MidCap Financial Investment Corp (MFIC) 2011 Q2 法說會逐字稿

Good morning and welcome to Apollo Investment Corporation earnings conference call for its second fiscal quarter ended September 30, 2010. At this time all participants have been placed on listen-only mode. The call will be open for a question and answer session following the speakers' remarks. (Operator Instructions). It is now my pleasure to turn the call over to Mr. Jim Zelter, Chief Executive Officer of Apollo Investment Corporation. You may begin your conference.

Thank you and good morning, everyone. I'm joined today by Patrick Dalton, Apollo Investment Corporation's President and Chief Operations Officer; and Richard Peteka, our CFO. Rich, before we begin would you start off by disclosing some general conference call information and include the comments about forward-looking statements.

Thanks, Jim. I would like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release. I would also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information.

Today's conference call and webcast may include forward-looking statements and projections and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these statements and projections. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our latest SEC filings please visit our website at www.apolloic.com 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 broad capital markets posted strong returns as well as record activity for the quarter ending September 30, 2010. Improved demand allowed the high yield market to surpass previous issuance records with third quarter volume exceeding $70 billion in the US. The ongoing trend of refinancing senior debt with new facilities as well as various subordinated issuances drove 2H rating and enhanced liquidity. Benchmark yields ultimately tightened by more than 70 basis points as reports of improved economic conditions outweighed double dip and sovereign debt concerns.

Now let me briefly go over some portfolio highlights. During the quarter we continued to make selective investment decisions. In total, we invested $184 million in two new and four existing portfolio companies during the quarter ended September 30. We also received prepayments and sold select assets which in the aggregate totaled $127 million. At September 30, our portfolio of investments totaled $2.95 billion, measured at fair market value and was represented by 67 distinct portfolio companies diversified amongst 31 different industries.

During the quarter we strategically timed two significant debt capital raises at what we believe to be attractive and disciplined prices in order to further and efficiently grow the company's capital base in these early yet volatile stages of an economic recovery. Again, understanding that volatility creates further investment opportunity. We were certainly pleased to add another new lender, a large well capitalized bank to our existing multi currency revolving lending syndicate during the quarter, contributing $50 million as we work with a number of new relationship lenders in structuring our private note.

Ultimately, we issued the five year $225 million private note on October 4, 2010 at a fixed rate of 6.25%. These capital raises bring our current total debt capacity under our revolver and private notes to $1.8 billion. Accordingly, on a pro forma basis considering the October 4 private note issuance, the Company has approximately $715 million currently available for new investment in operations. At September 30, our outstanding leverage measured as a ratio of stock holders' equity stood at 0.59 to 1.

And we continue to believe our capital and relatively modest leverage remains a competitive advantage in our industry as we continue to operate with what we believe to be the lowest cost of capital in the sector and with significantly greater flexibility than other more restricted facilities.

Now with that, I will ask Rich to take you through some financial details for the quarter. Rich?

Thanks Jim. I will start off with some September 30 balance sheet highlights. As Jim noted earlier, our total investment portfolio had a fair market value of $2.95 billion which is an increase of approximately 3.5% since June 30. Our September 30, net assets totaled $1.86 billion with a net asset value per share of $9.58. This compares to net asset totaling $1.84 billion at June 30 and a net asset value per share of $9.51.

The increase in NEV for the quarter was driven primarily from net unrealized appreciation on our investment portfolio. Positive contributors to performance for the quarter included investments in Alliance Booths, Altegrity, Sun Gage and Intellisat. The positive impact was primarily due to improving valuations. Partially offsetting the unrealized depreciation during the quarter was unrealized depreciation from MEG Energy, Generation Brands, Square 2 Financial and Assurant Corporation. MEG Energy successfully completed its IPO during the quarter and the stock has traded higher since September 30, 2010.

However, and as with any public stock, we should not be surprised to see some volatility. On the liability side, we had total debt outstanding of $1.09 billion at September 30 as compared to $993 million at June 30. This left our debt to equity leverage ratio at a relatively modest 0.59 to 1 at September 30 as compared to 0.54 to 1 at June 30. No investments were placed on non accrual status during the quarter. However, we did exit from our investments in American Safety Razor and European Directories which were both previously on non accrual status.

Our portfolio of 67 companies now has three companies with investments on non accrual status at September 30 versus five companies at June 30. These investments represent only 0.2% of the fair value of our investment portfolio at September 30 versus 0.2% at June 30. On a cost basis, they represent 5.7% of our investment portfolio at September 30 versus 8.1% at June 30.

As for operating results, gross investment income for the quarter totaled $91.5 million, up from $78.2 million for the quarter ended June 30 and $84.4 million for the comparable September 2009 quarter. Expenses for the quarter totaled $41.3 million. This compares to $37.4 million for the June 30 quarter and $33 million for the comparable September 2009 quarter. Ultimately, net investment income totaled $50.2 million or $0.26 per average share.

This compares to $40.8 million or $0.22 per average share for the June 30, 2010 quarter and $51.4 million or $0.34 per average share for the comparable September 2009 quarter. Also during the quarter we received proceeds from investment sales and prepayments totaling $127 million. Net realized losses totaled $89.4 million primarily related to our exits of American Safety Razor and European Directories noted earlier.

This compares to net realized gains of $3.9 million for June 30 quarter ended and net realized losses of $3.1 million for the September 2009 quarter. The Company's investment portfolio also recognized net unrealized depreciation of $107.4 million during the quarter. This compares to recognizing net unrealized depreciation of $129 million for the June 2010 quarter, and net unrealized depreciation of $60.9 million for the comparable September 2009 quarter.

