MidCap Financial Investment Corp (MFIC) 2011 Q4 法說會逐字稿

Good morning and welcome to Apollo Investment Corporation's fourth quarter and fiscal year-end 2011 earnings conference call. 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. Mr. Zelter, you may begin your conference.

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

Thank you, Jim. I'd 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'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 credit markets continued to exhibit strength throughout the March 2011 quarter, maintaining strong liquidity and driving debt yields tighter as investors continued their search for extra yields amid continuing low interest rate environment. These dynamics grow solid demand for primary and secondary paper, prompting continued record high-yield issuance with $80 billion issued during the first calendar quarter of 2011, only $3 billion off the all-time high record quarterly issuance from the December 2010 quarter. Even renewed fundamental concerns about inconsistent domestic economic data, and certain sovereign issuers, appear to pale in comparison to the significant liquidity within the current capital markets in this period.

Now let me summarize some brief portfolio highlights for the quarter ended March 31, 2011. In total, we invested $298 million in 8 new, and 11 existing, portfolio companies. We also received prepayments totaling $173 million and sold select assets totaling $82 million. At March 31, 2011, our portfolio of investments totaled $3.05 billion measured at fair market value, and was represented by 69 distinct portfolio companies diversified amongst 30 different industries. The weighted average yield on our overall debt portfolio was 11.6% as of March 31, 2011, versus 11.5% at December 31, 2010. During the fiscal year ended March 31, 2011, we invested in 21 new portfolio companies, totaling $1.1 billion, and harvested or exited 19 portfolio companies, totaling $977 million over the same period. Since the initial public offering of Apollo Investment Corporation in April 2004, and through March 31, 2011, invested capital has now totaled over $7.3 billion and 147 portfolio companies, with more than 90 different financial sponsors.

As we noted in our last call, one of our strategic priorities was to introduce new investors to Apollo Investment Corporation -- long-term investors interested in providing us with their capital, capital which we seek to use for growth. We believe these investors should recognize our current diversified portfolio of corporate securities and loans, and will be motivated to partner with us further into this uneven economic recovery. In doing so, in January 2011, we were pleased to issue a $200 million senior unsecured five-year convertible note with what we believe are attractive terms, a 5.75% coupon with a conversion premium of 17.5%. We also had in January another $50 million commitment to our senior secured revolving credit facility from our growing syndicate of revolving lenders. We expect the inaugural unsecured issuance to generate significant long-term benefits to AIC and its shareholders. Accordingly, we have deliberately accumulated capital resources as we look ahead and prepare for what we believe will be a long period of investment opportunity for Apollo Investment Corporation. Pro forma for our April 2011 debt maturities, AIC now has approximately $625 million of cash available for new investment.

Rich, why don't you take them through some financial highlights for the quarter, please?

Certainly. I will begin with some March 31, 2011 balance sheet highlights. As Jim noted earlier, our total investment portfolio had a fair market value of $3.05 billion. This is up from $2.92 billion at December 31, 2010. Our March 31 net assets totaled $1.96 billion, with a net asset value per share of $10.03. This compares to net assets totaling $1.90 billion at December 31, 2010, and a net asset value per share of $9.73. The increase in NAV per share for the quarter was driven primarily by net unrealized appreciation on our investment portfolio. Positive contributors to performance for the quarter included our investments in AIC Credit Opportunity Fund, Alliance Boots and Sorenson Communications, among others. Partially offsetting the Company's unrealized appreciation for the quarter was unrealized depreciation from PlayPower Holdings, Angelica Corporation and MW Industries, among others.

On the liability side of our balance sheet, we had a total debt outstanding of $1.05 billion at March 31, 2011, compared to $1.0 billion at December 31, 2010. Our leverage ratio at March 31 was 0.54-to-1, debt-to-equity, as compared to 0.53-to-1 at December 31, 2010. No new investments were placed on non-accrual status during the quarter. Our portfolio has 69 portfolio companies has two companies with investments on non-accrual status at March 31, 2011, unchanged from last quarter. These investments represent 1.8% of the fair value of our investment portfolio at March 31, 2011, versus 2.0% at December 31, 2010. On a cost basis, it represents 6.5% of our investment portfolio at March 31, 2011, versus 6.6% at December 31, 2010. As for operating results, gross investment income for the March 2011 quarter totaled $94.7 million, a slight increase from the $94.3 million for the quarter ended December 31, 2010, and up from the $87.7 million for the comparable March 2010 quarter.

