFresh, I saw there was an article out there about a consortium considering making an equity investment. I mean how should we think about it from a recovery standpoint? Do you think you guys could recover beyond what the current mark is?

Sanjay, it is Patrick. Thanks for the question. We have to be a little sensitive given this is a developing company that has public debt outstanding. We are very much involved with the company on the creditors committee given our position on the capital structure. There is some capital that has been on the sidelines willing to inject in the company.

It is probably more likely to be from folks who are familiar with the credit ,than from new people coming in. And you can rest assured, that given our position in the capital structure and our influence there, we are deeply involved there working collaboratively with the management team through their process to ultimately get the best recovery we can. The securities we own are quoted securities, and therefore are a brokerage dealer set the value on those securities. Obviously, those are at a very low levels at the moment, and we will do everything we can to optimize a recovery there. The story has yet to be written. There is a process going through the bankruptcy court, and we are actively involved.

Has the debt rallied since that happened.

Not really. It is too much of an unknown, as to the process going through and it takes time. There's not a lot of trading happening right now. Folks who own it like us, aren't willing to sell at these levels necessarily. And I'm sure there is not a lot of folks are able to get the diligence done that they would require, on to buy the asset given its status.

Okay, great. And I got a final question for Rich. I was wondering if you help us think through the spillover, and the fact you guys are actually earning more than your dividend? I mean at some point it seems to me, like the dividends either got to go up or all else equal obviously, or a special has got to be paid. I mean, how should we think about it, Rich? And then maybe you can also just touch on the activity in the stock kind of after hours yesterday. It seemed like it was down. Was there anything specific there? Thanks.

Thank you, Sanjay. Let me answer the second question first. After hours yesterday, our friends at Reuters put out an incorrect report noting that our entire fiscal year earnings of -- earnings loss of $4.39 for the full fiscal year was the actual loss for the quarter. That was a mistaken report on Reuters. And they did publish a correction later on, but I think most of the people in the afterhours, especially retail didn't see that. So I know there's a lot of confusion out there, with regard to that. Even the street.com put out a misleading note last night, with regard to picking up Reuters comments where they just got it wrong. And let me add, that Reuters outsourced this function a while back, and they actually messed up another BDC last quarter. I won't mention that BDC, but there was some co fusion the market with a similar accident last quarter. So, that said, we think that the research team on the call and those institutional investors, and retail investors that have owned our stock for some time now, really understand and get and actually read our press release versus a snippet that came out from Reuters mistakenly.

And now, going back to your dividend question. On Note 13 in our financial statements within our 10-K, it talks about our spillover. There's roughly $86 million there, that are earnings that have been monetized in excess of distributions through March 31, 2009. Those earnings need to be distributed before we file our tax return. I should say, let me clarify that. They need to be declared, not distributed before we file our tax return and given our, our dividend per share of $0.26 per quarter, that equates to roughly $37 million a quarter. So with $86 million harvested, and there to support the dividend going forward, we roughly have the June and September, and part of, or half of the December '09 dividend really coming out of earnings that were already earned through the year ended March.

So all of the earnings we are earning today for April 1 through the end of December, or through mid-December, is really going to be there, to be pushed into calendar 2010. That's the way the spillover works. So right now, we are fine with our dividend at $0.26. As you know, we have not given guidance, and since our IPO back in 2004 on where the dividend will be, but at this point given our RIC rules, given the RIC rules on distributing our taxable earnings, the $0.26 appears to be for this quarter, out of taxable earnings. And we appear to be able to support that. Again, we have to pay out $86 million by December.

Okay. Great. Thank you, very much.

(Operator Instructions). Your next question comes from the line of Matthew Howlett with Fox-Pitt Kelton.

Thanks for taking my question. Could you just go over the trend with the underlying portfolio debt to EBITDA, 12 month trailing EBITDA levels?

Sure. Patrick will take care of that.

The underlying portfolios -- we don't disclose the leverage levels, because they are misleading. What we do disclose in the portfolios is the interest coverage, because the leverage level do not capture working capital and true free cash flow. They have trended, on both cash flow coverage and on leverage level, stable. Obviously one off companies are higher leverage, given some of the stresses we talk about on common names that we've talked about for last 12 months.