In total, our quarterly operating results increased net assets by $68.2 million, or $0.35 per average share versus a decrease of $84.3 million or $0.45 per average share for the June 2010 quarter and an increase of $109.2 million or $0.71 per average share for the comparable September 2009 quarter. Now, let me turn the call back to our President -- call over to our President and Chief Operating Officer, Patrick Dalton. Patrick.

Thank you Rich. Back in 2004 at the time of our IPO we set out to accomplish many things, including building a long-term disciplined business based on the philosophy of transparency and responsibility. We believe that this philosophy, together with our management through the credit cycle has rewarded us with the opportunity to issue our recent long-term fixed rate debt at a time when most benchmark rates are at record lows. Certainly we believe it will prove to be an important and prudent corporate finance transaction for our Company.

Our consistent transparent strategy of investing in substantially larger, more well known companies that offer important portfolio liquidity was, indeed, embraced by the sophisticated syndicate of debt investors in our note offering from a marketplace that has been closed to BECs for nearly two and a half years. We are delighted to have led the sector in what we hope to be the reopening of the private debt market. We are also delighted to have added another $50 million commitment from a new well capitalized relationship bank to our syndicated banks supporting our flexible multi currency revolving credit facility.

Now let me take you through some specific portfolio changes during the quarter. As Jim noted earlier we invested in two new and four existing portfolio companies. The new portfolio company additions totaled $13 million invested in senior loans of MultiPlan, Inc., a leading provider of business process outsourcing services and NBTY, Inc. a multinational manufacturer of vitamins, minerals and supplements. MultiPlan was acquired by BC Partners and Silver Lake during the quarter and NBTY is a Carlysle Group portfolio company.

Our most significant investment during the quarter was in an existing portfolio company named Altegrity Inc which is owned by Providence Equity Partners and is a leading provider of security clearance background investigations and employee screening services. Our investment in Altegrity consisted of $12 million in senior loans, $130 million in senior notes, a portion of which we have subsequently sold down, $2 million in junior notes and $14 million in common equity.

Additionally, we invested $10 million in the senior loans of Allied Security Holdings, a security services firm as well as other small secondary market investments in both Ceridian and BWR bonds, companies we know and like. While our pipeline of investment opportunities continues to be very strong we will continue to be disciplined with our capital, especially during overzealous periods. That said we continue to find select attractive risk adjusted opportunities up and down the capital structure of companies we like.

In addition, we remain prepared with our capital to move quickly within even brief windows of market volatility. That flexibility we believe is just another competitive advantage for us as it offers our relationships an important service by providing financing solutions with our scale and certainty of execution. At this point, let me go over some portfolio highlights at September 30. We continue to be well diversified by issuer and industry. 67 companies invested in 31 different industries.

The total investment portfolio had a fair market value of $2.95 billion which is comprised of 31% in senior secured loans, 59% in subordinated debt, 1% in preferred equity, and 9% in common equity and warrants. Again, measured at fair value. The weighted average yield in our overall debt portfolio at our cost at September 30, 2010 was 11.7% versus 11.7% at June 30. The weighted average yields on our subordinated debt and senior loan portfolios were 13.3% and 8.9% respectively as of September 30, 2010 versus 13.3% and 8.8% respectively at June 30, 2010.

Please note that Apollo Investment Corporation's floating rate asset portfolio at September 30 continues to closely match with the company's average floating rate revolving credit exposure. At September 30, 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 of our total portfolio improved to 2.3 at September 30 as compared to 2.4 at June 30 measured at cost and continues to be rated 1.9 measured at fair market value at September 30, 2010, which is unchanged from the prior quarter.

Now, before I open up the call to questions I would like to say that we are pleased with how our current overall investment portfolio is performing and progressing in this economy. We also continue to believe that the worst of the challenging credit cycle may be behind us and that the global economy should continue its slow and bumpy development filled with pockets of volatility.

We believe that is good for Apollo Investment Corporation. This environment is good for our business and we expect our available investment opportunities to grow from here. In closing, we would like to thank all of our dedicated long-term shareholders and our existing and new lenders for your continued support and confidence in Apollo Investment Corporation. With that, operator, please open up the call to questions.

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

Thank you. Good morning. I had a couple of questions. Obviously good quarter that you closed the gap between current income and the dividend. I was wondering kind of described in your term, Patrick, you mentioned that the investment opportunities should be good from here on out so I'm assuming the pipeline is pretty good but how about repayments? Do you have a fair amount that you expect to be in repayment as well? And then secondly on the debt deal, could you discuss kind of the decision to go secured versus unsecured if you even considered that option? And then just perhaps help us think about the funding strategy from here on out in terms of debt and equity. Thank you.

Sure, Sanjay. This is Patrick, thank you for the questions. We are always looking at what we expect to see on the repayment side. Fortunately for us we have some really good companies in our portfolio, unfortunately, they have opportunities to exit. So we have a few companies that have filed registration to go public. That has taken more time I think than some of the owners of those companies would like given the backlog in the IPO market but we have a plan and we watch those and expect when those come out to replace those with new opportunities. Sometimes those are some of the lower yielding assets in the second liens that did not have LIBOR floors that were done when LIBOR was at 5%.

So we have the opportunity to replace those good investments when they get taken out at PAR or above. And with new opportunities that are higher yield. Some of our fixed rate deals will come out. These are businesses that have performed. If they get sold perhaps we will roll into a new transaction with the new owner. If they pay off all the debt and go public then we have places that we look to replace that and we look at our pipeline of opportunities to replace those. We can't be perfectly timed. It does create some volatility in earnings on a quarter by quarter basis when they may get taken out early in the quarter and we find new opportunities later in the quarter that have some impact on earnings.