Expenses for the March 2011 quarter totaled $44.7 million. This compares to $44.2 million for the quarter ended December 31, 2010, and $39.1 million for the comparable March 2010 quarter. Ultimately, net investment income totaled $50.0 million, or $0.26 per average share. This compares to $50.1 million, or $0.26 per average share, for the December 2010 quarter, and $48.5 million, or $0.28 per share, for the comparable March 2010 quarter. Also during the March quarter we received proceeds from the sale of investments and prepayments totaling $255 million. Net realized losses on those sales totaled $1.6 million. These were primarily related to the realization of previously recognized unrealized losses on our investments in Infor Global Solutions, partially offset by realized gains received from a combination of several sales of other select investments. These results compare to net realized losses of $64.9 million for the December 2010 quarter, and net realized losses of $219.7 million for the March 2010 quarter.

The Company's investment portfolio had net unrealized appreciation of $63.6 million for the quarter ended March 31, 2011. This compares to net realized appreciation of $99.3 million for the December 2010 quarter, and net unrealized appreciation of $161 million for the comparable March 2010 quarter. In total, our quarterly operating results increased net assets by $112.1 million, or $0.57 per average share, versus an increase of $84.5 million, or $0.43 per average share, for the December 2010 quarter, and a decrease of $9.9 million, or $0.06 per average share, for the comparable March 2010 quarter.

Now let me turn the call over to our President and Chief Operating Officer, Patrick Dalton.

Thank you, Rich. Looking back on the fiscal year ended March 31, 2011, we would like to categorize it as a year focused on strategic initiatives. Among them, we'd certainly highlight two significant items. These are our continued portfolio optimization and rotation, and diversification of our capital structure to access to new debt investors in expansion of our Company's long-term debt capacity. We believe these important initiatives have positioned the Company well for the long-term. We were active with our portfolio during the March quarter, investing in 8 new portfolio companies as well as 11 existing ones. Portfolio Company investments totalled $298 million.

I will take you through some of the specific portfolio changes. Investments were made in the following new portfolio companies -- Avaya Inc, Del Monte Foods, the Brock Group, Insight Pharmaceuticals, Ashland Distribution, RBS Holding Company, Valerus Compression Services and Yankee Candle. Of these investments, some of the larger investments included $49 million in the first and second lien bank debt of the Brock Group. Brock is an industrial specialities services provider to customers in the energy and industrial process industries, and is a Lindsay Goldberg portfolio company. $40 million was invested in a second lien bank debt of Valerus, a natural gas handling services company owned by TPG Capital, and $16 million was invested in the first lien senior secured debt of RBS, a creative marketing and direct mail services provider focused on the nonprofit sector. RBS is jointly owned by TA Associates and Stephens Capital Partners.

Investments in existing portfolio companies were made in the following names -- Alliance Boots, Advantage Sales and Marketing, Allied Security, Global Auto Care, Ceridian, Datatel, Leslie's Poolmart, Multiplan, NEW Holdings, Penton Media and 10-Guage Learning. Of these names, some of the larger investments include a $51 million investment in the second lien bank debt of Allied Security. Allied Security, a Blackstone portfolio company, is a provider of contract security services. Coinciding with this investment, our $20 million position in the mezzanine notes was repaid at a premium to par. $29 million was also invested in the first lien bank debt, Penton Media, a B2B media company that went through a successful reorganization last March. And $21 million was invested in the second lien bank debt of Datatel, an enterprise resource planning software solutions provider to the higher education institutions. We also chose to roll over our previous investments in the Datatel second lien what it was refinanced at a premium to par. While our March 2011 quarter was an active one, we believe our investment pace will remain highly variable as we seek to identify and invest in the most attractive risk-adjusted return opportunities.