Other companies are outperforming. As I did mention in my comments about the defensive credits performing, outperforming excuse me, non-defensive credits, we have been very pleased with a number of the investments we made, particularly in 2008 where we did see, we invested intentionally in defensive credits who have shown significant outperformance. Jim has mentioned some of the largest credits, some of the larger credits have outperformed expectations. Expectations may be flattish to down, and they're outperforming them which is a good sign on a relative basis. And as a lender, we get the benefit as we have underwritten cash flow businesses that do go sideways still generate cash flow, and de-risk the asset for us. Overall, the portfolio in aggregate is encouraging. There are a number which we talked about of situations that are stressed, and will continue to be stressed until we see the real economy have a consistent series of good news events, and confidence levels increasing, and consumers and business spending that we hope to see over the near to midterm.

Okay. Good. Fair enough. And then with respect to timing. I know it is very difficult to do this on a quarterly earnings call. but a few names I just want to ask you about. If you really could just quickly give -- provide us any color in terms of margins or cash flows, and I think they have upcoming interest payments. The first would be FleetPride, which of course, is in the automobile or the truck industry.

Fleet pride is performing extremely well on a relative basis, versus all its competitors. It is a market leader there. Business is a little bit down. This is a public bond as well. so we have to be very careful. Its a144A registered, so we can't give too much. We are, do have access to board materials. So we do feel good about the investment. We are holding it. We, at the moment are expecting to have the company fulfill all of its cash obligations.

Okay. Fair enough. Quality Home Brands?

Quality Home Brands, this is a business that has been on our watch list for a while. It is a great company in a challenging industry. They are a leading provider of lighting. They serve the building products, the mass retailers, home builders and show room space. The sponsor has been very supportive, has invested more capital into the company. Having said, that we do expect '09 to continue to be a challenged. The company is actively and prudently working with all of its lenders -- to -- to -- should they need relief to work towards that. We are very involved. We are with the sponsor and the management team, and are going to do the best we can, to help the company get through the cycle.

Okay. And the last one, PlayPower.

PlayPower, PlayPower is a business we have owned since 2004, end of 2004. It serves most municipalities and local governments. Obviously, they are somewhat stressed under their tax receipts, et cetera. This business is cyclical. We knew it going in, was cyclical. It was cyclical in 2003. We expect it to be cyclical now.

However, we do hope that the stimulus package, and the cash capital that ultimately does get to the local governments will be used for infrastructure, and spending and education in schools -- where is a big buyer of our products, the company's products. The first half is not the strong season for this business. So they don't really have the colors to how '09 will perform. And we have are in a good position in the capital structure, with a relatively modest amount of senior debt in front of us, with a friendly bank group which did recently do an amendment waiver for the company to give it a little more covenant relief. And the sponsor is very actively engaged and has a very strong management team.

Of the three I just mentioned, and only Quality Home Brand is the one on the watch list. Is that right?

Not necessarily. Not necessarily. We have, we are more conservative what goes on our watch list, PlayPower is not necessarily for what's happened in the company, but in the industry, is a company we put on the watch list, because of the industry it is in, given the cyclicality of capital to the local governments, but it doesn't necessarily mean if it is on the watch list -- it's is a three, four or five rated asset. Everything is three, four, five. And three just means we are watching it more closely.

Got you, great. Thank you.

Thank you.

Your next question comes from the line of James Shanahan with Wachovia.

Can you hear me? I'm sorry.

We can hear you fine here in New York. Yes.

I was muted I realized I'm sorry. The question I had was related. Two of them actually, first one to Innkeepers, if you could provide an update there. and the second question I had was related to equity, several of your -- of your quote unquote peer companies have been raising equity capital below book value, I would just like an update, or a reminder as to what your position is on equity raises on below book value.

Hey Jim, it is Patrick. Thanks for the question. On Innkeepers,this is obviously a remains a challenged investment given the space it operates in. We had underwritten a very conservative model going into '09. And that model is proving to be true. What we are more challenged by is the visibility in the industry, and you can hear comments from everyone of the CO's, of all the major brands, including even Marriott yesterday on CNBC commenting that we hope the world does get better, and the consumer and business traveler does continue to travel, or will start to re-emerge and start traveling more frequently. That really hasn't happened yet.

What we have seen, is that the decline has stabilized, which is hopefully the first sign of the positive feedback that we (inaudible) hope will come in time.. It is not getting worse, for a while going from the fourth quarter into the first quarter, things did get worse, on a week -- on a year-over-year basis. We track results on a daily basis The management team done a good job of being proactive on revenue management and market share gains and aggressive expense controls in light of what's happened in the industry. It is an industry-wide phenomenon. We operate in the not the high end market, which is I think the one in the market place that's having greater stress, but we are really focusing on the small and medium size enterprises, business travelers spending more than one night in a limited services hotels which is a vast majority of our portfolio. And we are seeing it stabilize, but not quite get better just yet, Jim. And we watching it daily. When we start to see a trend dop in the right direction we will be much more encouraged but for now it is performing as we expected it would perform, and the visibility is not as great as we would like.