We look at that at least weekly and sometimes even daily when we have new news reports of investments coming up. We are prepared. That is modeled into our growth. We have a plan, you've seen we executed on the plan this quarter to close the gap and we can do it going forward. On the debt our capital structure on the private note deal. The cost of capital is extremely important to us. And there are opportunities in other markets that would come at rates that are right now we don't think fair for the credit quality of our business, the history, the low leverage, and the rates.

But for those who need to enter those markets the lenders, the buyers of that paper are getting an opportunity. We have been fortunate to not have to do that. We have secured debt capacity to issue secured debt so we are well under cap (inaudible) from a secured perspective relative to the equity in the portfolio. That's a marketplace that quite frankly we enjoyed getting to know. These investors in that marketplace in the private debt spend the time, spend several days doing due diligence. They are like minded. We are credit investors and so are they.

So we really enjoyed getting to know them. We enjoyed differentiating ourselves to them. They appreciate our collateral, they appreciate the management through the cycle and they were willing to do a deal at a rate for which we can make money on. It is an accretive rate at 6.25. It's a fixed rate. When rates rise, we're not saying it will be tomorrow, that only gets cheaper. We are very pleased with that. To the extent our net capital raises going forward we are looking at all markets, secured, unsecured, et cetera to an extent that we find an opportunity to raise capital and we know we can be accretive with that capital we will look to do that.

Maybe just a quick follow up so I am clear on it. Do you guys expect a decent net growth next quarter and then just on the second question what debt to equity ratio do you guys consider raising capital?

We -- historically on the last question, historically you have seen us raise equity cap as we approach the 0.775, 0.8 times level. Don't expect that to change dramatically. Might there be windows of opportunity to take leverage up a little bit, perhaps. We don't want to get there and then have to raise equity when maybe equity markets aren't available.

So we've been very timely and prudent with the access to both debt capital and equity capital. We've been under capitalized on the debt side so it's nice to be able to find the debt markets opening up for us at rates that make a lot of sense and we are finding new markets even on the debt side that can be opened to us where we can make money on. Don't expect a fundamental change that we're going to run to 0.9 times leverage on a consistent basis. We want to make sure that we are well matched there.

Sanjay, they is Jim. I will just say one thing. Patrick laid it out very well for us. But we think the ability to expand one's access to debt capital providers is an under appreciated asset and we really believe that those who can show an ability to access a variety of financing sources will be something that is very important over time. And as Patrick said, we don't have a view on rates but we do think that having fixed rate debt at this coupon allows us to make investments that make sense in our business model and, as we said, we are always -- we are pretty capital market savvy whether it is secured, unsecured or other products but I think as Patrick mentioned and we all concur that the equity makes sense for us when we get to the 0.7, 0.8 times levered and in the interim we are going to try do things that we thing are competitively advantageous to our capital structure.

So on your question on net growth going forward. One of the things that Jim and I and the team spend a lot of time looking at is taking advantage of where the markets are. Clearly raising debt capital at a record low rate environment is a good thing. We are also looking to optimize. We can grow the portfolio but if we can utilize the credit markets to diversify further our portfolio maybe from improved credit, improved diversification and improve earnings, the trifecta, if we can do all that in this environment we going to do that. Don't be surprised to see us optimize the portfolio. We have gotten some interesting opportunities to sell some second liens and by first liens and improve earnings. And we are going to continue to look for those opportunities. We are not trying to grow for growth's sake. If there is the opportunity to grow and it improves credit and earnings and diversification that is when you expect to see us grow.

Thank you very much.

The next question comes from Faye Elliott of Bank of America.

This is Jason filling in for Faye. Just two questions. One, what are you guys seeing in your pipeline, you know, just in terms of what kind of investments are you guys looking at. Are you guys looking more at the senior level or the sub level and just comment on the yields at this point and the spreads. And second question, it is in terms of the equity funding, what do you guys see as a -- I know before the question was asked about what level of debt you guys are willing to raise equity but just wondering if you guys ever had like a target for the debt to equity?

Okay, Jason this is Patrick, let me jump on the first part and I'll let Jim talk about the targets. On the pipeline of opportunities, clearly robust credit markets stimulate M&A volume and demand. We are approaching year end. There are companies in the market right now to be sold and purchased. Most new names will probably wait until January, you don't want to start an M&A process as you get into Thanksgiving and Christmas so you will start to see that sort of wane but you are seeing people take advantage of the robust markets on either drive by transactions or refinancings.

A lot of folks out there looking to clean up their portfolios with dividend recapitalizations. You have to be very prudent with what you are going to do there. Good credits, there is opportunity but there is also a win-win for a sponsor to the extent that they can take money at the table and maybe the economy we are not so sure of, that company's performance through a more volatile economy so we are going to be disciplined. What we are finding is some of these arbitrage opportunities to move up the capital structure and get reasonable rates because the marketplace has less supply of buyers and we can take advantage of that.

We are looking at a bunch of opportunities up and down the capital structure. We don't need to grow which is great. I think like I said we would like to grow if it makes sense for us but we are seeing our competitive advantages are size and scale, the scope of what we can do for a sponsor and be providing a full pocket of solutions. We have portfolio company additions that will be taking place over the next quarter or two that will take advantage of that and when we do it they can be sizeable.

The Kroll/Altegrity transaction was a sizeable transaction for us. We get to spend a lot of time doing the due diligence around one or two names and we can grow the portfolio that way. We are going to be disciplined. It is a fluid marketplace. We are fortunate that we don't have to do too much to try to change our business but we are seeing a lot more opportunities come our way to take advantage of but we have to be disciplined about it. And I will let Jim talk to you about the --

There is no formal guidance but as our management team has been consistent when we -- our leverage gets north of 0.7, we are looking at opportunities to get it back to around 0.5 to 1. So there has been sporadic time but the evidence and the history shows us we have been disciplined in that regard. Not a hard and fast rule but certainly as a guide post and our past experience should be a very good guide of that.

