MidCap Financial Investment Corp (MFIC) 2014 Q3 法說會逐字稿

Good afternoon and welcome to Apollo Investment corporations earnings conference call, for the period ending December 31, 2013. At this time, all participants have been placed in a listen-only mode. The call will be open for a question and answer session following the speakers' prepared remarks.

(Operator Instructions)

I'll 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 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. 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 Company.

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 report on Form 10-Q. I'll begin my remarks with some financial highlights for the quarter, followed by some other recent business highlights. Following my brief remarks, Ted will provide an overview of the market environment and review our investment portfolio activity for the quarter and, finally, Greg will discuss our financial results in greater detail, and then we will open up the call for general questions.

We are pleased to report strong results for the December quarter, including solid earnings, a meaningful increase in our net asset value, an increase in the overall portfolio yield, and continued strong credit quality. We reported net investment income per share of $0.22 for the quarter which reflects an increased level of recurring interest income and higher origination-related fees, offset by lower -- a lower level of prepayment income compared to the September quarter. Net asset value per share rose 3.3% quarter-over-quarter to $8.57 driven by strong appreciation across most of our portfolio.

Underlying fundamentals in the credit markets remain sound; however, and as we stated before, we believe the persistent bid per yield continues to result in a miss pricing of risk, and we see increasing signs that warrant us to be conservative, cautious, and selective about investment opportunities. As always, we are focused on risk-adjusted returns, not absolute returns.

In addition, the banking industry continues to grapple with an evolving regulatory backdrop which is having a direct impact on primary origination in the marketplace, and we are constantly evaluating the opportunities that this can present to our business. That being said, we believe the risk-adjusted reward is most attractive for senior -- for secured debt opportunities in the primary market which account for 59% of our investments made during the quarter.

In addition, the markets provided us with the opportunity to de-risk the portfolio by monetizing select higher risk assets which Ted will cover. We are pleased with the current composition of our portfolio and we are disciplined in our approach and favor security over incremental yield as we deploy capital.

Turning our discussion to the dividend. The Board Directors approved a $0.20 dividend for shareholders of record as of March 21, 2014. Based on our closing price -- share price yesterday and annualizing the dividend, our current dividend offers in excess of 9.7%.

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

Thank you, Jim.

Beginning with the market environment, despite some economic uncertainty, the leverage credit market strengthened throughout the December quarter as volatility remained low and credit spreads tightened. Mutual Fund inflows into leverage loan and high yield were both positive and CLO issuance rose as demand for high yield assets remain strong.

High yield and leverage loan issuance remain at elevated levels and debt investors appear to be increasingly tolerant of higher leverage and covenant light structures. With this backdrop we continue to find select opportunities in our pipeline that meet our strict underwriting standards and remain focused on covenants.

During the December quarter, we invested $630 million in 21 new and 22 existing portfolio companies. Since early 2012, we have been focused on investing in secure debt which we believe continues to offer the most attractive risk-adjusted returns. Accordingly, 63% of investments made during the period were secured debt and at the end of the December, secured debt accounted for 51% of the portfolio up from 32% when we started to reposition the portfolio.

The December quarter was seasonally active and some transactions from the December quarter have spilled into the March quarter. We've also received $293 million of proceeds from sales and $250 million from early repayments and revolver pay downs.

From a yield standpoint our yields improved as we continue to both capture the ill-liquidity premium for our repositioning strategy and also sell lower yielding assets. There is a positive spread between new and sold investments during the quarter and the yield on new investments was up slightly quarter over quarter. Overall, the weighted average yield in our debt portfolio at cost increased to 11.4% at the end of December up from 11.3% at the end of September.

Next I'll discuss our portfolio activity in greater detail. Nearly 90% of investments in the quarter were primary market originations with continued contributions from our specialty verticals. Oil and gas accounted for 11% and aircraft accounted for 5% of our gross investment activity.

We made an investment in Crowley Holdings, a diversified marine solutions transportation and logistics company, to support their fleet expansion, and we committed approximately $35 million to Reichhold Industries which is a global manufacturer of resins for the composites and coatings market. Also during the quarter our investments in both PlayPower and Garden Fresh were refinanced.

Moving to sales. During the quarter we used the strength in markets to monetize our higher risk positions. Secondary sales accounted for over half of exits. Notable exits included the partial sale of our investments in First Data, Avanti, Magnetation, and Avaya, and a complete exit of our investment in Arysta LifeSciences.