Jim, let me handle your first question I believe on the equity or other capital market activities. We certainly are very -- we are a player in these markets and understand what's going on, in terms of fund raising. Our goal is always to have an optimal capital structure but very, very focused on what the cost of our capital is, whether it is debt or equity capital. And certainly we just -- we are in a monitoring stage right now, and really going to watch what the alternatives are. And depending on what makes sense for our shareholders long term, with the right cost to capital, balanced with the opportunities that we find, we will make that decision but we have no, we have no impending plans to do anything in particular.

Okay. One more follow up in that area, what do you feel the appropriate leverage is for your assets, given the risk profile and other factors such as stay where we are in the economy, et cetera?

Certainly we wouldn't, we have been pretty clear and consistent we really wanted to operate in and around, you know, a ZIP code of 0.5 to 0.7 to 1. Certainly in the last 12 months, we were well underneath that prior to the dislocation. And because of the manner in which we need to fairly mark our assets, we incurred a great degree of leverage, not by buying new assets but by purely following the appropriate accounting treatment. So it's our view over a long cycle we want to operate in this 0.5 to 0.7. I think that the tone you should take away from here is, we understand what's going on in the capital markets right now. We are very focused on that leverage. We feel we have a fair, a fair cushion right now, but I think right now we are in a -- a still focusing on deleveraging a bit of the book, but we want to make sure we do not always, we want to make sure we have the right balance for the offense and defense.

Thank you, gentlemen.

Thank you.

Your next question comes from the line of Chris Harris with Wachovia.

Sorry about that. My questions have been answered. Thank you.

No problem.

Your next question is a follow up question from the line of Sanjay Sakhrani with KBW.

Hey, Sanjay.

I'm sorry. I had it on mute. Is it fair to assume that if there was a material addition to the nonaccrual bucket, it would probably be mentioned in the K because it has been a while since quarter end? Thanks.

Certainly if it was a material event the answer would be yes.

Yes, it would of been a subsequent event if there were any material events before we filed yesterday.

Okay, I just wanted to make sure. Thank you.

Thank you.

Your next question comes from the line of Faye Elliott with Bank of America/Merrill Lynch.

Hi. Good morning. I apologize if you have already noted this. I had to pop off briefly. Did you give the average investment grade in your portfolio? I know you were planning to do that.

Yes. We gave the weighted average investment grade is up to about 2.5.

Okay.

On the portfolio level. Last quarter it was closer to 2.

Okay. And any, I mean directionally I guess probably through the cycle, it's probably not going to get head back toward 2 any time soon? Would that be the logical to assume?

I think logical -- it would be logical to assume. We anticipated it, and we would expect that we would be pulled down the continuum, given that 3 is we are watching closely in the capital structure. We are putting more on to the 3. And we believe we that we should be watching for industry issues, macro issues, or economic individual micro issues at the company. And it is, as expected rights now.

Okay. Great. Then the other question I have is, with your deleveraging efforts, are you finding that the market is loosening up in terms of being able to sell assets or delever relative to the past couple of quarters?

Yes. It is a great question, Faye, and fortunately given the portfolio construction and the quality of some of the assets, we were even able to access these markets to sell assets at reasonable prices in December, and in the last quarter when the markets were significantly dislocated. Obviously, with the rallying credit, there are more, there's more inflows of capital, significant inflows in the high yield, and significant inflows in the bank market. And with more capital on the sidelines, and those marketing rallying, there is more folks are looking for assets to purchase. Without an origination platform, which many folks don't have, with without a new M&A calendar, or primary market calendar, when they're more flushed with cash, assets do trade more frequently, and the size of companies we invest in have a larger following. And companies can get up to speed easier, than smaller companies that no one is going to get engaged, or actively get engaged to find out what they should be paying for these assets. So the answer is it is getting even more open, but we were fortunate to be able to access some capital when we needed it, given our goal to have a less levered business in December and March quarter.

Okay. Great. That's helpful. Thanks so much.

Thanks, Faye.

Your next question comes from the line of Bob Nicholson with Pine Cobble Capital.

