MidCap Financial Investment Corp (MFIC) 2016 Q1 法說會逐字稿

Good morning, and welcome to the Apollo Investment Corporation's earnings conference call for the period ending June 30, 2015. At this time, all participants have been placed in listen-only mode. The call will be open for a question-and-answer session following the speakers' prepared remarks. (operator instructions)

I would now like to 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 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 companies.

You should refer to our registration statement and shareholder reports for risks that apply to our business and that 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 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 reported earnings for the quarter ended June 30, 2015, and filed our 10-Q. I'll begin my remarks with a brief overview of our results for the quarter and discuss some additional business highlights.

I'll then turn the call over to Ted, who will discuss the market environment and our investment activity for the quarter. And finally, Greg will discuss our financial results in greater detail. We will then open the call to questions.

For the quarter, we reported net investment income of $0.22 per share, which reflected a decline in the average size of the investment portfolio, offset by income from prepayments and structured products.

Net asset value declined 2.1% to $8.01 per share, and the decline resulted primarily from the final purchase-price adjustments related to the sale of our investment in PlayPower, some commodity-related investments, and several of our legacy holdings. We continue to be very focused on commodity-related investments, particularly oil and gas, and we have substantially exited any mining investments.

During the quarter, we invested $509 million, sold $334 million of assets, and received $198 million in prepayments. All in, net investment activity for the quarter was a negative $23 million. We remain selective in our approach, with a focus on secured debt, which we continue to believe currently offers the most attractive risk-adjusted return.

Looking ahead at the regulatory landscape, we remain optimistic regarding opportunities for providers of flexible capital such as ourselves. And we believe the scale of our platform enables us to participate and be selective in the marketplace today.

We will continue to execute on our strategy of seeking to selectively deploy capital and monetize select investments, particularly non-yielding positions.

Consistent with our commitment to deliver shareholder value, we have adopted a $50-million stock-repurchase program. Given where our stock is currently trading, we intend to begin repurchasing shares as soon as possible.

In addition, the Company held its annual meeting of stockholders and special meeting yesterday. At these meetings, the Company's stockholders approved all three proposals. We greatly appreciate the support of our shareholders on these matters.

Lastly, turning our attention to our dividend, the Board approved a $0.20 dividend for the shareholders of record as of September 21, 2015. With that, I will turn the call over to Ted.

Thank you, Jim.

I'll begin my comments with current market conditions and then discuss our investment activity for the quarter.

Despite some headwinds, including concerns about Greece, China, and the continued debate around the timing of potential US rate hikes, leveraged-loan market conditions strengthened during the quarter as a result of market technicals.

Despite a pickup in leveraged-loan volume during the quarter, net new supply declined slightly amid substantial repayments. Strong CLO issuance and flat leverage-loan [fund close] contributed to narrower [preparing] yields and higher loan prices.

That said, the middle-market lending environment, while not immune, is believed to be generally insulated from trends in the broadly syndicated market. Pricing in the middle market remained relatively unchanged during the period.

We believe the middle market currently offers lenders superior risk-adjusted returns as the overall demand for capital to middle-market companies exceeds the supply.

With this backdrop, our origination activity picked up following a seasonally slow March quarter. During the quarter, we invested $509 million in 10 new portfolio companies and 20 existing portfolio companies.

The weighted-average yield on investments made was 10.5%. As Jim mentioned, we continue to focus on secured-debt opportunities, which counted for 61% of investments made during the period.

During the period, we exited $532 million of investments, of which $334 million were proactive sales. The yield on investments sold was 11.3% and the yield on repayments was 11.2%.

We continue to increase our exposure to floating-rate debt to better position us for an expected rise in short-term rates. Fifty-nine percent of the debt portfolio was floating rate at the end of the quarter, up from 52% at the end of March.

Moving to specific investment activity, we've been actively investing in sectors away from our specialty verticals -- aviation and oil and gas. During the quarter, we invested $23 million in secured debt of Emergency Communications Network, the largest SAS-based provider of emergency communications within the state and local-government market.

We also invested $15 million in secured debt of STG-Fairway Acquisitions, or First Advantage, a provider of comprehensive screening, identity, and information solutions that give employers and housing providers access to actionable information.

We also invested $34 million in secured debt at Deltek, an existing portfolio company, which is a leading provider of enterprise software and solutions to project-focused businesses globally.

In addition, Merx continued to pursue opportunities as well as actively manages the existing aircraft portfolio. Given the current competitive landscape, during the quarter, Merx monetized several aircraft at attractive levels.