Okay, thank you. That's all I have.

Thank you, Jason.

Your next question comes from Chris Harris of Wells Fargo.

Thank you, good morning, guys.

Good morning, Chris Harris from Wells Fargo.

You know, we all know that private equity still has some unspent capital deployed from the last cycle which clearly should be favorable for you guys. Just wondering what are you guys seeing in terms of new private equity funds. Has capital raising gotten any easier for new funds or is it still somewhat challenging?

My sense -- this is Jim. My sense is there has been a bit of a breakthrough in the last three to six months in a variety of vehicles in the alternative assets space that are raising capital. You know, investors, endowments, pension funds and others are realizing that with liabilities going to such low levels the actual gap has actually gotten greater and while everybody is rushing towards liquid assets the ability to get a little bit more illiquid assets really makes some sense. Yes, there is a thaw in the ice, if you would. I think you will see a bit more fund raising take place in 2011 and 2012. That is interesting from a capital markets perspective but our business there is enough dialogue that we are having right now with sponsors that do have capital that we don't need that ice to thaw for us to have future success. A lot of our relationships have plenty of capital right now.

And our sponsor coverage team is really focusing on a key number of sponsors that have proven to be the best in class and they will have access. We hope to see more discipline around the fund raising on the LPs to focus on the funds that have proven track records, performance and operating excellence and timing of exits and purchases versus just, you know, a bunch of our guys piling on when the market opportunity is there to raise money. We don't see that, we think our base of clients will grow their capital over time.

Okay, great, thank you for the detail of that. And I know you guys are always very disciplined with your capital and deploying it when it makes sense. But if I'm to read through the lines here, and correct me if I'm wrong, but it sounds to me like you guys are little bit cautious on credit market valuations right now. Is that a fair assessment or no, are you guys still thinking that there is pretty good value opportunities on the market right now?

I mean I don't think there is a black and white answer to that. I think that certainly we have seen a great robust marketplace take place, a lot of high yield issuance. There are things when you see a holdco dividend take place through 10% those are obviously, you know, caution signs. But we have never been in the market share game and if we can find a handful or less than a handful of yields a quarter. I will tell you I do think what you are really asking is, is there an institutional memory and we are seeing some evidence where there isn't and we are seeing some evidence where there is. I think banks are being pretty cautious by not lending inappropriate levels on senior debt. Patrick can comment on some of the things we have seen in the mezz space. We are seeing pockets of bubbles but I don't think we are no where near where we were three years ago.

Year end does provide some interesting sort of changes in markets, folks are sitting on a lot of cash and deploying it, some folks are being more conservative and not deploying it. Retail inflows continues to commit to high yield funds and investment grade funds and there is still a lot of money in fixed income. So we have to be careful what that is saying. What we have seen develop the last couple of weeks is a couple of transactions that were really, we view down the road on the risk premium, on the risk spectrum, excuse me, tried to get done and the markets say no.

You know, it was yes, yes, yes, yes, for the last couple of months and now you start seeing a couple of transactions saying no and that is a good thing because that means the markets will be a little more discerning around credit. For us we have been fortunate to find some really good credit opportunities that are companies that are a little more unique and a little harder diligence that we feel really good about using our expertise to still get paid well and use our capital as a solution provider and the amount of capital we can provide around that to get paid and that is partnering with Wall Street, that's going direct with sponsors and we are indifferent as long as we get a good risk adjusted return.

Thank you, guys.

Thank you, Chris.

Your next question from Vernon Plack of BB&T Capital.

Thanks. I know you all have addressed this issue from an opportunistic standpoint. Just looking at the balance sheet, what are your thoughts on tapping the securitization market for long-term financing?

Vernon, it's Patrick. Great question. We for the six plus years we have been around, almost six and a half plus, have been always shown opportunities in the securitization market. We have been very disciplined about it. I think it's nice that we have not had to access that market. I think that a lot of folks who were challenged on it, as Jim mentioned, the competitive advantage of being with access debt capital across a variety of different capital providers the flexibility and the structuring and what you can do with that capital is very important. It is not just a headline coupon that you may read about.

We continue to have dialogue across the board with many institutions providing those opportunities. Apollo is a global footprint, a franchise that has a lot of these securitization vehicles elsewhere. If and when they make sense for us and they are a complement to our business then we will execute on that. Those markets are improving. The opportunity set for us is there on the asset side we think in some of those markets. To the extent that something comes around, we will be discussing that with our analysts and our investors at the right point in time. But you can assure yourself that we are looking at all that.

Okay, thank you very much.

Thanks, Vernon.

Your next question comes from Jason Arnold of RBC Capital.

Hi and good morning, guys. Congratulations on the private note deal. I think those are very attractive rates for long-term capital. Just curious, it sounds like you are going to look at a variety of diverse sources for funding going forward. But this type of private offering in particular, is this something that you would expect to perhaps do down the road here again as another source of financing?

That is a good question. We are very pleased with the group of folks that we have done our inaugural transaction with, have all come in to us offering potentially more capital down the road. We want to build those relationships. We want to prove to them what they expect they are going to get out of being invested with Apollo. We've had significant reverse inquiry post [app] transaction from new investors in that marketplace that we can potentially add on to and move more capital into that. And we have the secured capacity to do that. I think some folks have tapped out secured saying you must look at the unsecured market. That market is not quite as attractive as we would like it to be.

So if we get something there that makes sense and have another group of strategic investors where we add to the existing investors we would like to think that is a long-term growing marketplace for us in addition to the other markets that we hope are also long-term and growing.

Terrific. Thank you for the color there. I guess I was just curious as well on the lending side of the equation, are there any industries that you are at this point in the economic cycle saying that you want to have a little bit more exposure to or perhaps still avoiding? Just a little bit of color there would be great.

