MidCap Financial Investment Corp (MFIC) 2013 Q3 法說會逐字稿

Good morning, and welcome to Apollo Investment Corporation's earnings conference call for its quarter ended December 31, 2012. 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)

I will now turn the call over to Elizabeth Besen, Investor Relations Manager for Apollo Investment Corporation.

Thank you, Operator, and thank you, everyone, for joining us today. With me are Jim Zelter, Chief Executive Officer; Ted Goldthorpe, President and Chief Investment Officer; and Greg Hunt, Chief Financial Officer. 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 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. Forward-looking statements involve risks and uncertainties, including, but not limited to, statements as to our future results, our business prospects, and the prospects of our portfolio companies. You should refer to our registration statement and shareholder reports for risks that apply to our business and may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our SEC filings, please visit our website, at www.apolloic.com. I'd also like to remind everyone that we've posted a supplemental financial information package on our website which contains information about the portfolio, as well as the Company's financial performance.

At this time, I'd like to turn the call over to Jim Zelter.

Thank you, Elizabeth. This morning, we issued our earnings press release and filed our quarterly 10-Q. I'll begin my remarks with a review of some of our accomplishments since we announced a series of strategic initiatives approximately one year ago. I will then discuss our financial highlights for the quarter. Following my remarks, Ted will then provide an overview of the market environment and will review our investment portfolio activity for the quarter. And finally, Greg will discuss our financial results in greater detail. We will then open the call to questions.

Last February, we announced a variety of strategic changes and we believe we have made significant progress relative to those initiatives. First, we laid out a plan to reposition the portfolio over a two-year period and provide you with a hypothetical target asset mix which included increasing our exposure to secured loans. With a market back drop of lower yields, we believe that we have made significant progress migrating the portfolio to more secured loans, while maintaining the yield on our overall portfolio. For example, at the end of December, 40% of our portfolio was invested in secured loans, up from 29% last December. We also invested over $80 million in the equity tranche of two senior secured loan vehicles. While repositioning the portfolio is a dynamic process, we believe that we have made significant progress relative to our initial expectations.

Second, we have enhanced our origination platform. Over the past year, we have expanded our direct origination capabilities in select industries which we believe provide attractive risk adjusted returns, as Apollo Investment Management, our investment advisor, established an energy financing team based in Houston, and we established an aircraft leasing team based in New York. The energy team has sourced many assets, which has resulted in the closure of nearly $170 million of investments to date; and at the end of December, energy investments accounted for approximately 4% of our portfolio. In addition, subsequent to quarter end, we completed our first aircraft investment, which Ted will discuss in his remarks. We continue to look for ways to expands our direct origination capabilities.

Third, we made several improvements to our funding structure, including the renewal of our credit facility at a lower rate, and the issuance of our first unsecured debt offering of $150 million of 30-year retail baby bonds. We will continue to evaluate opportunities to further diversify our capital structure. Fourth, we have reduced our leverage ratio from last December, while maintaining yields and without significantly sacrificing net investment income. While I have just highlighted the significant progress that we have made in the past year, as a credit investor, there's always work to be done, and we will remain focused on improving the credit quality of our overall portfolio.

Moving to some financial highlights, for the December quarter, we reported net investment income per share of $0.21. Net asset value was $8.14 as of December 31, compared to $8.46 at the end of December, a 3.8% decline. This decrease was driven primarily by realized and unrealized losses on two investments, partially offset by gains on the remainder of the portfolio. During the quarter, we invested $515 million, and received $307 million from select sales and $204 million from repayments. As a result, our net investment activity before repayments was positive $208 million. The fair value of our investment portfolio was approximately $2.63 billion at December 31, versus $2.68 billion at the end of September. For the calendar year 2012, we invested $1.26 billion, and received $837 million from select sales, and $611 million from repayments. So net investment activity for the calendar year 2012 before repayments was $419 million. A robust market environment in calendar year 2012 contributed to a higher level of early repayments than we originally expected.

Finally, turning our discussion to our dividend, the Board of Directors approved a $0.20 dividend for shareholders as of March 21, 2013. Based on our closing price yesterday and annualizing the dividend, our stock currently offers a dividend yield of approximately 9%.

With that, I will turn the call over to Ted to discuss the current market environment and our investment portfolio.

Thank you, Jim. Despite fears concerning the fiscal cliff and uncertainty about the US election, capital markets were strong during the December quarter. Strong high yield bond and loan issuance was met with robust investor demand searching for yield. Dealers responded by bringing opportunistic transactions; and financial sponsors rushed to close transactions after the election, before potential tax rate increases. The market continued to be favorable for issuers, as evidenced by a narrowing new issue clearing yields, increasing dividend financing, and covenant-like facilities. Investors continue to put money into the high yield market, creating strong demand for both primary and secondary bonds. Secondly, bank debt remained well bid, and in line with last quarter. The corporate mezzanine market became less desirable, given the strength of the underlying credit markets and the tight spreads found in high yields. Although underlying fundamentals remain strong, we believe continued strength in the high yield markets is partly attributable to an abundance of liquidity and a search for yield, which has resulted in an increased mispricing of risk in certain segments of the credit markets.