Now let me go through some portfolio highlights at March 31. We continue to be well diversified by issuer and industry, with 69 portfolio companies invested in 30 different industry groups. The Company's total investment portfolio had a fair market value of $3.05 billion. It was comprised 33% in senior secured loans, 58% in subordinated debt, 1% in preferred equity and 8% in common equity and warrants, measured at fair value. The weighted average yield on our overall debt portfolio at our cost at March 31, 2011 was 11.6%, versus 11.5% at December 31. The weighted average yields on our subordinated debt in the senior loan portfolios were 13.1% and 9% respectively at March 31, 2011, versus 12.9% and 8.7% respectively at December 31, 2010.

At March 31, 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 was 2.3 at March 31, unchanged from December 31, measured at cost, and continues to be rated at 1.9 measured at fair market value at March 31, 2011, which is also unchanged from the prior quarter. Before I open up the call to questions, I would like to reiterate that we continue to be pleased with how our overall investment portfolio is constructed, and how the majority of our underlying portfolio companies are currently performing in this uneven economic recovery. And closing, we would like to thank all of our dedicated investors in Apollo Investment Corporation for your continued and long-term support and confidence in us. With that, operator, please open up the call to questions.

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

Hi, this is actually Steven Kwok filling in for Sanjay. The first question is, if you guys could talk about any benefits from the investments that pre-paid this quarter?

I'm sorry, Steven, to discuss benefits of the ones that prepaid?

Yes --.

We don't generally go into specifics, but if you went through the portfolio, I think the one that stands out is our investment in VNU-Nielsen. That one came out before it was called, when we got a May call on that. That contributed to our interest income line item. That was probably the significant item to point you to.

Okay, do we know about how much that represented, about?

It is roughly about $3.4 million.

Okay. And then I was just thinking about, in terms of the growth, do you guys foresee any slow-down in the repayments going forward, or do you think it's going to continue at that elevated level?

I think there has been a tremendous amount of activity over the last several quarters with companies that have the opportunity to refinance have taken advantage to do so. We do have a lot of companies in our portfolio with call protection that make even the benefits of our lower yields slightly more costly given the May call prepayments or call premiums that are charged. We do expect it to slow down because it has been done already. That's not to say there won't be some more coming through. We cannot predict those. It's really up to the underlying portfolio company management team and sponsors.

I think we are seeing is, over a period of time, the average life of our portfolio we've always said is between 3 and 5 years, and in slower periods, it probably elongates to 4, 4.5, 5 years. And in shorter periods, it's the 3 to 3.5 years. We're seeing that, that doesn't really surprise us, that you'd see a lot of companies, as Patrick said, that did have access to refinancings would be doing so, and I think you will see a more steady pace over the coming quarters and years.

My final question is in regards to -- could you guys give any updates on Innkeepers, and if there will be any impact on your fiscal first-quarter 2012 results? Thanks.

I think, as we have said before, Innkeepers is a public bankruptcy process, restructuring process. There is a fair amount of disclosure in our document, in our K, regarding that, and I think that if you combine the 2 of them that would be really a clear indication of what we see going forward. So, I think that those 2 in the aggregate should really give you the information you'd need to make any decisions.

Your next question comes from Rick Shane of JPMorgan.

Thanks, guys. Good morning, and thanks for taking my questions. Just 2 quick ones. One of the things that has happened, and this just may be because we are relatively new to the name, there is a -- what appears to be a semiannual increase in dividend income. Is that related to 1 investment, and is that predictable? Should we see it that way, as it's basically a semiannual payment that comes through?

Hi, Rick, this is Rich. That's a dividend from AIC Credit Opportunities Fund. There is 3 debt investments inside that fund. It is First Data, TSU, and Alliance Boots, and First Data is the notes. That is the largest investment inside there. And First Data senior notes, that's a semiannual payer. So when we get the cash into that fund, it typically flows up semiannually. That is the primary driver of the semiannual payment out of that investment.

Terrific, thank you. Second question, it does look like strategically you are increasing your exposure to bank and senior secured loans a little bit. Can you just comment on that in terms of what that is telling us about the credit cycle, and your thoughts strategically?

Hello, Rick, it's Patrick. Thanks for the question. I think we've said over the last several quarters that it is our view that rates are pretty low, and they are not going to go much lower, and likely will go higher. We don't know exactly when that's going to be. But we want to make sure that we are not going to speculate on rates, either way, but protect our business, should rates increase, and we believe they will.