We are invested in 31 different industry groups. We tend to really look at it more on free cash flow. If an industry provides us with free cash flow, you may have a company in industrial company that is heavy CapEx and one that is light CapEx. We will do an industrial company with light CapEx more often than heavy CapEx because the middle of the capital structural lender doesn't really accrue to our benefit as much. It accrues the equity if it returns on the investment and accrues to the senior loans as collateral if it doesn't.

So really it is the asset heavy industries we are staying away from. We have avoided historically things like airlines and automotives and what not. There is a lot of change in those industries. We are going be looking at everything, never say never. But right now we like companies that historically, especially now with the tough economy have proven themselves even through a tough economy because that is the free cash that is going to deleverage the capital structure and improve our risk adjusted returns going forward. So we are looking at many industries and we are going to avoid the ones where we think that there is pitfalls.

Excellent. Thank you so much for the color. I appreciate it.

Thank you.

Your next question comes from John Stilmar of SunTrust.

Good morning, gentlemen, thank you for letting me ask my question. Patrick, this is a question, this quarter, frankly, you guys did something that caught my eye and I think you mentioned it earlier in which you rotated from your senior structure or your senior loan portfolio you rotated from second lien investments up to first lien investments. And one would think that the coupon or the yield would go down but the yield actually went up. And it seems to sort of touch on the idea of improved earnings, improved structure in the product. And it seems sort of counter intuitive in a liquid market where pricing is getting tighter that you would be able to move up the capital structure and improve coupon. Can you help kind of identify for me what the key driver is of that, especially since I would have thought that senior first lien loans would have been getting more competitive and not less. And, you know, just some help there would be really appreciated.

John, thank you for noticing. We work very hard and when we mention the words optimization we truly mean it. What we have -- I'll give you an example and I'm not going to put any names around it. We have some investments in second lien that we did three or four years ago that were done at LIBOR plus 600 when LIBOR was at 4% or 5% and they were accretive to us at that point in time. We locked in our spread because we borrowed a floating rate revolver to invest in those names. So even though the absolute yield came down, we are still making the earnings for our portfolio.

Within the last -- end of summer and into the fall, the primary market for bank loans for new large LBOs was emerging and CLOs are getting towards the reinvestment periods ending, we were able to capture some LIBOR floors, some OID by being a significant player in a new buyout transaction on a new primary issuance. We, quite frankly, saw that as an arbitrage. So we were able to exit some of our second liens at good prices because they performed really well but move up the capital structure and even make more earnings. Those opportunities aren't available all the time.

We see some secondary market opportunities to either sell or buy as well where there is an arbitrage. Because one of the things that happens in some of the markets that we operate like the second lien. There may be five owners of that second lien paper. It is a liquid security but there is five owners. One guy may have a reason he needs to sell, and we may find a reason we want to buy or vice versa. We can take advantage if it's trading at a level that we can get out of par or close to par and redeploy into a senior bank loan of a new primary market when the Wall Street firms were partnering with 1 R capital early and to give them the comfort that that is going to be executable for a new sponsor and a buyout.

These are windows of opportunity. Do they last forever? Probably not. But given the relationships we have with the Wall Street firms and the sponsor community, the size of capital we have, our knowledge of the secondary market given our trading platform that we have at the firm, we are finding those pockets and we love finding those pockets and they again they improve our diversity, they improve our credit and they improve our earnings so we look forward to doing that. But thank you, John, for noticing.

Just kind of touching, and I know we love to talk about pipelines when asking you questions, but if you were to characterize the flow at least in conversations that you are having or at least considering opportunities as you start planning not just for the next couple we'll call it weeks but months you really have three markets as I look at it. The secondary market are you also taking advantage of leveraging maybe distressed sellers as you talked about with some second lien buyers and then obviously your sponsor community. As you start thinking about the mix of where your originations potentially could be coming from how would you think about that mix evolving? Is there one particular pocket that you would probably favor that is either growing or one that might be shrinking, how would you sort of characterize that over the coming months and quarters?

There is no surprise the secondary market for opportunities are probably going to pass us by at the moment because the markets are trading so tight. If there is one off situations we will do that and those do come across surprisingly but given our platform and guidance we have trading for us in the market every day seeing those opportunities, being a part of Apollo makes sense for us. We do think that going forward into next year it will be probably more primary new LBO transactions to purchase and sale to a company. We've had a couple of interesting large situations, Crow being one of them, of an existing portfolio company owned by a sponsor making a very strategic acquisition and the certainty of that capital and that capital may not be required for two or three or four or five months.

Wall Street is not going to want to make that kind of a long-term commitment. We can come in knowing that we want to own that paper, we may already own some of that paper, and we like the transaction and the acquisition and post synergies, it's very accretive to the sponsor and sponsors we are doing business with they are not worried about the eighth or quarter point here or there, it is I know that you will provide the capital to me when I need it to buy this company. And we love that because we can do a $100 million, $130 million or $230 million commitment on Altegrity and there have been more of those opportunities. Those should be around as well.

But we think that next year if the economy continues to get a footing and shows it is sustainable in even a slow recovery and the amount of that prime equity capital that Chris Harris mentioned earlier in the system, that primary market leverage buyer transactions where new buyers are coming in will probably be where we will see more of our flow in 2011 and 2012.

Perfect. In all sincerity, nice job this quarter.

Thank you very much.

The next question comes from Troy Ward of Stifel Nicolaus.