Investments that were repaid in whole or in part during the quarter included our investment into the My Gaming, Smart & Final stores, and First Data.

Moving to some general portfolio statistics for December 31. We continue to be diversified by issuer in industry with 101 portfolio companies investing in 34 different industries. The Company's total investment portfolio had a fair market value of $3.18 billion with 51% in secured debt, 32% in unsecured debt, 7% in structured products, and 10% in preferred equity common warrants.

Lastly, we believe the overall credit quality of our portfolio remains strong. The weighted average net leverage of the portfolio at the end of December was 5.2 times unchanged from the end of September. The weighted average interest coverage at the end of December was 2.3 times compared to 2.4 times at the end of September.

No new investments were placed on non-accrual status during the quarter and in a dig the weighted average risk of our portfolio measured at cost and fair value was 2.2 and 2.1 respectively, unchanged from the prior quarter.

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

Thank you, Ted.

Beginning with operating results, total investment income for the December quarter was $94.6 million up 1% from last quarter and up 14% from the year ago quarter. Net investment income was $49.7 million or $0.22 per share for the quarter. This compares to $49.6 million or $0.22 per share for the September quarter and $42.1 million or $0.21 per share for the December 2012 quarter.

In comparing both quarters, the decline in prepayment income was offset by higher origination related fees and an increase in dividend income. Specifically interest income for the quarter included $2.5 million of prepayment income, compared to $9 million in the September quarter and $2.2 million in the December 2012 quarter.

As of today we expect repayment income for the March quarter to be roughly in line with the December quarter. Origination-related fees rose commensurate with the increase in investment activity. The increase in dividend income was attributable to higher dividend income from structured product investments as well as a special dividend from our Booz Allen investment.

Expenses for the December quarter totaled $44.9 million, up slightly from $44.1 million last quarter and $41.1 million one year ago.

For the quarter, the net gain on the portfolio totaled $56.1 million or $0.25 per share compared to a net gain of $26.8 million or $0.12 per share during the September quarter, and a net loss of $64.8 million or $0.32 per share for the year-ago quarter. The net gain in December 2013 quarter was driven by an appreciation within both our quoted and non-quoted securities including inVentiv Health, Magnetation, Griffin Colleges, Generation Brands, and Energy and Exploration partially offset by minimal declines from a handful of positions including Allied Nevada, Univar, and LVI.

In total our quarterly operating results increased net assets by $100.7 million or $0.47 per share compared to an increase of $76.4 million or $0.34 per share for the September quarter, and a decrease of $22.7 million or $0.11 per share for the year-ago quarter. Our total investment portfolio had a fair market value of $3.18 billion at the end of December compared to just over $3 billion at the end of September. Net assets totaled $1.93 billion with a net asset value per share of $8.57 at the end of December. This compares to net asset values totaling $1.86 billion and a net asset value per share of $8.30 at the end of September.

On the liability side of the balance sheet we had $1.26 billion of total debt outstanding at the end of the quarter, up from $1.08 billion at the end of the prior quarter, and the Company's debt-to-equity ratio was 0.66 up from -.58 at the end of September. The net leverage ratio, which includes the impact of cash and unsettled transactions, was 0.65 times at the end of December, up slightly from 0.62 at the end of September.

With that, Operator, we'll open the call to questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Arren Cyganovich of Evercore Partners.

All right, thanks. The deal activity you had was obviously strong, but it was also pretty granular of the 21 new companies and 22 existing. Is that something that signaled that you were going towards smaller companies or just happened to be what was coming to you during the quarter?

Yes, that's a good question. We've taken up a number of our portfolio companies. The average position size has gone down pretty materially over the last two years, and I think there's a big focus by Jim, myself, and Greg, and the entire management team on reducing overall position sizes, so if there's an issue with one of our portfolio companies, it doesn't cause our shareholders undue losses. But I think there is a concerted effort from us, A, to focus on smaller companies than we've historically focused on, but number 2, sizing positions very differently, so not only did we invest in a lot of new companies, you'll also see that we've reduced the size of some of our large positions not necessarily because we don't like those positions, we just prefer them to be smaller.

Thanks, and then my other question is on the prepayments and exits that you have, obviously the exits are somewhat elevated right now. What are your thoughts going forward. It sounds like from the prepay guidance that you don't have a lot coming to -- coming back to you at least as of now. What are your thoughts on continuing to rotate out of some of your positions in the portfolio?