Regarding our oil and gas exposure, our portfolio remains well diversified by [borrower] and geography. As a reminder, our strategy focuses on lending against producing upstream oil and gas reserves, with an emphasis on asset coverage.

At the end of June, 82% of our oil and gas portfolio was in first- and second-lien debt. Although [PDP] coverage has declined with the drop in oil prices, we still remain comfortable with asset coverage.

In addition, several of our borrowers are working to improve their liquidity by reducing CapEx, sell noncore assets, issue equity, or other [structural alternatives]. As of the end of June, oil and gas represented 16%, or $531 million, of our portfolio and included 13 borrowers. All of our oil and gas investment activity during the quarter related to existing portfolio companies.

Our [marks] generally reflect the underlying fundamentals of each borrower and the widening spread in these securities given the stress in the sector.

Regarding our investment in Miller, the company recently paid down the vast majority of its RBL, and our investment is effectively the most senior in the capital structure. The company is undergoing a capital-repositioning plan, including potentially refinancing or restructuring debt and selling noncore assets.

Regarding our investment in [Medico], we participated in a strategic exchange where we [rolled] unsecured debt at a premium to market value for second-lien secured notes and invested additional capital in the company's first-lien notes. We believe we've enhanced our position in the capital structure, which is designed to benefit us in a [lower-for-longer] environment.

We also [up-sized] our investment in Deep Gulf's first-lien term-loan facility by $30 million to fund the development of a well. And we invested an incremental $25 million in Canacol as part of our [delayed drop] commitment to the company.

Exits, which include sales, repayments, and revolver pay-downs, totaled $532 million for the quarter. Sales totaled $334 million for the quarter, including the full exit of our investments in PlayPower, Molycorp, and PetroBakken.

Repayments for the quarter totaled $198 million, including our investment in British Car Auctions, or BCA. With the exit of PlayPower and BCA, we've reduced the amount of equity and PIC in our portfolio, which improved dividend coverage as we redeploy the proceeds in cash-income-producing assets.

We currently have a diversified $3.3-billion portfolio measured at fair value, consisting of 102 portfolio companies across 25 industries. Overall, we believe the credit quality of our portfolio remains relatively strong.

The portfolio's weight-averaged risk ratings were unchanged and remained at 2.2 on a cost basis and 2.1 on a fair-value basis. The weighted-average debt leverage of our investment remained constant at 5-1/2 times, and interest coverage decreased to 2-1/2 times, down from 2.6 times.

As mentioned in our last earnings call, Magnetation, one of our portfolio companies, filed for bankruptcy. As a result, our origin first-lien investment in this company was placed in non-accrual status. At the end of June, investments on non-accrual status represented 0.4% of the fair value of the portfolio, compared to 0.1% at the end of March. On a cost basis, these investments represented 2.5% of the portfolio at the end of June, compared to 1.3% at the end of March.

Regarding our investment in Magnetation, in mid-July the company received a court approval to enter into a restructuring-support agreement. A small portion of our first-lien notes were rolled up into the debt, and the remainder will be converted to second-lien notes in convertible and preferred equity for the terms of the exist RSA.

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

Thank you, Ted.

Total invested income for the quarter was $101.7 million, relatively flat compared to last year and the year-ago quarter. With that said, the composition of our income has changed, with a decrease of investment income due to the lower income-bearing investment portfolio, offset by prepayment income [and dividends].

Interest income for the June quarter included $8 million of prepayment income, compared to $6.7 million in the March quarter and $6.1 million in the year-ago quarter.

Dividend income for the quarter increased due to the growth of our investment in shipping and solar energy, which are structured as common and preferred equity, respectively. We expect these investments to generate recurring dividends.

There were no nonrecurring dividends during the June quarter, compared to the prior quarter, which included a $1.4-million one-time dividend. The amount of dividend income may vary quarter to quarter, based on asset mix. But the run rate should be slightly below the current level, given the exit of PlayPower.

PIC income for the quarter accounted for 7.9% of total investment income, down from 9% last quarter. As Ted mentioned, the decline in PIC [was due to the] exit of our investment in BCA and should decline further next quarter with the exit of PlayPower (inaudible).

Expenses for the quarter totaled $50.7 million, compared to $50 million last quarter and $49 million for the year-ago quarter. This slight increase was due to an increase in interest expense and G&A expenses, partially offset by lower management fees.

The increase in interest expense is attributable to a full quarter of interest on our $350-million ten-year debt issuance completed during the March quarter.

As a reminder, we have $225 million of 6.25% senior notes maturing in October and $200 million of 5.75% convertible notes maturing next January. These notes have a blended interest rate of approximately 6%.