Great, thank you, guys. Could you just provide a little bit of color from the credit quality perspective. You made comments in late 2009 even here in 2010 where, you know, we should expect to see the portfolio because you are a true subordinated lender the credit quality is going to lag some of the other maybe portfolios. Looking at the credit quality in this quarter you had the realized losses but again we knew those companies were under stress but you had $107 million of unrealized appreciation which is $20 plus million dollars above the reversal of the realized. Can you talk about what you are seeing in the credit quality and line portfolio and does this signal a point where you think the underlying investments are actually starting to improve?

Yes, Troy, thank you for that question. We -- there are and we have been very transparent with our investors about where some of the challenges have been. Almost all of those have been cleaned up. We are working on a couple of one off restructurings, maybe we'll convert and take equity ownership and hopefully get a nice recovery going forward because we like the companies and the capital structure just needs to be changed a little bit. But there are far fewer of those in that category.

In general, we definitely are seeing companies that have been victims of the economy now sort of being the recipients of an improved economy. They grew a lot -- a lot of companies grew EBITDA because of productivity gains and operating margins being improved through cost cutting and restructuring of their operations. That has kind of played out and what we are starting to see now is the revenue side is picking up. So we are getting still EBITDA growth and we're getting revenue growth now as we go forward. But we don't have a crystal ball as to what next year is going to look like.

You see raw material prices going to still linger on companies going forward. We have 10% unemployment. QE 2 is out there. The equity markets are responding favorably. Perhaps unemployment will come down. As productivity gains generally slow you start to see unemployment rise to satisfy the demand. We would like to see that. That is what happened the last two cycles. If that happens again that is a good thing for us. But in general we have been pleased with the last, since March of 2009 our portfolio in aggregate has improved both top line and EBITDA year-over-year.

The year-over-year comps get harder as we go forward and we are not expecting again a V shaped recovery going forward. We are pleased. There will always be the idiosyncratic mismanagement of a company that we didn't foresee and hoped wouldn't happen but it does happen and that is just what life is liked in fixed income with 67 portfolio companies but we are feeling, as I mentioned in my comments, the performance and the progression, progression is an important part of overall portfolio management.

Troy, I had one other point. I think we are really seeing the fruits now of the repositioning of the portfolio to larger credits and those companies are if they have any broader exposure than just the US they are doing really well. Some of the things we are seeing is we see what is going on with some companies that are really in some chemical space and we see that companies that are really getting sometimes hurt by raw material costs we are very focused on that. But we are seeing the benefits of the portfolio reposition, no doubt about it.

Great, thanks, that is very good color. Then just a follow-up from Sanjay's question about the repayment activity. You had mentioned that a couple or several of your companies had filed recent public registrations. Could you provide us the names of those just so we can kind of keep an eye and start to look if those are going to look to repay. And then secondarily you have a couple of equity pieces one in particular in the Canadian minor that obviously have done very well. Is there any thought to reposition that equity into yielding assets?

Great, Troy. Right now, we have three companies that we are very much aware of has filed to go public. Booz Allen, Hamilton has filed to go public. VNU Nielsen, and Goodman Global have filed to go public. Meg Energy is the one I think you are addressing here which filed to go public and actually did go public on the Canadian Stock Exchange. It was, I think the markets would agree, it was a bit of a challenged execution on that transaction given some precedent that was in the marketplace.

That stock has traded up nicely. We understand what an equity investment means for our cost to carry in our business. We look for fundamental value and return. You know, Jim and I are very focused on that and you can expect that to the extent that there is an opportunity to redeploy that capital elsewhere we think it has just got to run its course, we will do that. We have the full flexibility to do that. We are not part of the group that was locked up. But we are not going to throw it out at a value that we don't think is the right thing to do and we can't redeploy that capital in something net accretive for us going forward.

One point to add to Patrick's, I want to make sure the subtlety he is mentioning came through. Not every time -- when a prepayment occurs sometimes that is at a lower level than our overall portfolio so we actually -- that is actually a benefit to us. It is coming out of par but we can actually reinvest that and it is actually accretive.

What happens is, it's interesting, if it is trading at LIBOR plus 500 instrument it's probably not trading at par. But when you can take it out, you can take it out at par and we can redeploy those par proceeds into something else.

Great. Thanks guys.

Thank you, Troy.

Thanks, Troy.

The next question from Jeremy Banker of Citi.

I was hoping to follow up on the last credit question. Wanted to hear your thoughts on in floor enterprise solutions. I believe the mark on that has been coming down over the last couple of quarters.

It's a business that we have been in for awhile. We don't particularly get into great [conversations] about any one credit. But certainly we are watching it, we think there is some inherent value, we think it still makes sense in the portfolio. Like all these things we monitor it closely and have been in contact with the company and the sponsor and if at if any point in time we think that it makes sense for us to sell and monetize we will.

Thanks.

Thank you.

The next question comes from Jasper Birch at Macquarie.

Good morning, gentlemen. I guess starting off with I just wanted to clarify something. Is your appetite for new equity capital predicated on your ability to leverage it?

No, not necessarily. I think that we -- right now, you know, we feel that we have got a very nice amount of equity capital. We have got, you know, 190 plus shares outstanding. Obviously we are focused on NII on those shares, cost of debt capital industry has gone up a little bit the last couple of years. We have excess debt capacity. The key for us is to make sure that we have the capacity. We might not utilize all the debt capacity. We'd like to have an even amount of debt capacity with our equity capacity. The debt markets have improved dramatically. The equity markets have not improved as dramatically. In record low rates we have been accessing the debt part of our capital structure. When it makes sense and if we're, we don't have any immediate desires to go raise equity at the moment. If the opportunities for investments are there and the cost of capital, the debt or equity make sense for us we will access either debt or equity.