And so we have repositioned our assets and liabilities to take advantage of a rising-rate environment, and want to protect the portfolio's earnings and potentially -- maybe there's an opportunity to expand earnings in a rising-rate environment. So, it's been an intentional and deliberate strategy that we have communicated several times. We also will look at the risk-adjusted returns of a senior security versus a mid-security, fixed and floating, the remedies, the underlying attributes of the investments, and make the appropriate ones. But you see the bias has been towards the senior-secured and floating-rate investments, and that is positioned intentionally.

And do you think that if we get into a -- some sort of dislocation event where there is more opportunity further down the capital stack for you, that there is more liquidity you can access by selling those senior securities off? Is this also a liquidity hold for you as well?

Not as much. There is definitely liquidity across our portfolio, including some of the junior tranches of the securities that we hold, mezzanine or high-yield notes. So, we would look at liquidity as 1 aspect across the different securities, but we are not necessarily looking towards 1 asset class because of liquidity. But we do want to have liquidity in our portfolio should we want to access that liquidity to delever and/or to find more interesting opportunities whatever the economy brings us.

And Rick, I would just add that -- we've talked about this before, we have articulated a view that going forward, you will see more periods where volatility comes into the market, and the windows are shut down for other avenues. That's a more predictable part of a longer cycle. We had 18 months of down, 18 months of very strong markets, but now you will see choppiness for a variety of reasons. I think that those are where we're the most opportunistic, and have been. That is the environment we would expect to roll out in front of us.

Terrific. Thank you very much.

Thanks, Rick.

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

Thanks very much. A couple quick questions. One, I was curious on the timing of exits and new investments in the portfolio. Was it spread out during the quarter, or was there bias toward the beginning of the quarter, the end of the quarter; any pattern there?

Yes, hi, Vernon. This is Rich. I would lay it out as, we were active throughout the quarter, but I would say that the new buys came in the middle and towards the end. And that the exits largely came in the middle. Again, pretty active throughout, but when you looked at the sizes of the larger transactions, again, middle to end on the new buys, and kind of middle on the sells.

And I would just -- on the buys, we can't control when the dates of these issuances happen or the closing of the loans, so it's really, we're reacting to the sponsor's choice as to when they are going to access the market.

Okay, great. And the carryforward amount, is that about $88 million? Did I read that right?

That's a great question. I would tell you that we are still working on the tax reconciliation between now and when we file our tax return. K-1s are coming in, we're still looking at potential currency adjustments, that's probably a number of pre-other, post-October 31 adjustments as noted in those footnotes. It's not a number I can actually give you right now. We are still working on it.

Okay, sure. And 1 other question. Trying to gauge the interest rate sensitivity to the investment portfolio. I know you have a little over $1 billion in assets right now that are fixed, and I'm just curious in terms of the impact that any floors that you may have on those investments would have in a rising interest rate environment. In other words, just trying to gauge a sense for if LIBOR goes up 100 basis points, what impact will that have on that floating-rate portfolio? A little color there would be helpful, thanks.

I'll give you some of the strategy, and Rich is going to get the other number for you, I think. As we mentioned, we have tried to reposition ourselves to get some fixed-rate liabilities in the capital structure, hence the private note and the convert note that we did, which is about $425 million of liabilities that used to be floating-rate liabilities, now fixed. We have increased the assets in our portfolio from fixed towards floating, and Rich, I think, is going to give you a number on the sensitivity that is in our disclosure.

I believe a 1% move, Vernon, as I flip to it, it is going to be a $0.01 increase for a full year. It's nominal. But as interest rates rise 1%, you will get a $0.01 benefit over a year.

And in our 10K, there's a footnote on that --.

In the quantitative analysis section of the 10K, it will be more fully described.

I saw that, I was just curious in terms of the floors, of what impact that would have on any initial move in interest rates, but I think you answered the question. Thank you.

Yes.

Your next question comes from Joel Houck of Wells Fargo.

Thanks, and good morning. I was wondering if you guys could maybe talk a little bit about the strategy in terms of equity churn. You've obviously got some nice embedded gains. Given kind of the compressed spread environment that we are in, and probably likely to stay in, what is your thought in terms of maybe turning some of those out into interest-bearing investments?