We intend to use our revolving credit facility, which currently has an interest rate of LIBOR plus 200, to replace the maturing debt. Upon the maturity of these notes, and assuming the same amount of outstanding debt, the blended interest rate on our total debt outstanding should decline by approximately 100 basis points.

Net invested income was $51 million, or $0.22 per share for the quarter. This compares to $52.1 million, or $0.22 per share for the March quarter and $53.6 million, or $0.23 per share for the year-ago quarter.

For the quarter, the net loss on the portfolio totaled $44.6 million, or $0.19 per share, compared to a net loss of $63.8 million, or $0.27 per share, for the March quarter, and a net gain of $11.1 million, or $0.04 a share, from the year-ago quarter.

The net loss of $44.6 million [includes] $81 million of realized losses. Approximately $63 million of the realized losses were previously recognized as unrealized at March 31, 2015.

Negative contributors to the performance for the quarter included our investment in PlayPower, SquareTwo, Artsonig, Miller Energy, and Magnetation. Positive contributors to performance for the quarter included our investments in Venoco, Gen Brands, Merx Aviation, and AMP Solar UK.

In total, our quarterly operating results increased net assets by $6.4 million, or $0.03 per share, compared to a decrease of $11.7 million, or $0.05 per share, from the March quarter, and an increase of $64.6 million, or $0.27 per share, from the year-ago quarter.

On the liability side of our balance sheet, we had $1.4 [billion] of outstanding debt at the end of the quarter, down slightly from $1.5 [billion] at the end of March.

The Company's net leverage, which includes the impact of cash and unsettled transactions, was [set at] 0.72 times at the end of June, unchanged from the end of March. The Company's debt to equity was 0.73 times at the end of June, down from 0.77 times at the end of March.

At the end of June, our portfolio had a fair value of $3.3 billion, down slightly quarter over quarter. The weighted-average yield on our debt portfolio [at cost] was 11.5%, an increase of 30 basis points from the end of March. The change in the overall yield was due to three factors -- investment activity, an increase in rates [from amendments] on a few existing positions, and the placement of one of our investments [on non-accrual].

Regarding yields on investment activity, yields on new-debt investments were 10.5%. The yield on debt investments sold were 11.3%. Excluding PlayPower, the yield on investments sold were 10.2%. And the yield on prepayments were 11.2%. Increases in yield as a result of amendments and PIC [elections] accounted for approximately 20 basis points of the 30-basis-point increase.

This concludes our prepared remarks, and now we'll open the call to questions.

(operator instructions) Terry Ma, Barclays.

Given the reduced focus your specialty verticals, can you talk about what sectors you find attractive right now and talk at a high level about how you're thinking about oil and gas exposure going forward?

Yes. I would say we are actually finding a lot of value in our just bread-and-butter, middle-market lending business.

When we say reduced focus, obviously we're still very focused on the aircraft and our other specialty verticals. But our opportunity [set] in the last at least three months has really picked up in middle market.

So if you look at [quarterly] activity, we're still finding really good value in just plain-vanilla [sponsored] finance. And we're probably seeing less opportunities to deploy new capital in places like aviation and oil and gas.

And finally, the oil and gas portfolio is -- listen, we're very, very focused on it. Obviously -- we still feel like we've got good asset coverage. But obviously oil prices are much lower. So it's a portfolio that we're spending a lot of time on. It's really concentrated in just a couple investments, and it's a portfolio we'll continue to monitor very closely.

Got it.

And just for context, we continue not to see today -- we're continuing not to find a lot of attractive new origination opportunities as we sit here today.

Got it. Can you give a little more color on Miller and how well you think your investment is covered there?

I would say, obviously we're focused on Miller. Miller -- I would point people to the press release that Miller put out last week about an update on their business and strategic alternatives and asset [sale process] and everything else. I think that's pretty self-explanatory.

Okay, got it. That's it for me, thanks.

Thank you.

Kyle Joseph, Jefferies.

Thanks for taking my questions. I know the first half of the year started out relatively slow in terms of deal flow. I wanted to get your outlook for the remainder of the year and thoughts on if we'll see net investments go to the positive this year.

I think -- listen, our -- if you think about gross versus net investment activity, new originations for us are typically pretty correlated with repayments. And I'd say we've been in a relatively benign period of repayments, and our investment activity is not as robust. So I think over the next 6 to 12 months, I think our portfolio should be around -- (inaudible) net activity should be around flat.