Hi. Two quick questions. The first one, given the rally in the underlying levered loan and high yield industries as well as individual names, do you guys have an estimate on what you think the impact the to your book value is, if you were to bring the portfolio forward to where the market is today?

We -- we -- it is a great question. We monitor that on a daily basis, however, it is not something we communicate. It does change on a daily basis. We monitor as closely as we can, to make sure that our portfolio optimization strategy and goal of maintaining a less leveraged portfolio is -- will be there at quarter end.

Okay. I guess the follow up, how, for you, Patrick, as you make a decision on when to monetize assets, what are the things that you look for as you think through that? You obviously have a number of sizable positions in good companies. There's a lot of demand right now out in the market for sizable positions and good companies. How do you think through -- where -- how you optimize that portfolio, what you sell, and where you add assets.

Very good question. The four kind of key drivers. Number one is the specific credit itself. We have an asset in our portfolio we believe is going have more credit challenges going forward, and likely end up either depreciating the asset, or ultimately reducing a recovery of an asset. Secondly, we look at this impact on the diversity in the portfolio. if we are we over exposing a name, and should we lighten up the name. Or maybe it is another name we will do a swap to where we are actually less exposed, and we want to be more exposed. Third thing is where the prices are relative to where we are carrying that asset. The fourth thing is, how much of the asset could we sell quickly should we need to.

We prioritize the portfolio at least weekly on, on the scale of what we can sale. There's significant amount of assets we can sale. We don't like to sell good assets. So it is really, it is very, as Jim mentioned the liquidity ladder in his comments, it is a real concept here, where we have multiple tools we have discussed them in previous calls to generate liquidity, and this is one of those, those tools.

Okay. Great. Thank you.

Thank you.

Your next question comes from the line of Sam Martini with ECI.

Hi guys. I have three questions, in just a random order. First of all, could you just remind me what your ability per your charter to go down the liquidity scale in the CLL market, obviously huge dislocation, you own some CLOs. What's the ability to add to CLO's positions, question one? Question two you talked about delevering, per the last question, the high yield market has improved materially, at least in terms of marks since quarter end, how much of your delevering strategy is based on a forward-looking view, i.e., you had the to delever because the whole world was delevering, and you want to be prudent and now things are stabilizing, you might consider taking leverage back up? And thirdly just on the AIC, and the Prismian situation, the positions, could just -- I read note 6 and have some understanding of Prismian, could you just, can you just in layman's terms tell me exactly how you own Prismian, it's just through, you're just the LP, but is that just a common equity that trades in Milan, and we can track that as a percentage.? Thanks very much.

Sure. This is Patrick, I will just start, and then Jim will jump in. First, on the CLO question, there is no restrictions -- what we own is a double B tranche of CLOs. We can buy as much of that we would like. When we went into it, we did it more as a research and development effort, looking that we saw dislocation versus fundamentals, and price. That market continue to be more dislocated. Several assets we could acquire. Obviously, the access to the underlying portfolios are important to us. And we did have the ability to do diligence on the underlying portfolios of these managers, and the managers themselves. You don't always get that benefit. So we are going to be cautious about just taking making a market call, on the recovery of CLO's. That is not our fundamental investment strategy. But we can do more.

But you have -- you have a view on the underlying collateral, and it seems to me, that this is one of the last remaining, hugely dislocated pieces of the market, is it something you are interested in adding to going forward?

Again, we could be, and we would be to the extent we got the access in line of the portfolio. There are a lot of CLO managers. And some are good, and some are not so good. Some are in business, some for sale. The underlying portfolio, some can trade, some don't trade. Some have ratings defaults, some have rating defaults coming. So there's an extreme amount of diligence that needs to get done for us, as a fundamental value investor, that isn't available, generally available to do that, to make that call. So we are monitoring that as one of many options. Keep it simple strategy for us has worked. If we find an asset that is non-structured products related, that we can accrete it to our dividend, and its consistent with how we invest, that may be a better place to generate -- deploy our capital.

Understood.

Secondly, I'll talk about the AIC Opportunities Fund in Prismian,and then I will come back to deleveraging and Jim will jump in there with some comments. AIC Credit opportunities fund, these are three underlying debt investments that have credit facilities that were provided by the folks from which we bought them, so we are really looking at them as --- as a replacement for using our revolver. That's simply what they were, and we are getting value on those facilities. Obviously, those are mark to market, some facilities require some margin, a few dollars here or there. With the asset prices improving obviously that's, that constraint has gotten easier for us, and the fact that there might be capital available to us as asset prices recover. Did you have Prismian--

I'm sorry, just to finish up there. The debt, the leverage to the credit is at which piece? Is it at the most subordinated piece? Is it at the senior piece?