Our strategy with equity is really -- has been more of a coinvestment alongside a sponsor when they're making a purchases of a company. So we're not necessarily in control of the timing. These would be many illiquid securities, and really are exited with preemptive and drag-and-tag rights with the sponsor when they choose to get liquidity, in the sale of the company. So that is very difficult for us to predict and/or manage.

We have had in the past a couple of companies go public, and then we had liquidity. MEG being one, GS Prysmian, we also got liquidity when that went public, and the sponsor chose to sell -- we sold alongside of them. But overall, we can't control the timing of liquidity on the equity portfolio.

Okay, that's helpful. Then, when I look at your scheduled investments, you have, on the debt side, a lot of investments trading well above par. Can you maybe give us an accounting lesson, here? How much of that is accrual of prepayment penalties, what's already run through income, what might come in the future income off of that portfolio that's trading at premium to par?

Joel, this is Rich. It is really security by security, depending on what is going on with the security. I really don't have a number to give you to help you with regard to how much of that may flow in or may not. Clearly under 157, it's a yield-based approach, even on principle markets, so how much of that amount, above par, is related to yields in the marketplace versus potential, what's going to come into income from a call premium, what the timing is of each of those call schedules, it's really hard to lay out to anybody.

And just from a management of those, some of these are quoted in due trade, we could seek liquidity. However, the return we are getting we think is relatively attractive to an alternative. So to the extent that we have some liquidity, we'd look to find something else. We like the credits, the right to credit risk in these online portfolio companies, and so the price we're getting, it's something that -- if we are holding it, we're continuing to hold it because we like it. Some of them do trade to a call price, that is an expectation of the sponsor, when it's called we they call out that price. We cannot control that. So, the values are the values, and our strategy is really on a credit-risk-by-credit-risk basis. The yields we are getting for the risk we are taking.

Okay, and the last thing I have is, you talked about the new investments' prepayments. Can you give us a sense for the weighted average coupon that went on in the quarter versus what was refi'ed out? Just in a general sense, it doesn't have to be exact.

Joel, it's slightly lower, the assets that were being taken out, many of them are fixed rate assets, and we are reinvesting in some floating-rate assets. So we are willing to take a discount for a floating-rate exposure in this environment, so we are being taken out of the fixed-rate, maybe slightly higher yield that's -- we can't control, but our choice to reinvest the capital, you see the amount of activity in floating-rate. And our choice is to take a floating-rate exposure, and even if that comes with slightly lower yields, over time provides protection in a rising-rate environment. We view a lot of this as temporary.

And I would just add that, overall right now, we think about our floating-rate assets versus our floating-rate liabilities and aggregate size. A couple years ago we would have been more matched, and now we definitely have a much greater amount of floating-rate assets versus those floating-rate liabilities in the overall portfolio. Probably, broadly speaking, around $500 million, something like that, such that when those rates rise, we will be the beneficiary of that.

And I think that the discount, the fact that the overall debt portfolio actually moved up a couple bips, quarter over quarter, tells you that there's not a significant discount there between the yields that came out of the portfolio versus what came into the portfolio.

All right, thanks, guys.

Thanks, Joel.

Your next question comes from [Kian McFeedy] of Bank of America.

Thank you, gentlemen. I have a question, a follow-up to that last one, and I guess you quantitatively mentioned the floating grosses, the greater floating having a lower rate on the new investments. I was wondering if you could quantify that, on the new portfolio investments, what the average interest rate was, and what it was for the portfolios or investments that were exited?

That's a number that we are not going to disclose. It's an active management of a portfolio, things come in during the quarter at different points in time, different prices. We get some fees sometimes up front for floating-rate investment, we may get a prepayment premium on the way out. It's hard to quantify on a dynamically managed portfolio, but as we mentioned to Joel that, the slightest small discounts which we are happy to take in this environment, but we can't control the exits as much as we can control the investments.

It's not just this quarter. Historically, we have never provided that, because it is that active portfolio for those reasons.