Given the environment I have just described, during the December quarter, we continued to focus our investment activity on secured loans rather than unsecured debt. In today's market, we are not seeing value in traditional subordinated mezzanine opportunities; and therefore, we are inclined to take liquidity and complexity risk instead of credit risk. There continues to be a significant spread between liquid and less liquid investments, which has allowed us to continue to improve our security position with little impact to our overall yields or net investment income. There were significant repayments in our portfolio during the period which impacted the overall portfolio yield slightly, but also generated strong fee income during the period.

Given the rally in the overall market, our direct origination capabilities provided us with significant opportunities to deploy capital during the quarter. During the December quarter, we invested $515 million in 16 new and 13 new existing portfolio companies, with the vast majority coming from primary originations. Approximately 64% of investments made during the quarter were secured debt. We also received $307 million of proceeds from selected sales, and $200 million from repayments. Given the robust deal environment, the level of repayments experienced in the December quarter was higher than our normal run rate, and flat compared to the prior quarter.

The yield at cost on new debt investments was 11%, and the yield at cost on debt dispositions was 10.4%, while the yield at cost on debt repayments was 12%. Accordingly, the overall yield of our debt portfolio was 11.9% at the end of December, unchanged from the prior quarter. We continue to rotate out of our -- some of our unsecured investments in the senior secured investments, which we believe have more attractive risk adjusted returns. As Jim noted, secured investments were 40% of the portfolio at the end of December, up from 37% at the end of September.

I will now discuss some specific portfolio activity for the quarter. First, we made a $40 million investment in Kirkwood Fund II, a newly launched senior loan vehicle managed by Madison Capital. This is the second investment in the senior loan vehicle managed by Madison, and is similar in structure to the first vehicle. This vehicle has purchased an existing pool of senior secured loans to middle market companies in the US from Madison Capital, with approximately $250 million of combined face value. Like the first vehicle, Kirkwood Fund II has a revolving secured financing provided by Wells Fargo. Given the yields on the assets and the structure of the vehicle, we expect to generate mid-teens gross returns on this investment.

Our energy team continued to actively deploy capital during the quarter. For example, we invested in the senior and subordinated debt of Venoco Incorporated, also known as Denver Parent, to support a management buyout. Venoco is an exploration production company with significant oil and natural gas assets, located primarily in southern California. We also invested in the first lien debt of Amaya Gaming, to support an acquisition. Amaya is a leading provider of technology-based gaming solutions to the regulated -- to regulated gaming. And we exited our investments in Asurion, Clearwire, SRA International and Stork Technical Services. Notable investments that were repaid during the period included our investment in Chesapeake Energy and Foxco Acquisition. Our investment at Chesapeake is a good illustration of the difference between the stated coupon and the realized return on an investment. Our realized gross return on our investment in Chesapeake was over 16%, well in excess of the stated coupon of LIBOR plus 700 basis points.

Regarding our investment in Cengage Learning, as many of you recall, during the September quarter, we exchanged our unsecured investment into secured notes with a higher coupon and longer maturity. In November, the Company reported weaker than expected earnings, which resulted in Moody's lowering their credit rating by two notches. The note has been traded down, resulting in a decline in the value of our position. We subsequently sold some of our position during the quarter, realizing a $24 million loss. The loss in this position, both realized and unrealized, during the quarter equated to a $0.30 decline in NAV per share. We continue to focus on mitigating losses and maximizing recovery for our remaining investment in this company.

Lastly, as mentioned last quarter, we established an operating subsidiary, Merx Aviation Finance, to participate in the aircraft leasing industry. Merx has been actively screening new investment opportunities, and subsequent to quarter end, made its first investment. In January, Merx purchased a portfolio of 26 commercial aircraft from GCAS.

I now would like to review some general portfolio statistics as of December 31. We continue to be diversified by issuer and industry, 71 portfolio companies invested in 27 different industries. The Company's total investment portfolio had a fair market value of $2.63 billion, with 40% in secured loans, 48% in subordinated debt, 12% in common equity, preferred equity, warrants and collateralized loan obligations, measured at fair value. As I mentioned previously, the weighted average yield on our overall debt portfolio at current cost at December 31 was 11.9%, unchanged from the prior quarter. The weighted average yield on our subordinated debt portfolio rose to 12.6% from 12.4% from the prior quarter, and the weighted averaged yield on our secured loan portfolio was 11.2%, unchanged from the prior quarter. At December 31, the weighted average cash interest coverage on our portfolio remained at over 2 times. And regarding our risk rating, the weighted average risk rating of our portfolio, measured at cost, was 2.4 at the end of December, compared to 2.3 at the end of September. The weighted average risk rating in our portfolio measured at fair value was 2.2 at the end of December, unchanged from September.