Obviously, things can change. If you look at our existing pipeline, which is pretty good, and you look at our repayment pipeline, which we've got a decent amount of visibility on, I'd say -- I don't think we expect a material increase or contracture in portfolio through the rest of the year.

Okay. And then looking at the sales in the quarter, I know the average yield on the sales was bumped up by PlayPower, but what motivated the sales in the quarter, was it trying to reduce exposure to certain industries -- I guess that's my question.

That's a great question, actually. I would bifurcate our sale activity into three buckets. One is, we monetized PlayPower, which obviously is a very large investment to us that was -- some partial [picking coming] partial nonyielding, and we're going to redeploy those proceeds in -- things like stock buy-backs and new originations, which we think is very prudent for our shareholders.

We also basically took down our [mine] exposure to [a de minimus] amount. We're really trying to get out of that sector. And then the third area is what we talk about a lot, which is selling more of our low-yielding assets to help out with yield expansion. And we still have opportunity to do that.

So I think you have to break our sales in three areas -- reducing exposure to cyclical sectors; obviously, the repayment of PlayPower because the [monetization of] PlayPower is a big exposure for us; and selling out of legacy, low-yielding investments.

Okay, great. And can you give us your thoughts on capital allocation going forward on new investments versus share repurchases and how you think about valuation there?

I think -- certainly, we're putting forth a positive statement. There have been lots of analyses done on cost of capital. I don't want to have that debate or discussion in this forum.

There are some practical limitations between [windows] and other things, about how much stock you can actually buy back. But certainly it's part of our portfolio right now, and we think it merits the purchase. So we can buy some stock in this range, and the returns on that, realizing the practical limitations, we think it makes sense for our overall portfolio.

Great. Thanks a lot for answering my questions.

Doug Mewhirter, SunTrust.

Good morning. Could you give me a few clarifications on Venoco? Was the restructuring of your position, did that happen during the quarter or subsequent to the quarter end? And is it reflected on your statement of investments currently, or will that change? Because it sounds like you shifted some things around.

So just for clarity -- so it happened in the quarter that it was reported. So that's reflected -- the activity of Venoco has been reflected in the schedule of activity.

And effectively what we did is, we took an unsecured risk and rolled it into secured risk. And so that will be all reflected in our [scheduled] investments.

Okay. And a question about Venoco specifically. They gave an operational update on their website, and they mentioned that part of their production disruption was due to actually a pipeline that stopped working. Do they have any financial recourse to the pipeline company? And also, do they anticipate that getting fixed any time soon, and is that part of the reason why you sort of reinvested in the company, for lack of a better term?

Again, the pipeline outage does not affect reserve coverage, but it does affect near-term cash flow. The outage happened subsequent to the transaction being announced. And for an update on -- Plains, which is the pipeline operator, issued a public release -- they had some comments about it on their latest earnings release. And I would just point you to those public comments made by Plains.

Okay. Thanks for that. And, Greg, it looks like you have some -- you may have mentioned this in the preamble -- but do you have some convertible debt -- it looks like it's coming due. Was that part of the debt that you said you would take out with your credit line, or were you talking about a different set of notes?

No, that is the convertible debt that comes due in January of 2016.

Okay, thanks. And one last question. It looks like leverage is about 0.75 times, give or take. I suppose with recycling your portfolio and buying back stock that you're pretty comfortable at that range -- you don't intend to pick it up or down significantly?

We've always talked about leverage growing from 0.5 to 0.75 and operating 0.65 on average. We're a little bit towards the wider end, but we're comfortable right now. As Ted said, I think we think that our portfolio will be stable in terms of the overall size. It may increase a little bit. It may decrease a little bit. We don't see it materially expanding or contracting dramatically.

And for our view of being able to position [the side] a buy-back [and some of the] proceeds we've gotten back from PlayPower that was non-yielding asset, we feel comfortable with where our leverage is today.

Great. Thanks. That's all my questions.

Jonathan Bock, Wells Fargo.

Good morning, guys. Joe Mazolli filling in for Johnathan Bock here. I have a few questions about a couple portfolio companies.

The first is Miller Energy. On Miller's call last week, Miller's management indicated that a private financing source was providing $165 million that would pay down existing debt. And to me, when I think of that, it seems like that 165 would probably be used to take out the [ABL] lender that sits in front of Apollo, as well as provide cash for the balance sheet for liquidity going forward. And also, given the situation that the company is in, it seems likely that maybe existing Miller Energy lenders would provide that 165.

So my question, Ted, is how -- would this improve liquidity going forward? And how much time does this buy Miller? Does this materially improve their liquidity, because I know they do have some relatively small legal claims against them that they were delaying as they waited for tax credits.