And as we said, time and time again, we are really focused on risk-adjusted returns, and the market is robust. We are seeing a lot of refinancings and securities coming to the marketplace, and a lot of liquidity driving yields down and chasing leverage up. We are not going to chase leverage up, or credit risk up. We are happy to take a slightly lower yield because it makes sense for us in this environment versus chasing yield and taking undue credit risk, which we believe is not the right thing.

Okay, great. Thank you. And I just had a follow-up. As you are positioning the portfolio more for a rising-rate environment, having some more floating-rate investments, potentially you could have some of these investments carrying lower rates and pressuring NOI. Do you have any plans to offset this strategy for investments in other areas of the business, such as your asset management arm?

We are always looking at what's accretive to our business. We want to make sure that it makes sense, it makes long-term business sense for us. But we are always looking at ways to improve, and at the extent that we have something to discuss, we will present it to our investors at that time.

Okay, great. Thank you.

Thank you.

Your next question comes from Jim Ballan of Lazard Capital Markets.

Thanks a lot. Couple questions. One is that, over the last couple of years it looks like, including in this quarter, you have opted to trade out of some of your more liquid assets and purchase others where you see better relative value. Is that a strategy, given where the high-yield market has gone recently, is that a strategy where you still see, you think you'll see opportunity going forward? Or are you thinking you will move towards the traditional, originating new investments?

The good news is that we have access to excess capital, so we wouldn't necessarily have to rotate out of a name we liked to make a new investment. I think you said the last few quarters that we expect more deal flow coming from primary issuance, which really tracks M&A activity. We have a healthy pipeline building. We are seeing a little bit of a lack of discipline from other credit investors. So we're going to be very prudent about when we make investments and where we make investments, and we are seeing even the lower end of the middle market some undisciplined deals, as we see the world.

So we're going to make sure that we are taking our time in making a portfolio decision, an investment decision, one at a time. But we do think that most of the activity, at least in our deal flow pipeline -- and we're not saying we're going to do many of these deals, but most of the deal flow in the pipeline is from new M&A originated primary issuance, which is the business we love to be in.

Well, Patrick, given that, what you just described, does it make sense for you to maybe liquidate some of the more liquid investments? Could we see leverage maybe come off a little bit in the short term if the market is getting a little undisciplined here?

The good news is, is a lot of those investments in our portfolio, because we've owned them for a while, have de-leveraged, have de-risked, are still paying us the same yields that we got when we made the investment originally, and many have call protection. We really prefer those investments. We like a maturing investment that we know well, that is doing well, and seasoned and de-risked over time. So, we wouldn't want to -- unless we saw a better opportunity for that capital, where we will retain title and liquidity, which we're not today, we would not necessarily need to do that.

I would just add, Jim, there is a differentiation between robustness in the secondary market versus robustness and fluff in the primary markets. A lot of names we'd like to hold and we think are relative value, but we are seeing a pretty active pipeline. A lot of middle-market mezz deals are coming to us, and I think some of the leverage levels that we're seeing recently, are getting pushed out to a point that we don't see value there, versus stuff we own in our portfolio. So, I think the primary market can get a little bit fluffy on the edge, and we can still be comfortable with our portfolio.

Terrific, thanks. Just 1 other question. On the AIC Opportunity Fund, it looks like that investment has performed very nicely for you. What are your thoughts, once those assets pay off or are liquidated, what are your thoughts on continuing to maintain that fund or grow that fund going forward?

The name of the fund is an opportunity fund. It really comes from when there are opportunities that are that unique, and I think that these were 3 very unique situations that we found ourselves looking at and having access to. We like the opportunity, but right now we're not seeing as attractive types of opportunities giving the robustness in the credit markets. That's probably a fund that -- it's not really a fund, it's really a shell company that holds 3 individual loans, which will become -- see more investments in there, in times of dislocation versus times of the robust market we are in today. That's why we set it up, and that's why it is called an opportunity fund, but when we find unique opportunities they will go in there, Jim.

Thanks a lot, gentlemen.

Thank you.

Your next question comes from Jasper Burch of Macquarie.

Good morning, gentlemen. I guess just starting off with, could you give us a little more color on the convert deal that was pulled, why it was pulled, and when you might be looking at coming back into the market?