With that, I will now turn the call over to Greg, who will discuss our financial performance during the fiscal second quarter.

Thank you, Ted. I'd like to remind everyone that in addition to our 10-Q, we have also posted a financial supplement presentation on our website.

I will now discuss Apollo Investment Corporation's financial performance for the third quarter ended December 31, 2012. Our total investment portfolio had a fair market value of $2.63 billion, compared to$ 2.68 billion at the end of September. At December 31, net assets totaled $1.65 billion, with a net asset value per share of $8.14. This compares to net assets totaling $1.7 billion, and a net asset value per share of $8.46 at the end of September. The decrease in NAV was driven principally from losses from our investments in Cengage Learning and Delta Educational Systems, partially offset by gains in other investments.

On the liability side of our balance sheet, we had $1 billion of total outstanding debt at December 31, up slightly from our September quarter. As mentioned in our last call, we issued $150 million of 30-year unsecured notes in early October, at an interest rate of 6.625 %. At December 31, the Company's debt to equity, or net asset ratio was 0.63, up from 0.54, at the end of September. Our net leverage, which includes the impact of cash and unsettled transactions, was 0.58 at the end of December, up from 0.56 at the end of September. These ratios are within our target range. One investment, a preferred equity position in Delta Educational Systems, was placed on non-accrual in the December quarter. At the end of December, securities in two of our portfolio companies were on non-accrual status, representing approximately 3.2% of our portfolio on a cost basis, compared to 2.2% at the end of September.

As for operating results, total investment income for the December quarter totaled $83.2 million, a slight decrease from the September and December, 2011 quarter. The decrease quarter to quarter reflected a decline in dividend income as a result of certain holdings within our AIC Credit Opportunity Fund, which pay dividends semi-annually, offset in the quarter by an increase in prepayment premiums and structuring fees. In addition, expenses for the December quarter totaled 41.1 million. This compares to expenses of $39.3 million for the September quarter, and $45.3 million for the December, 2011 quarter. The quarter to quarter increase in our expenses was mainly due to a higher outstanding debt balance during the quarter and higher average interest costs. Net investment income totaled $42.1 million, or $0.21 per share, for the December quarter. This compares to $44.5 million, or $0.22 per share, for the September quarter, and $38.5 million, or $0.20 per share, for the December, 2011 quarter.

For the quarter, net realized losses were $9.3 million, and were primarily related to the partial sale of our position in Cengage Learning, offset by gains on several other positions. This compares to net realized losses of $40.6 million in the September quarter, and net realized losses of $275 million for the December, 2011 quarter. The portfolio's net unrealized loss for the quarter was $555 million. This compares to a net unrealized gain of $69.1 million for the September quarter, and unrealized gain of $300 million for the December, 2011 quarter. As mentioned previously, notable contributors to the net unrealized loss for the December '12 quarter included our investments in Cengage Learning and Delta Educational Systems. Other contributors for the quarter included our investments in Square Two Financial, Penton Media and Ram-Pac Corp.

In total, our quarterly operating results decreased net assets by $22.7 million, or $0.11 per share, compared to an increase of $73 million, or $0.36 per share, for the September quarter, and an increase of $63.7 million, or $0.32 a share for the December, 2012 quarter.

I will now turn the call back to Jim, who will provide a few remarks before we open the call to questions.

Thank you, Greg. Over the last year, we believe we made great strides toward achieving many of our strategic objectives. Given the rally in the overall credit market, we believe that our direct origination capabilities are providing us with the best opportunities to deploy capital in today's environment, and we will continue to selectively look for opportunities to grow our specialist origination capabilities.

With that, Operator, please open the call to questions.

(Operator Instructions)

Rick Shane, JPMorgan.

Thanks, guys, for taking my question this morning. One of the topics that came up a lot during November was heightened dividend recap activity. And now that we're through a lot of the year-end stuff that drove that, I'm wondering if there was a substantial pull forward in terms of deal volume, and so you'll see a little bit of a lag. or conversely, given how tight spreads are, you've seen more normal and regular way business coming through, and that activity is starting to pick back up.

Yes, Rick, this is Ted. As we mentioned in your mid-cap conference, we -- post the election, our deal activity picked up quite materially, and a lot of activity was trying to get done by December 31. So we definitely benefited in increased dividend recap activity and increased LBO activity in the second half of the quarter. What I would stay is, a lot of that activity actually spilled over into this quarter. So we have not seen, to date, as we sit here today, we have not seen a huge ramp down in activity, But I will say that we did see increased activity in the second half of last quarter. Our expectation is things will kind of tread back to normal over the course of the rest of this quarter.