So, what I'd say is we continue to have a large amount of liquidity in our portfolio. If you look at our exits and repayments over the course of last quarter, there was a lot of sale activity, so when the credit markets are strong as they are now, it's a good opportunity for us to either sell certain positions or shrink certain positions which we think is a very prudent thing to do. The benefit that we have, there's a massive wave of repricing sitting in the loan market today.

One of the benefits that we've had is obviously all of our -- almost everything we own has pretty significant call protection, so the call protection makes it very costly to do a drive by repricing of one of our assets. So, we haven't really seen anything abnormal in terms of repayment activity, but obviously if the credit markets continue the way they are, repayments are still going to be an issue for us for the next 12 months. So, we really haven't seen a big pick up in repayments.

Okay, thank you.

Our next question comes from the line of Terry Ma of Barclays.

Thanks for taking my questions. Can you talk about how your originations are shaping up and what the investment environment looks like for your specialty verticals, quarter to date?

Well, let me start out and I'll toss it to Ted. We feel as if the progress that we've made and the head [roads] -- inroads we made into our origination verticals have been very beneficial to our shareholders. Certainly there are dynamics in each one of those markets that, in time, competition heats up or competition changes, but I don't think there's any one vertical where we're spending all of our time, neither do I think that any vertical is drying up right now.

I think that there is, as Ted and I both mentioned, there's an elevated of activity around the senior secured syndicated market, but smaller companies are afforded, sometimes, less options. And as I mentioned earlier, I think there's been a lot of headlines, a lot of articles written about the changing regulatory back drop, but I think traditional underwriter's ability to underwrite and distribute second lien and subordinated paper is a little bit more challenged these days. So, I think there's a healthy knowledge of the challenges in a rich environment, but we're still finding idiosyncratic investments, so I wouldn't expect a tremendous historic pace, but it's not dried up entirely either, so we're somewhere in the middle.

So, I'll get a little more specific, which is, there really isn't a lot of opportunities for us in either the liquid markets or the regular way primary issuance. Spreads have come down quite dramatically. Sponsor activity's picked up pretty dramatically for us, as well. We can't tell if that's seasonal or a bigger trend, and I think that it's a bit of both. We always are very active with the December 31 deadline, so I think a bit of it is seasonal, but I also think a lot of it is sponsor activity's picking up. And we've also seen yields begin to stabilize a little bit in the sponsor finance channel, which is a very positive thing in our business, you can see that in the numbers.

And if you look at our book and you bifurcate it between our specialty verticals and our sponsor finance -- or other, what we call generic verticals, you see that there's a big spread differential between where we're booking stuff in our specialty verticals, so we think the investment we've made in the breadth of platform has been a very good thing for us and we think we've increased the size of the funnel so we could make decisions around being more selective on what's coming in.

Okay, great. I appreciate the color. Can you give a little color about how much more opportunity there is left to high grade the portfolio?

Yes, we talk about it a lot. If you bifurcate our portfolio, there's still a decent amount of our portfolio, or I'd say a significant amount of our portfolio, that yields sub 10%, so we have an opportunity to, if we originate 12% assets, we have an opportunity to what I'd call -- I use the word high grading, I don't know what the right term is, but enhanced yield for our shareholders. So, we've said this on every earnings call. We don't feel this pressing need to grow, and we think there's continued organic opportunities to reposition our existing portfolio.

Okay, thanks for taking my questions.

Our next question comes from the line of Ryan Lynch of Keefe, Bruyette & Woods.

Good morning, and thanks for taking my questions. inVentiv Health accounted for about $14 million of your portfolio gains this quarter, and I was wondering, were those gains due to the underlying strength of that portfolio company, or was it more of a mark-to-market kind of issue?

Yes, so that's -- I mean, taking a big step back because I'm assuming we're going to get this question, our gains are pretty broad-based across the portfolio. I think a lot of people were surprised that our NAB increase, but it was very broad based. Obviously the largest amount is inVentiv. Listen, I think the Company is doing fine. I think a lot of it was market-related, to be honest, but there was a -- there's some technical factors to it which drove the bonds lower earlier in the year, and this is a position that obviously has risen. I think we benefit on this specific position by people -- a bit of this reach for yield by the market.

Okay. Then also in the calendar first quarter 2014 I see you guys entered into a $175 million credit facility with Miller Energy. Will that new position cause your position that you had in the fourth quarter to be repaid?