Okay. And then, first of all, I think it is really telling about how far this space has come that the main focus of most of the conference calls have been on growth capital. Just sticking with that, the topic a little bit, I mean you guys have been one of the most diligent BBCs in keeping your overall cost of capital down and I was wondering just sort of over the long-term, first of all, what do you think is sort of a sustainable ROE on unlevered capital in terms of if you are seeking longer term capital what sort of spread would be necessary there? And then also how do you weigh giving up some, giving some ground on the cost of capital right now to pick up a little additional yield in the near term?

Well, we are both going to answer that. I guess I would say a couple of things is, you know, a little bit of -- bonds don't go to 200. They can go down and you never want to reach for that incremental yield unless you love a credit. We are just never going to go down that, I know the question earlier today was about the primary calendar. The primary calendar today may not be the opportunity but those are secondary opportunities of tomorrow.

We are just never going to really reach for yield on -- to get a little bit more NII per quarter if we don't love a credit. The second question, it is not -- and I'm not evading the answer but it is not easy to say because, yes, ROE is very important to us but because we distribute a lot of it we don't retain a lot of that equity. It really for us it is at any one point in time making sure that every incremental dollar of debt or equity you can over time make a spread that allows you to make your dividend. We look at the business in very simple terms like that in that manner. We try not to get too complicated. A theme you are hearing from Patrick and I and Rich, all of us, is we think it is under appreciated. Every focus is on the equity side of the balance sheet. The debt side of the balance sheet is very important in the industry.

And the cost of it.

And the cost of it. We do think that those who can access and get a variety of funding sources those will be folks that will be able to be long-term have a mandate that allows them to fulfill their shareholders duty by having a stable and growing dividend. And that is just a theme. We don't really -- we are focused on ROE but really focused on the capital structure on what it allows you to invest over time.

And if we keep our costs of capital going lower and low the opportunity set that is accretive is just larger. The lower your cost of capital, there are plenty of things do above the low cost of capital are accretive for us.

And across cycles.

And across cycle. That is why Jim mentioned primary market opportunities today we may pass because the rates are too low but down the road the higher market may dislocate in those opportunities. We spend a ton of time diligencing things we don't do and then keep in mind we keep them in our library and to the extent that they trade down our traders come in to us and say the higher market is trading off, here's and opportunity for 12%, 13%, or 14% yields on a bond that got about 8% two months ago. We like that opportunity and we took advantage of that and we've proven so.

That will occur again. As long as we are sitting here there is a couple of names of stuff that we know we looked at many, many names in the last three to six months that have come tight, a lot of money coming in the high yield market. That is great and when they trade down, and eventually they will for technical maybe not fundamental reasons, we will be there.

Okay, that is helpful. Kind of related but not directly. Just thinking about the term of funding and also the term of investments. We have definitely been hearing some talk that new investments are generally going on a longer date of maturities, maybe in the five to seven year range. Are you guys experiencing that and sort of how to you look at match funding in that case?

You know, there is a maturity on a security and it is very few of them that actually go to maturity. The mezz business has always been a seven to ten year security business. And there is rarely -- if it goes seven or ten years something has probably not gone well because there is always -- we really coincide with the buyers of the companies that use our financing and their whole periods have been three to five years. Private equity owners hold the company three to five years. That's coincident with our average hold periods.

Robust markets maybe the average maturity goes down towards two years because a lot of refinancing in sales, because businesses have improved so quickly or the markets improved so quickly and then when the markets get a little sluggish then the whole period goes towards five years. And that's why we like the duration around we have in our revolver and our new debt offering and why we look to extend our revolver 18 months before it came due to get us that pushed out again. Plus we have a ton of liquidity within the portfolio. We have almost a third to a half of our portfolio that is very liquid that provides us with another liquidity avenue should we need it.

Okay. On that liquidity in the portfolio, I mean I know you guys obviously have $380 million of debt coming due. I mean I think most people's expectation is that over time you will get more debt funding. But just in the absence of that sort of how much yield do you think you can pick up and over what time period just recycling your portfolio and what avenues do you have for earnings growth in the absence of added capital?

I'm glad you asked that question because there may be some market misperception about the $380 million. That $380 million is not funded. That is roughly $1.6 billion revolver going to about $1.3 billion. We have now replaced $225 million of new proceeds in our debt offering that replaced some of that capacity. We don't have any funded maturities. Our borrowings last quarter, Rich, were?

At September 30, were $1.09 billion.

We have plenty of access cash -- with the 1.5 roughly that we have of capital we still have plenty of dry powder there. And we are constantly being shown new opportunities for financing and that is what we have proven to do. So there is not a maturity issue at Apollo Investment Corporation.

I'm just talking about excess capital in order to deploy. I think you have maybe enough capital -- after the $380 million, enough capital for maybe like 14% portfolio growth.

That is why we have about a $500 million post that maturity of available capital to us today.

Which still only gets us to 0.7, 0.75 anyway. And that is if we use all of that capacity.

And we are definitely executing on a plan to continue to increase our earnings in this environment now. It's going to be lumpy. Because if we get -- exit out or something, if GE decides they will by a dresser and we get taken out of investment and we didn't know about that, that happens and good companies are attractive to people. Our focus on raising debt capital at record low rate environment is going to prove to be I think a smart strategy. Optimizing our portfolio out of some of the lower yielding assets into some higher yielding assets without taking too much credit risk is an important strategy.

Us working very, very closely with the Wall Street firms who are risk adverse and they are going to continue to be risk adverse and they have more capital requirements going forward, just to partner with them to be buyers of that risk and get paid for that risk in partnering with them as they are looking to grow into next year and year beyond is a strategy. Us arbitraging the capital structure what we talked about with John Stilmar, us exiting some of these equity positions, returns that make sense and redeploying that capital. Sponsors coming to us directly given our strong sponsor coverage effort we end up structuring those deals and get structuring fees. That's an opportunity for us.