Got it. Okay. That's helpful. The last question is this, you guys provided a really helpful slide in terms of showing how the portfolio rotation is going and how you're, frankly in a declining yield environment, able to maintain yield. How much dry powder do you think you have left in terms of being able to do that? How far along the rotation are we, at this point?

I think 12 months ago, we laid out a target portfolio. If you look at the portfolio today, the portfolio today effectively matches that -- what we laid out. That being said, we continue to see opportunity to move up the capital structure. We continue to have a bias to be in secured debt. It doesn't mean we're out of the subordinated debt business. It's just where we're seeing value today. And we continue to see a massive spread between liquid and less liquid risk. And when you go through our portfolio, even though we've done a lot of rotation over the last nine months, we also -- we continue to believe that we actually have additional opportunities for us to exit out of liquid risk positions, or be taken out in new financings, and deploy that capital into proprietary originated transactions. And we think that we can do that in a way that enhances -- that maintains our yields, and is better risk/reward for the vehicle.

I would add, Rick, a little color behind that. We still own a variety of higher quality second liens of buyouts that were done a handful of years ago, that if you look at the yield specification of our portfolio right now, those assets are, we believe, are fairly liquid. We believe they're par recovery assets. They're trading at or near par. And they are probably, in aggregate, below our average yield on the overall portfolio. So as Ted talks about optimizing, that's almost 20% in terms of assets that are less than 10%. So we believe, between revolver capacity and other ways, we still have a lot of liquidity that can continue to optimize, as Ted mentioned.

Got it. That's very helpful, guys. Thank you very much.

Arren Cyganovich, Evercore Partners.

Thanks. Just again on the competitive front, you mentioned that the mezzanine loan area has been increasingly competitive. In light of a lot of competitor commentary that senior secured is also their focus, I'm surprised that that is not getting a little bit frothy on that side. Can you talk about the competitive dynamics on the secured side that you're seeing, as well?

I think this goes back to our comments we always make about the overall sector, which is, although a lot of our peers have been moving up the capital structure and trying to do senior secured loans, we are a small sub segment of the overall senior secured loan lenders out there, and we continue to see a lot of the large players from pre-crisis continue to be very, very stingy on extending credit, secured credit, to middle market companies. So when you look at large cap markets today, when you look at regular way investment grade or high yields, you've seen a ton of liquidity come into that space. We have not seen as much liquidity come back into the areas that we traffic in and our peers traffic in. So don't get me wrong, we do see our peers on the competitive landscape. It's just, we don't just compete against other BCCs, we compete against a much broader universe, and we haven't seen everybody come back into the space.

Okay. Fair enough. Can you talk a little bit about the aircraft portfolio acquisition you made from GCAS for this coming March quarter, and what's in there and any kind of size? Are you able to provide any additional details there?

You'll see full details of that in our upcoming disclosure. But what I would tell you is GE -- we purchased a portfolio aggregating around $900 million of aircraft from GE. There's 26 planes in there. There's 16 lessors. And against that, there's -- $650 million of non-recourse debt was raised against it. So the way I describe it is, we took a mezzanine piece of a highly structured transaction. There's money in there below us, as well. We'll go through all the details of this in our next disclosure. But we think, when we think about the type of return payoff profile of this investment, we think it's a phenomenal franchise transaction for us and a phenomenal risk/reward opportunities for our shareholders.

Okay. And I saw that Advantage Sales and Marketing is doing a refinancing. Do you expect to be refinancing that out of any prepaid fees? And maybe talk about your expectations for this coming year in terms of getting repayments and prepayments from your existing portfolio companies.

That deal was just announced this week. As it looks like today, what has been stated publicly is it looks like, as of today, unless they don't upsize the deal, it looks like they're only going to be taking on a portion of the second lien. So there will be a very small piece of our second lien that will be refinanced, if that deal gets done and if the deal does not get upsized. There's always the chance they upsize the deal and take out more of our deal. It depends on how much of the deal, of our second lien, gets taken out will drive fees. But we don't think it's going to be a material contributor to NII this quarter.

Broadly speaking -- but also, Advantage Sales and Marketing, that specific piece of paper falls into what Jim was talking about earlier of, it's a sub-10% yielding liquid second lien, and that is obviously offset by our origination activity at higher levels this quarter, higher yield levels. Broadly speaking, what's happening, what we're seeing in the market today, in the syndicated markets, is a massive wave of repricings in the bank debt space. We are not as affected by that, just given the fact of what we own. And a lot of our - most of what we own, if not all of it, has substantial call protection. So lot of these transactions, they are repricing the senior secured debt, but they're not repricing the second lien debt, just given the call protection involved. So we've not had a lot of refinancing activity to date. But that could change over the next three, four months. There's been a big, big wave of repricings the first couple weeks of this year. I think a lot of people were trying to get stuff done ahead of this Dell transaction. And we have not seen anything out of the ordinary in terms of repayment activity in the portfolio.