Yes, Miller sent out a press release earlier this week. We were refinanced out of our Miller Energy position. We obviously did not do the whole 175. We actually partnered up with somebody who we think is a very, very smart sophisticated counter-party, and so that was announced this week, so the answer is, yes, it got refinanced, but with a bigger facility. The company has done very well and grown. They've tripled production since we made the initial loan, so we feel we're growing with the company.

Thank you, and then one last one. I see you guys provided -- a lot of people are asking about interest rate exposure to the BDCs and you guys provide a nice slide in your deck about how that affects your guys earnings if interest rates go up. Have you guys done any kind of analysis or a thought about what the effect of rising interest rates will have on underlying portfolio companies that you guys lend money to?

You mean -- are you asking about credit quality?

Obviously if interest rates go up, it might cause some stress on your portfolio companies, those are going to be -- the interest expense is going to go up. Have you guys done any analysis on that or thought about that in any way?

Yes, I mean when we're underwriting all of the credits, one thing I'd caution people on is the fixed charge coverage ratios in a zero interest rate environment look pretty good, and a rising interest rate environment they will get worse. But that being said, we obviously focus on that pretty closely with all of our underwritings. I don't think we've rolled it up and published it on a portfolio basis, but it's definitely a consideration when we're underwriting our credits.

Thanks, that's all for me.

Our next question comes from the line of Doug Mewhirter of SunTrust.

Good afternoon. I guess two questions. One is more of a big picture question. If the equity markets continue to correct for a little bit, how does that -- in your experience, how do you think that would affect your world? Would that increase M&A transactions because the targets got a little cheaper or would that actually disrupt the market because risk aversion is higher so your deal flow -- you get better terms but your deal flow dries up? Have you ever played around with scenarios in a down public equity market environment?

Sure, as investors in the credit space for a long -- many decades, we think about this all the time. Certainly, a year or so ago it didn't surprise us that the equity market had a lot of room to run when one looked at relative risk reward, that's probably changed, and this whole EM market concern of refinancing in many countries and currency issues is putting a bit of volatility in the market, and we like -- actually as an investor with this pool of capital we like that, because whenever there's uncertainty, it brings some of the more aggressive folks back to the sidelines and so a little bit of volatility in the credit markets we would not be -- we would be supportive of, we're used to it. If equity prices went out a little bit might that bring a bit more strategic M&A, it might.

I think that we are-- if you said what are our top down views here from Apollo, certainly I think that we feel that some of the economic numbers in the US are stronger than we would have felt a year or so ago and so through the course of 2013 some positive numbers. That being the case right now, the US consumers in better shape than it has been. Detroit's in better shape, so at the same time we realize we're five years into a credit cycle so, that's why we're not afraid to invest. We want to make sure we're investing in a better attachment point, but it's -- we don't predict multi-quarter volume based on equity flows or other flows, they're too precarious to do that.

So, I have one thing which is, volatility typically is very good for us because we compete -- one of our leading, and this is all the BDCs, all the BDCs provide certainty of execution, and oftentimes our biggest competitor is the syndicated markets, and so in June of last year when there was a pullback in credit and equities, we had a huge origination month because, again, we typically are more expensive than a regular way deal that gets syndicated, so all that being said, any pullback is usually good for us. We've not really seen a big pullback in credit and we've also really not seen a big pullback in syndicated market activity, so the equity market as of today, we have not had a real material pick up in origination activity due to volatility.

Thanks for that answer. My last question is a specific question. Do you have any update on Gryphon Colleges or Delta Educational Systems? And also if you could clarify, is the investment made in Gryphon College's Corporation or in the underlying Delta Educational company?

So, I'll answer the first question and let Greg answer the second question. We feel really good about this one. They had a maturity, obviously they're in a sector that is shrouded with uncertainty and the business -- and you've seen this across the whole industry, not just in Delta, which is Delta is -- the holding company is called Gryphon but the company is called Delta Education. So we feel very good about this investment. I think a lot of the compliance costs they spent on their business are behind them, and I think you've seen a stabilization in enrollments, so I think the whole sector has done much better and so we feel cautiously okay about this one as we sit here today. I'll let Greg answer the specific corporate structure question.

We're in both the Griffin securities and the Delta in various parts of their capital structure.

Okay great, thanks. That's all my questions.

Our next question comes from the line of Jonathon Bock of Wells Fargo Securities.