It depends. These are all nonrecourse.

Yes.

Some of which are senior loans, and some subordinated loans. For example, in TXU, US Foods (inaudible) those are bank loans, and First Data is subordinated debt loan. We own some of that same loan on balance sheet.

Right. So it is basically just additional TXU, FDC, and Alliance Booz exposure through a nonrecourse vehicle that is that still flows cash to you. It is effectively more exposure to these loans that you already own. Because it is First Data bonds, right?

That is extremely well put. We agree. Okay. And the last question on deleveraging, on a technical rally, that is a good thing for us, as you mentioned for our companies. Obviously, we see asset prices rally, but what we must be cautious about is, the asset prices go the other way. So we are going to be cautious about that.

I mean, if you look at the Q's and K's last year, our leverage went up because of what happened to our assets, we didn't incur more leverage. And we are now getting the benefit of that. And again, I think our view right now is, we like what's going on with our balance sheet. We like what is going on with our portfolio. We make individual decisions based on each individual asset. And certainly the tide is affecting us in a more beneficial manner right now with regards to our leverage. But we watch on a daily basis, and we are hawks on this, and we have a comfort zone, we want to get to that 50 to 70, but we are not uncomfortable right now where we are. We are very happy where we are right now.

Got it. It sounds like you are watching the monthly reports more than the prices to decide whether or not you want to be levering up or delevering further.

We watch it all, certainly the ability to have less leverage right now is a good thing, generically speaking.

It is certainly -- we have assets that we like fundamental, but there's volatility in the (inaudible) price that there will be more.

Exactly.

So it is a combination between the underlying fundamentals of the assets, the overall view of the market, and then the context of where we think the market is going. So, we are comfortable where we are today, and have been diligent in monitoring this in the multidimensional nature of it.

I forgot to answer your question on GS Prysmian, what we own is a partnership interest, and that partnership owns underlying stock of GS Prysmian. We are a part of the Goldman Sachs private equity group, obviously that business has done very well for us, as an investor along side of them. We are subject to, lock ups but we have drag and tag rights. I think with their leadership on at what point in time you get liquidity, we are in active discussions with them. It does have volatility but the business is performing well and we are going to continue to hold it should that be free to trade we will make a decision at that point in time.

got it. Thank you very much.

Thank you.

Okay, operator?

We do have time for one final question. Your final question today comes from [Walter Keating] with Apollo Investment.

Hi. I'm with UBS Financial Services. My question is this. And by the way, congratulations on a good quarter in a difficult environment. What will it take to have you begin more -- what will it take for you to be comfortable to begin to make new investments, and if you did, would you primarily (inaudible) to new situations, or more money to additional investments to existing investments?

We actually have access to capitol, should we need it, we can recycle capital on a daily basis for new investments. We are actively out there talking to sponsors, we are actively talking to the banks. There seems to be a lot more discussion and activity. A couple of the large LBO's that were recently announced, we were actively involved. They did not no go the MES route. And we were involved there.

We continue to want to be involved and to be relevant in the market place. And these are companies, that we think are defensive and what we believe might be some more fundamental pressure, and are priced well and structured well,we will be engaged. The new pipeline of opportunities is not deep yet. When -- the technical rally took us in the cycle maybe it takes leads us on the way out but the fundamental of the real economy we talk about, will make us more comfortable to look at a broader set of opportunities. Right now we are very elect selective.

The only thing thing I would make a last comment about is the decision to put new money into an old investment undergoes the same rigor that we would undergo to buying a new investment today. There's no emotion. It is just the facts, its the returns. There are the question earlier about one or two of the names, we are putting the new money in. There will be some we will put new money in, and there will be some where we do not put money in. Everyone is an individual decision based on the facts and the merits in return at that point in time.

okay.

Walter are you set?

Yes. Thank you very much.

Thanks, Walter. Great. Well, first I would like to thank on behalf of the management team, and our entire investment team, we want to thank all of the investors for participating today, and some great questions. We look forward to your support and look forward to talking to you in the coming quarters. Take care.

Thank you. This does conclude today's Apollo Investment Corporation fourth quarter and year-end 2009 earnings conference call. Please disconnect your lines at this time, and have a wonderful day.