Great. Thanks a lot.

Jason Arnold, RBC Capital Markets.

Good morning, guys. Just one quick follow up on the Merx transaction. Composition-wise, can you tell us, is it mostly narrow bodies that you purchased? Any particular type of aircraft, or any additional details you can provide?

Sure. I'm sorry, I should have mentioned that earlier. It's a very new portfolio of planes, very, very -- only a couple years old. And the whole portfolio is comprised of either Airbus or Boeing planes that are of the newest and most liquid vintage. So these are not old, less liquid aircraft. These are the most liquid assets in the aircraft space that currently exist.

Okay. Terrific. And then any other color on the growth trajectory that's a nice big lump of an investment there? I know in the past, you talked about looking a little bit more at the older aircraft that are in greater need of financing. Are you still seeing quite a bit of an opportunity there?

As we outlined to everybody on the last call -- we had follow-up calls a lot investors and shareholders. And we want to take this business slow. We have a very, very large pipeline of opportunities. This is a space that's been massively affected by the secular changes in the world over the last five years. And we are seeing opportunities in older vintage aircraft. I think it's something that we will approach cautiously, and we probably will do smaller transactions in that space, at least up front. So it is a space that we will look at. There's been a lot of opportunities generated out of the American Airlines bankruptcy, for example. But we want to go slow in the space, just given it's a relatively new business for us.

Great. Okay. Thanks for the color.

Jonathan Bock, Wells Fargo Securities.

Good morning, and thank you for taking my questions. I appreciate the color on some of the education businesses that -- in particular, Cengage -- that did generate a loss in the quarter. Could you perhaps give us some additional color on maybe the forward outlook and how you're looking at that credit, just in light of the fact that you did sell some? Really, how does value get realized for Apollo's shareholders going forward here?

That's a great question. If you think about the two losers that we outlined this quarter, both of them are in the -- both of them are affected by the education space. Delta, I think we've talked about a lot in the past, which is a -- the sector that it's in is facing a ton of headwinds. So Cengage, specifically, was a 2007 vintage deal. Last quarter, as we indicated, consistent with our strategy, we moved up the capital structure into a second lien. I think they came out with numbers that we thought definitely surprised us and definitely surprised the market to the negative. And as a risk mitigation/portfolio management decision, we decided that you've got to re-underwrite everything in your book with every new piece of information. We thought that our exposure was too large, given the new information that we received, so we monetized a chunk of our position, which obviously realized the loss. And on a go forward basis, I think the way we'll think about it is, as new information comes out and new news comes out, we'll reevaluate our existing position.

Okay. Great. Thank you. One small portfolio question, again, just as it relates to Inventive Health. Obviously, since it's a very large investment and very important to shareholders in terms of interest income, just maybe give us a sense -- I saw a small little markdown there. Was that technical, or perhaps maybe just a quick update on the fundamental story there?

Sure. Inventive -- we actually are feeling better about Inventive today than we felt three months ago. They did a new financing of first lien debt. They've taken out a lot of the covenants, and also done some things. The sponsor put in additional money. I think this is a name that doesn't really trade too often. So some things in our book that trade all the time, that there's a lot of market discovery, I would say on Inventive specifically, it's a relatively chunky holder base. And so it's not one with a ton of price discovery. So we market to broker quotes out there. And we feel like that's fair value, and we feel very, very comfortable with where it's marked. But I would say, I wouldn't read too, too much into the markdown last quarter.

Appreciate it. And appreciate you taking broker quotes as you look at the book.

Now another question, Ted, you have focused more on esoteric and proprietary transactions, CLO, aircraft leasing. Obviously, that strategy continues to pay off. Of course, as credit risk premiums compress, market wide, terms deteriorate -- and this, of course, is even in the middle market -- could you perhaps maybe give us a reasoning as to why you would want to focus on higher leveraged CLO equity or aircraft leasing, effectively taking additional leverage risk at a point when credit risk premia has compressed and there's a higher likelihood of a credit mistake to be made?

It's a great question. We think about it a lot. Certainly, it's not only the amount of financing, but the terms and manner in which you receive that leverage and that financing. And I think that we find both in the Kirkwood facilities as well as we did in the GCAS portfolio, very advantageous financing on extremely strong terms, where we have a tremendous amount of head room where we are in the portfolio to withstand a lot of volatility. What we're definitely finding right now is the ability for a financial provider to provide you a tremendous amount of long tenor financing at extremely low rates vis-a-vis where the illiquid opportunities lie, you can stress that, to a great degree, on defaults and recoveries, and you are still in a much better position than you would be buying a corporate mezzanine issue with an attachment point of 6.5 times on a sponsor-driven deal at a level of return sub-10%.