Good afternoon, and thank you for taking my questions. Ted, real quick, a point of understanding as I look at slide 5 in your deck that refers to new investments. As I look at the first and second lien securities, obviously makes sense that there's opportunity in both classes. Yet I noticed the yield at cost are effectively the same, and so could you provide a little color on either a strong yield or risk-adjusted return opportunities. One is getting in first lien to allow that outside spread or perhaps more pricing competition in second lien which is pushing it down because one would imply that between first and second lien there's a difference in terms of all-in leverage, yet the yields or the return to the investor appears the same?

Yes, that's a great question. So, I think number one is, it's hard to measure it quarter to quarter because you're talking about $158 million of first lien on a business with a lot of originations, but the answer to the question is most of our first lien senior-secured risk is originated and ill-liquid, so as we've mentioned in the past, there's still a big, big premium for ill-liquidity in the market. The second lien, we do do a lot of originations in second lien as well, but the yield gets dragged down a little bit by certain positions that are a little bit more liquid, so I think it's A, driven by certain originations that we've done and I think number two is our first lien senior-secured basket is typically less liquid than our second lien basket.

That's fair. And then maybe a question on the ill-liquid and liquid opportunity. So looking at the ill-liquid opportunity in today's environment, would you be perhaps a bit more enthused in light of the additional economic strain that continues to be pressed on the market, or do you just see those deals as a very idiosyncratic and generally it's very hard to postulate where they will come in as it relates to general market moves?

I'd say a slow growth environment is not terrible for our debt portfolio, because typically it means if companies are growing really quickly we typically get repaid a lot faster, so it's good for repayments. Number two is I'd say the big impact in our business has been -- there's been a lot more -- Jim mentioned it in his remarks, there's been a lot more clarity on regulations that have been put out in the last three, four months, the Volcker rule, the CLO skin in the game rule, and this is having profound implications on our origination business. So, we are definitely a beneficiary of a lot of these rules that are coming out, and we think that will continue for the foreseeable future.

And a few more questions if I may. Talking about the liquidity that you have from other, we'll call it liquid, I think you mentioned loans 10% and under, Ted, would you give us a sense of the amount of, we'll call it churnable liquidity, that you currently would look at as available to you today?

Yes, I'd say the total amount of our portfolio yielding below 10%, is 26%, so when we look at the different levers we have in our business, we have a couple different levers. There's obviously -- and one of them is this, and we also have -- we still think we have over $1 billion of liquidity in our portfolio, so we feel like to the extent the origination environment picks up or we see really good opportunities come to us, we feel like we still have a very good ability to be able to reposition our portfolio.

Fair enough.

The other thing I'd say, Jonathan, is we've talked in the past about our comfort range on leverage from 5.5 to 7.5 and right now we feel like that's one of the levers we can pull for shareholder returns and we're comfortable operating in this zip code right now. So, we're not at all, between the liquidity that Ted's mentioned, between the quality of our book, we like having that operating leverage in the business to generate incremental returns which we think is appropriate.

That is very much appreciated. Thank you. And then a few more smaller items. I noticed that pick income picked up slightly from $6.6 million last quarter to about $8.4 million. Can you outline perhaps what this was due to?

Yes, Jonathan. One was one of our investments in our wind holdings, but we also moved our PlayPower investment down to a preferred stock position in order to assist the company in their refinancing. We didn't change basically the amount of leverage in the company. We just swapped it down so that they would get actually a better rating for the rating agencies, so that impacted the balance also.

But I don't think, Jon, there's no material view like we don't want to outlaw pick, but picks should be a portion of our portfolio. So, it's about whenever you get longer in a cycle there will be some more pick opportunities, but you've got to look at them on an idiosyncratic basis.

No, you're right and I guess I'll juxtapose that in light of the gain. Obviously those can offset over time and it's good to see additional value being realized. Ted, Jim, guys, have you seen additional opportunities for upside to NAV perhaps as it relates to LVI or I guess over the long run, right, or other investments that might perhaps give an additional boost to NAV as maybe a few others have just recently?

Yes, I mean listen. I would be very cautious in guiding in terms of additional NAV upside for certain private equity positions, but what I would say is there's a huge focus on them. So, things like LVI and PlayPower, we've got multiple people here who spend the vast majority of their time trying to maximize value of those for shareholders and we're doing a lot of things with those companies to try and create net asset value for our shareholders, but I think it would be inappropriate for me to paint a positive NAV upside story through those two positions.

Fair enough. I appreciate it. Thank you.

Our next question comes from the line of Chris York of JMP Securities.