Sure. We are always pretty prudent stewards with our capital, and certainly it was our view at that point in time that there would be a more prudent time for us to access the market. We are confident, and we consider ourselves pretty savvy folks in the capital markets, and are always looking to add what we think are accretive debt instruments to our capital structure, whether it's on the straight fixed or whether it's on the convertible. So, active dialogues, but nothing imminent to address on this phone call.

Okay. And I guess, looking at where some other BDC convert deals are trading, do you think that market is still sort of open to BDCs at this point, or do you think the next round of issuance is going to be in a different type of debt?

We still feel like there is great inquiry in the space, the convertible market. I don't consider myself an expert in it, but there are -- it feels like there's a lot more demand than there is active supply right now. So, if it made sense on terms that made sense for us, we still feel like there is depth.

Thank you for that. And then I guess just changing tracks here, given your commentary that the assets that came off were higher yielding than the assets you put on. What drove the increase in the portfolio yield in the quarter? Was it repricing within the portfolio, or just some fee amortization?

I don't necessarily have that, but those are some things that would make sense to me.

Okay, excellent. Thank you, guys, very much.

Your next question comes from David Chiaverini of BMO Capital Markets.

Good morning, thanks. You referred to the economy as being in an uneven recovery. Could you talk about what you are seeing in the portfolio regarding EBITDA and revenue growth trends, and also what industries, if any, you're focusing more on given your view of the economy?

We are seeing some of the -- even today, some of the recent data that has come out that's showing some of the unevenness in the recovery, and a lack of continued momentum, but still growth. I think our portfolio, we are pleased in general with what we are seeing in our portfolio. We have continued to see portfolio revenue and EBITDA growth at the portfolio level. There's certainly idiosyncratic differences between companies and performance, but we have been pleased, I think we have been more surprised at the upside, and the underlying performance, just given our credit background and nature, looking at downsides, but we are not going to run the business assuming that there's going to be a steady, continued growth.

So, as a debt investor, primarily we don't necessarily need growth if there's cash-flow at current levels, in the companies, and so we are working very, very hard and looking at the portfolio and monitoring it very closely. But we are pleased.

And then, any particular industries you may be focusing on more?

Because we don't dictate which deals come to us, it's really driven by M&A volume and activity, which sectors are popular at that point in time. So we're really -- as the opportunities come to us first, then we will look at its impact on the portfolio. We continue to be very cautious on heavy CapEx, or heavy cyclical, or industries that are reinvesting constantly in growth, and not using their cash flows to pay down debt service. That does come in the form of some industries that are less popular for us to look at, but we are going to be looking at companies that show sustainable free cash flow, and we invest in 30 different industry groups, so it can come from generally any industry group. But it's really the underlying, what's the cost structure of that company, what's its demand, what's its market position, and we don't necessarily instigate where the new deals come to us, it's really what comes from the M&A activity in the marketplace. But we are seeing across the board, for the most part, improvement.

Okay, thank you.

Thanks.

Your next question is a follow up from Joel Houck of Wells Fargo.

I just wanted to follow up on the comments in terms of the pipeline, in terms of new LBO activity, can you give us some color in terms of -- are these more likely to close near term, perhaps in the first fiscal quarter? Or is it more drawn out in the second half of the calendar year? Thanks.

Joel, I'm glad you asked that question, because it really goes to the heart of why we continue to say there's a lumpy investment pace. We don't control, we don't really publish pipelines or commitments or give guidance because we can't. Until the deal actually closes and funds, we don't know for sure the timing, it could cross over quarter end or not. But given the amount of time and diligence that we perform, it does take several months, sometimes, to close a deal. That's the right thing to do. Given that our activity level is more looking at the primary market versus the secondary market, where you can choose when to go into the market and close transactions in secondary versus the primary market, it will take some time.

Again, we are active, deals do get delayed and postponed, and so I think that your question is right on spot, which is that we can't predict it. The portfolio continues -- the pipeline continues to build. We don't know until the very end of a transaction whether or not we're going to be there or get there or negotiate the right deals. But it continues to be a lumpy investment pace. But we are seeing the pipeline pick up, and it has not been just this last quarter.

Thank you, Patrick.

No problem.

Again, as Patrick mentioned, we appreciate everybody being on the call today. We appreciate your support and ongoing questions, and we look forward to having you participate in next quarter's call as well. Thank you.

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