So we weigh that. We weigh that all the time. And I think it's because of that, the themes that clearly Ted's articulated, that I've articulated for the last nine months is, we just see a breadth of opportunities, as we think our peers are as well, in these types of activities that are away from the tradition norm of our business. No doubt, we spend a lot of time thinking about the quantum of financing. But again, it's not just the quantum, it's the underlying credit quality, which in the case of Madison, we're very comfortable with, in terms of their historic underwriting standards and their historic returns. And owning the real assets of the aircraft portfolio, as Ted mentioned, we feel we can stress that in some pretty dire outcomes, and feel very, very comfortable with where we lie in our position.

That's very helpful. Perhaps -- I think we're very aware of the risks that could be posed in the event of a default environment, which is relatively benign. Of course, if we're looking at a CLO structure, or structured product, where your liabilities are essentially fixed by a low cost provider, walk us through what happens to equity in the event that asset spreads continue to compress in that vehicle. Is there the possibility of a write-down, and maybe how are you gauging risks of repayment, particularly if those entities are still within their reinvestment period and what that does to the equity itself?

There's a long discussion. You're getting very detailed. And you are correct, that if one is buying CLO equity, depending on if it's a version 1.0, pre-crisis, versus 2.0, post-crisis, your ability and your constraints -- certainly, pre-crisis CLO equity right now, with what's gone on in the broad syndicated loan marketplace, certainly the limitations of those vehicles, in terms of your ability to reinvest, that's a concern. We don't own any of that paper. We own all post-crisis, generation 2.0, where we have a variety of flexibility in the reinvestment mandates to really offset that.

But you are raising a very valid question about really understanding the ability to reinvest to make sure you have that equity value. I think -- we are, as a platform, a very large participant in this space. And there are many transactions that we looked at and passed on, because the original collateral was too high a price or there were limitations such that you really couldn't reinvest appropriately to assure yourself of a solid equity return.

The Kirkwood vehicles are a bit different, because the intense repricing that Ted described in the broadly syndicated market, it really has not impacted that market. Certainly levels are a bit tighter, year over year, but they're nowhere near -- again, we're very active in that space as a platform. We see where new pricings are coming out in broadly syndicated deals, LIBOR, 300, even a bit lower, with a real adjustment in floors. So I think, again, you raise a very valid issue. We take that into consideration as we decide what assets we want to buy in those vehicles. And take that concern into our equation to make our final choices.

Great. Thanks, Jim. Excellent color. Thank you so much, and we'll talk to you next quarter.

Thank you very much for your great questions.

John Stilmar, JMP Securities.

Good morning, everyone. Thank you for letting me ask my question. Just to hopefully close the loop on Merx, thank you for the color there with the portfolio. Should we be thinking about Merx's investment as an equity, fairly similar to what we might see in public comps that are out there? Or perhaps should we be thinking about it like a preferred investment that might be marginally higher on the capital structure than maybe a traditional public equity? Just wondering what we should expect with regards to capital structure for this investment.

I think, the way we think about it is we think about -- I think the transaction that we just completed, I think is more the latter than the former, which is, we think about is as higher up in the capital structure, very attractive attachment point, capped upside, because of where we sit, but really good downside protection, given there's equity in below us. And on that specific transaction, we felt like that was the right place to be. So we don't feel like -- in the Merx entity, we don't think that entity is really supposed to be doing equity risk, as we define equity risk. We think that's much more of a mezzi, mid-teens type risk vehicle for us, and we don't think the right vehicle to be taking private equity or equity-type risk.

And I would say, I would concur. We are trying to buy mispriced debt risk, not mispriced equity risk, in this business. And there's a fine line. You need to have the experts on staff, which we do. But Ted is exactly right, when we think about the activities, it's that mispriced debt with very solid downside protection, but a capped upside in return.

Perfect. Very helpful. Secondly, as you start moving to more asset based loans, which by their very nature move from fixed on the unsecured mezz traditional product to LIBOR-based with typically some floors, is there a interest rate outlook or a macro view that's driving part of that? Or is it really just a relative value with regards to credit spreads themselves and a comfort level of risk? Just wondering if there's anything macro that's helping drive that decision, or is it really just, as you sit today, there is a stronger relative spread per unit of risk value that you're ascribing in part of this rotation?