Good morning, thanks for taking my question. As a response to leverage lending guidelines in May, have you guys seen more banks start to shop loans of special mention, and if so, have you been looking to buy some of these assets given that PDCs have been a place for more ill-liquid assets?

That's particular -- I don't think it makes sense to comment on any particular activity, but we're not broadly speaking seeing banks shop asset that would be special mention. I think, my sense is they're trying to curtail the amount of new volume that accrues to that category, and there's been some noteworthy articles talking about some firms underwriting assets and other firms backing away, but I've not seen a wholesale desire to rid themselves of those loans.

I think in the multitude of dialogues that we're having, every firm has a different perspective on how they want to interpret the rules for their own platform. There's a lot of very thoughtful time being spent and a lot of resources being spent on it, and as I said earlier, I think that subordinated credit will have a narrower window of acceptance in the broad regulatory-categorized institutions, and with that being the case, not sure how it's going to play out, but I believe we will be a beneficiary.

The only thing I'd add is it's early days, so I think banks are trying to interpret some of these rules, so as Jim said, we're not seeing a lot of activity but I don't think that means anything because it's still very early days.

Sure, that's helpful. Thanks for all that color. That's it for me.

Our next question comes from Robert Dodd of Raymond James.

Good morning. Just a quick one first. On the structuring fee dividend income, or origination fee income, how do you -- can you give us any color on the sustainability of the level you expect to see? Obviously, you disclosed on the prepayment fees. It looks like the Booz special dividend, which I guess is about $1 million, looks like you got maybe $4 million in structuring fees when you restructured PlayPower and Merx or changed the structures there, so it's about $5 million. Is that in the ballpark or do you think the levels from this quarter are sustainable on the dividend side and structure and origination fee side?

Yes, there's a component to our business that is unpredictable and I call it recurring, non-recurring items. Listen, we have 100 portfolio companies, so we're constantly getting dividends and repayments and amendment fees and as we originate new deals, we get origination fees and so there's a certain level to our business where we get a constant stream of what I'd call non-interest income, and I don't think this quarter was an aberration, vis-a-vis the run rate of our business.

Okay, perfect thank you. Just one follow-up. On Merx, looks like you changed the structure of that to essentially a single revolver versus piece by piece financing. Can you give us any color? Was that just to give it more flexibility, nimbleness in the marketplace or has there been some change in the market that necessitated the change in structure?

There's not been any change in the market or how we're financing Merx. We just thought it was an easier structure. As Merx needed capital and they repay capital, it was an easy way for us to have a facility available for them should they need it.

Merx is of sufficient size now where it's generating cash, a lot of investments, and this is the way that you'd capitalize a normal company and, again, making one-off loans every couple months to one of our entities and this for us just felt a lot cleaner and more straightforward.

Got it. Appreciate it.

Your final question comes from the line of J.T. Rogers of Janney Capital Markets.

You guys touched on -- a little bit earlier on upside NAV from appreciation in existing investments, but I was wondering what your thoughts are on structuring new deals to specifically generate capital gains? You guys have about $5 per share of realized losses. It really looks like there's an opportunity to grow book value pretty significantly and in a tax managed way if you were to focus on capital gains.

We agree. I think whether it's what we're trying to do at Merx or other areas, we wholeheartedly agree. That's an asset that we think we've got to figure out how to monetize and accrue to our shareholders' benefit. We have a bunch of ideas that we're working on right now and in our book, but I think any discussion in greater detail would be premature, but we wholeheartedly agree and want to make sure we monetize that asset long term for our shareholders.

One thing I just want to caution people on is we're -- first and foremost our investment team here is focused on downtime protection and we're focused on generating income for shareholders in a stable dividend, so I don't think -- one of the things under consideration, for example, is not us moving wholeheartedly into the private equity business, I don't think you're going to see us do regular way LBOs, you aren't going to see us buy operating companies. I know that some of our peers are doing that. We eel like our shareholders really want us to be focused on downtime protection, making it -- covering our dividend comfortably, and as Jim said, listen, if there's ways we generate NAV, we will try and do that and we have a lot of things under exploration. I just want to caution people that we're not going to wholeheartedly change our business model.

I think that makes a lot of sense, and you guys have done a good job of rotating a portfolio just now with NII more comfortably covering the dividend in a recurring way that perhaps that's an opportunity for you guys to explore. Thanks for taking my question.

No problem. Well, with that, folks, we appreciate all of the questions, we appreciate the attendance on the call, and until next quarter we look forward to hearing from you, and call in the interim if you have any questions. Take care.

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