In positioning our business right now like doing a 6.25% fixed rate deal when rates rise will prove to be very accretive. Even though it's accretive today, it will prove to be only more accretive as rates rise. So we are trying to position our business, we don't think rates go lower. We are not expecting rates to go up tomorrow, but when rates go up we try to make sure we are in a fortuitous position to benefit from that. These are most all the plans that we work on every day. We challenge ourselves every day to find more plans that make sense but we are not going to jump on a treadmill that finds ourselves having a nice one quarter and have a problem a couple quarters down the road.

That is definitely nice color. Then just one last sort of follow-up on that topic. Other than exiting the equity investments, how much control do you have over repayments and when we are modeling it out should we look at it mostly as involuntary and take off your average yield and redeploy that higher or how should we look at that?

We don't have any control investments in that regard so yes, we are a passive investor. I think if I was building a model I would think about over a cycle, as Patrick said, there may be a five or seven year stated maturity. Because we are with sponsors and appropriately so, they are trying to create activity. We have probably a three to four year average life of our portfolio, in more buoyant times it's probably closer to three, in more slower times, it's probably four. That is probably the zip code that I would use.

And then we're also utilizing these credit markets to optimize. You may see us sell down a security that we own a lot of and redeploy it somewhere else. Because it's trading at a very good level that making sense for us to improve the credit and diversification. We don't have a target for portfolio growth quarter to quarter. We have a strategy, we think it makes sense in a good market to grow your business. Right now we want to get our portfolio in the best shape we possibly can and our capital structure in the best shape that we possibly can to take advantage of what will be a longer term opportunity.

Okay. Well, great, thank you for all the color and nice job this past quarter.

Thank you.

Thank you.

Your next question comes from Ram Shankar of FBR Capital Markets.

Good morning. Thanks for taking my question. Most of them were asked and answered, but since I have you can you maybe talk about what your close rates are today versus what they have been historically?

Well, in terms of how many transactions we actually invest in versus how many we look at?

Exactly. What goes through due diligence and what you actually close?

It's very fluid, you know. That is why we never tell you what our pipeline is or the commitments we've made because you know something, a deal doesn't close until the money funds and that has always been our experience. It is our strategy. I think that when we like something we have -- we looked at many opportunities we'd love, but unfortunately the high yield market is getting it done at 8% but that is an opportunity six months from now. The Kroll/Altegrity transaction in the early part of the summer that may not have been an opportunity then the high yield market backed up very quickly in a very short period of time and it became an opportunity. But we do all the work around it so it is a tough question to answer in how we manage this business.

If there were a number, it would be very small. I mean, you know, what is officially a look, what is officially a review. But we -- there is a lot of things that come over the transom and you can see by our steady pace not many get executed. It is a pretty tough filter.

We've looked at over 3,000 plus deals in the six years and we have done 130.

Okay. Thanks for the color. If I may, one more question. Within the 10% build up exposed to the education industry group, does the DOE's gainful employment rules come into play in any way directly or indirectly?

I think indirectly is probably the real answer for the portfolio of companies we have. They are really focused on more certificate programs, short term programs, one year diploma programs and not the four year colleges that you are sort of see every day. A different company that is called Apollo, the public company. And we are not going to comment on a public company. But what we are looking at is the companies we own, ATI, Delta Education, Loriette, we think our business models are different enough that it does not have as direct of an impact. Gainful employment, it may cost the company more money to continue to comply.

We are in constant dialogue with our sponsors and management teams and feel comfortable with the companies today. News changes every day in the industry and the space. It probably has an impact on overall equity valuations, but we are generally a debt investor so that should not have an impact. We are very reasonably and moderately leveraged in each of these investments. Our education bucket also includes Cengage which is a textbook publisher or Datatel which is a software company to community colleges. Not all that 10% roughly of our portfolio is in for profit education, in fact, it is a small number.

Okay. Thanks for the color.

Thank you.

Your next question from Aaron Taiginovich of Evercore.

Thanks. Just thinking about it a little bit longer term, we have seen folks talk about the high yield refi wave coming over the next few years including some refis of leveraged funds. Does that still seem like an opportunity for you? Are a lot of those getting pulled forward in the recent refis? And also in terms of the lower yields on the high yield right now, the credit spreads are still pretty wide but the yields are low. If the benchmark rates rise a bit, would that actually create a better opportunity for you going forward?

Well, let's answer both of them. On the first part, we do have a view that the backdrop of the refinancing of bank facilities with high yield will continue. It makes sense for issuers, sponsors, the banks that hold the loans and the high yield market that has capital. So that trend is going to continue. Certainly the wall of maturities that commenced in 13 to 16, 17, a lot has been chipped away and the wall of maturities is lower than it was 12, 18 months ago so a lot has been done. Very few of us around the table or on the phone would have predicted 24 months ago that 2010 would be the largest high yield bond issuance on record but that is how fluid the capital markets are right now. Certainly you raise a good point. If you look at the high yield indexes that are through 8% right now, with a 10 year around 250, that spread, somewhat -- somewhat standard over time.

But when rates back up what happens to the high yield market, we suspect that will be interesting to us and that is why because of that dynamic is sort of we don't mind having some fixed rate debt right now, having a view that that may happen. I think we suspect that trend will continue and there will be some folks that don't refinance and I would also say the average high yield, yield to date is north of $500 million. There is lots and lots of companies that are under $500 million in subordinated debt that can't go to the high yield market. Many years ago a $100 million to $200 million deal was a typical high yield transaction. Those deals are just not getting done now and so that is an opportunity for our industry and our company.

Thank you.

With that, great questions. We really appreciate the follow-through by many of the folks on the call today, your support and knowledge of our business is very important. We appreciate all our shareholders on the call and look forward to talking to you next quarter. Take care.

Thank you. This concludes your conference. You may now disconnect.