When you think about our traditional -- the term you used, ABL, we've not really done any ABLs that's receivables and inventory per se. But when we think about secured financing with hard assets, I think it's a combination of both. We've certainly -- having both done this for a long time, we see where the rate environment is right now. There's a reason why we issue debt in the fall, where we think that's a good choice for us and our capital structure. So I think a little bit is the view on floating versus other types of assets. But I think it's about -- and I think Ted said this a number of quarters ago, we just want to make sure if there ever are defaults, we want to meaningfully increase our recoveries than we historically received in this vehicle. We don't want to just take that subordinated risk, where the recoveries were dramatically lower than we can accept, such that I think there's a little bit of implied view on a rising rate environment, and a view on owning hard assets, if we can.

I'd say one more comment which is, we are not macro people, and we are not -- we don't have a crystal ball on interest rates. But given where LIBOR is today and given where our interest rates are today, we think it's smart to have a decent amount of floating rate exposure in your portfolio. But we have to offset that by current yields. And as of today, we are seeing, if you can get the best of both worlds, which we've been lucky to be able to do over the last six months, which is get floating rate assets with high current yields, that's very good for us.

Perfect. And then my final question, just with regards to sourcing. You clearly have articulated the energy team and the burgeoning aircraft leasing business, but wondering if there are other sources or other leverage points throughout the Apollo platform, or the capital markets platform, that will allow you to source transactions, whether they be in -- obviously, you're very active in commercial real estate, very active in the CLO market, other arms of the management company. Was wondering if any of those elements have fostered or could be talked about with regards to originations or strategy or structuring, at least in this quarter or maybe even the quarter to come.

One of the big strategic priorities of our vehicle is to maximize the value of being part of a broader platform. And what I would say is, we are getting a ton of transactions and transaction activity. As you guys know, we turn down probably 95% of the transactions we see. We are sourcing and closing a number of things that are sourced by the broader platform. So I'll give you an example. This past quarter, we did an investment in a healthcare transaction, which traditionally healthcare has not been a huge vertical within the BDC. And we sourced a deal this quarter that was closed that was a first lien senior secured healthcare deal that we think is extremely attractive.

Perfect. And then, Jim, to that point, since you've been overseeing this structure through two management teams, I'm wondering if you've seen an increase in the velocity, relative to Ted's comments, clearly, it seems that there's an absolute amount of sheer volume that is certainly very representative of the market. But have you seen an increase in the velocity of that, relative to the past? And if you could put some parameters around quantifying that broadening or narrowing scope.

I certainly think, going back to the firm's investment in the stock a year ago, there's a heightened sensitivity of the importance of this vehicle to our overall platform. I don't want to put a number on it, but it's safe to say that we're not going to be happy if we're sitting here a year from now, and the only platforms we're talking about are energy and aircraft. So the onus is on us. There's clearly a theme which we've really tried to be transparent and strategic with our approach. But there's not a number per se, but certainly just a heightened sensitivity around the platform about the importance of this vehicle and the desire to really execute on what we've laid out strategically.

Great. Thank you for all of your answers.

Thanks.

Doug Morden, SunTrust Robinson.

Hello. Good morning. Most of my questions have been answered. I had two questions. They're more clarifications, really. Just to be clear, on the aircraft leasing investment, should I see that in terms of numbers as a -- just your investment in the equity is what shows up in the portfolio, or investment in the vehicle, or are you going to actually look through that to the actual assets that are behind that, in terms of recording assets and liabilities in the portfolio accounting?

Just the investment in the vehicle itself. Apollo Investment Corporation makes an investment in Merx, which then is the equity in the actual underlying pool of assets.

Okay. That makes sense, and that's what I thought. Thanks for clarifying that. Also maybe a broader picture question. I know that, as you mentioned, you're not macro economists. Do you think as interest rates rise, and we've seen the longer dated Treasuries start to tick up, credit spreads are still extremely tight, and there could be some widening, how do you think the repayments would go, refinancing activity? Obviously, as interest rates get really high, the opportunity for refinancing would go down, but do you think there might be a rush to the door of people trying to lock in what they can?

I don't know. A lot of refinancing has been done. That being said, you've got three years of a pretty robust high yield market and bank refinancing market. I don't have the exact number on top of me what percentage of last year's high yield market was refinancing. I think north of 50%. So a lot of refinancing has happened, but many portfolio companies or sponsors have not had the runway to show their growth. So I do think you'll see, at the beginning of this year, if you would ask me, do I think that the amount of volume year-over-year would increase or decrease in the broadly syndicated markets, I think it was the house view here that it would broadly decline a bit. Then you have a big LBO that gets announced. We unleash a big LBO calendar now, don't know. I think it's our view that a lot of refinancings have taken place. We think the impact has pretty well been seen. But whenever you have -- a lot of corporate balance sheets are in good shape right now, and those companies, when they get the confidence to buy businesses, that's good for leveraged capital structures. So that being said, I think we've seen a lot of refinancing take place to date, but there always will be some taking up taking place.

Okay. That's all my questions. Thank you very much.

Thanks for your support. Thank you.

Robert Dodd, Raymond James.

Hello, guys. More of a strategic question, and then one quick follow up. On the education side, obviously, Griffin dealt a sand gauge, those assets have been with you for a while, for the most part, and you've tended to stick with them. In the past, Apollo, when there's been troubled assets, the tendency has been to dispose of those, exit very quickly and has [kept on accruals] looking pretty good. Would this write-down on Cengage and then exit a piece of it, is that a shift in strategy on your approach to the education investments, and are you looking basically to clean those out and are you starting the process of getting rid of them? Or can you give us some color there?

I'll take a crack at that one, which is, if you remember, both of these education investments were made in 2006 and 2007, when the world looked very different. I think our -- I don't think it's a change in strategy. I think number one is on Delta specifically, it's an illiquid investment. We don't think the right thing to do for our shareholders was to monetize that, just given the value that's ascribed to it. On Cengage specifically, I would say, listen, we think that it's very important to re-underwrite positions every day. And to the extent that the risk/reward changes -- and we think it's a smart thing to do to either monetize that position, or do what's best for our shareholders, versus holding on to it in the face of new information. So we re-underwrite our portfolio every day. Certain of our positions are more liquid than others, and so it allows you to do things. The more liquid positions obviously have more flexibility in what you can do with them. But I don't know if it's necessarily a -- we are not in the business of trying to manipulate our non-accrual numbers, or anything else. We're in the business of maximizing our investment portfolio for shareholders.

Got it. And hopefully, one hopefully silly question, are there any Dreamliners in the Merx portfolio that they acquired?

There is not. There is not. (Laughter) Good question, though.

(Operator Instructions)

Greg Mason, Stifel Nicolaus.

Good morning, gentlemen. In Greg's comments, he mentioned about the AIC Credit Fund dividends. And I think in 2011, those were running about $6 million every six months. I think in September, there were $4 million. And I know in your disclosure, I think there's some commentary about some more leverage rolling off in 2013. So could you give us some color on how we should think about the dividends from the AIC Credit Fund in March and next September, 2013, how we should think about that level?

As I think we've disclosed, our Boots investment, which is disclosed within there, has sold down with the transaction of Boots by Walgreen's. So that will be running off. And so that the level that previous quarters -- will be coming down. And I think you'll see that level as we report our fourth quarter numbers to you.

Is there also some of the First Data debt that was in front of you? I think that had a maturity in 2013, at least in the disclosure. Is some of that leverage going to roll off, as well, and will that impact the dividend?

That is correct, yes. I think in the Q, where we lay out the actual underlying assets, that the detail is pretty transparent there. And it's inappropriate, as you put your model together, to assume that that would run off, and then we would either hold it on balance sheet or sell the asset.

Okay. Great. And can you talk a bit about, I think in your disclosure you said you had 16 new investments. When we look at the schedule of investments, I think we only find 10 new ones that show up. Can you talk about, is that 16 all brand new portfolio companies, or are there some in and outs inside of the quarter? Can you reconcile those two numbers for us?

The delta there is, there's a couple positions during the quarter that we entered into, mostly in the subordinated debt space, that revalued very quickly, and we exited the position at the end of the quarter. So that's the difference.

So can you talk in terms of looking at the originations and the sales, how much of those were just in and outs versus core portfolio changes?

A very small percentage, sub-10% of our overall originations, were what you described as in and outs. Just to explain in more detail, there's periods of time where we may want to participate in a primary new issuance, where we may not get the allocation that we want as a core position, or the allocation we get may revalue very quickly. And if that happens, from our perspective, subsequent -- I've made this comment a couple times on this call, we re-enter the position. So if we like it at 11%, and it trades to a 9.5% yield and it's subordinated debt, from our perspective, that is something we will monetize and realize a gain on.

Great. And then finally, not to continue to rehash the Merx acquisition, but as we think about origination and portfolio growth next quarter, do you have a dollar amount that you invested? If I look at $900 million of aircraft, $650 million in front of you. That's $250 million potentially left. What is your investment in that remainder?

The number has not been disclosed. We'll disclose it in our upcoming quarter. And obviously, there's a confidentiality agreement involved. The thing I think is fair to say is, the value of the aircraft is $900 million. Your point of the $250 million residual would assume that we paid the full amount of value. And then, the other thing I'd say is, obviously, there's equity below us in the transaction, so the number is going to be somewhat less than the number you just outlined.

Okay. Great. Thanks.

First of all, I want to thank all the participants for some great questions. Certainly, the goal that we laid out a year ago in terms of strategy and repositioning, certainly the broad questions today, we really appreciate the focus and the detail of really understanding our business. We appreciate the support from all our investors, and look forward to talking to you next quarter. And with that, thank you very much.

Thank you. This concludes today's conference call. You may now disconnect.