What I'd say is this -- again, there's very little in the way of debt ahead of us, if any at all. And what they've said publically is they're working with a source to -- the contemplation is to [take out] our debt.

And we can't comment on whether that's going to happen or not. We don't know. But obviously, they're in the market trying to refinance out their existing capital structure.

So I think your read of it is -- I don't think they're out there saying they're going to put a whole bunch of debt ahead of us. I think there's effectively no RBL (inaudible) of the first dollar in the whole capital structure. And what they've said publicly on their calls is they're trying to refinancing out our total debt.

Okay, very helpful. The second question relates to My Alarm. The company was in market with a bond deal, I believe in June, that -- I think they were trying to price it around 10%, or north of 10%. And that deal was pulled. So I'm curious -- the current first-lien position of My Alarm is marked at par on the balance sheet. Is that -- if you could give some color, was the bond deal viewed as more of a technical phenomenon versus where the value of the first-lien currently sits?

That bond deal was launched in a very tough market. I'd say -- listen, it shows the power of [covenants]. They tried to get a larger bond deal done than our facility provides them with less covenants. So it's not exactly an apples-to-apples comparison.

So the bond deal that they launched went deeper in the capital structure with less covenants. And so it's not exactly apples to apples with our existing [portfolio loan]. So we feel good about the position that we're in.

I wouldn't read too much into it because they launched it in a really, really tough environment in the middle of Greece and a bunch of other things that were happening macro-wise.

Okay, very helpful. And then just finally, it looks like that position is now paying L plus 800 versus L plus 750 last quarter. Was there a step up -- a leverage-based step up or something in the loan doc?

There was an amendment that was done that provided new terms on that [piece of paper].

Okay, very helpful. Thank you very much.

Greg Mason, KBW.

Thanks for the commentary on Miller. I appreciate it. Just in the energy marks in general, given that oil has fallen off in July and feels like the credit-energy markets have fallen off since the June 30 numbers, any sense that you can give us for where you think in general the energy portfolio is trading at in terms of flat to percentage down, just a ballpark of where you think we're at maybe today versus quarter-end?

I think our view is -- we do watch this stuff very closely. You guys watch it very closely. I think there's a lot of volatility in the market, but our sense is that we are probably flat to where the last quarter was.

I know there's a lot of curiosity about the space and these individual [names]. And as Ted said, we understand what's going on in the macro. We feel -- we're happy that we are in the securities and where we are in the capital structure. Notwithstanding a challenging macro, we're working and we're on top of it. So to answer your question, Greg, I think we think that we're probably flat overall and expect more volatility.

Great. And, Jim, just on the $50-million share repurchase, you said you're going to start it immediately. What is your --?

I actually said as soon as possible.

Yes, as soon as possible. What's the thought in terms of how quickly to deploy the $50 million? I'm sure you could deploy it quickly or leak it out over a 12-month period, so your thoughts on the aggressiveness of that.

As I said earlier, Greg, there's a practical limitation in terms of various programs and how much stock you actually can buy back based on volume and windows and things of that nature.

I think that what we try to do is -- the Board and Management kind of put a number out there that we expect to put to work over an appropriate period of time. So is that between now and year end? I think that's a good window.

We didn't want to announce a number that we didn't feel like we could stand up to. As Jim said, there's a lot of practical limitations on how much you can buy back. And so I think the message from the management team and the Board is, we intend to use this. It's just not an announcement -- like, we intend to actually use the buy-back program.

That's a great message. Thanks, guys, appreciate it.

David Chiaverini, Cantor Fitzgerald.

I have a question on loan pricing trends. So the average portfolio yield at 11.5%, that's actually up quite nicely from 11.1% a year ago. I was wondering, do you expect to stay -- keep the portfolio around that 11.5% level based on what you're seeing in the market, or do you expect it to pull back some?

Our portfolio yield has been reasonably stable over the last three years. I don't think we expect large changes either way. But again, we're focused on risk-reward versus just reward. And so a lot of the [step up] this quarter was related to things like amendments and other things, as well as some new originations. So I don't think we see a material change coming in our yield either way, up or down.

Okay, thanks for that. I was also curious about the fee rebates on [Scion Investment Corp]. I know it's been pretty low the most recent few quarters. I was curious in the second quarter, did that up-tick at all, and what are your thoughts there on a go-forward basis?

David, it contributed a little bit to the -- directly in our [fees]. As you know, we have the waivers, and then we have the Scion offsets. So I think it's very helpful. The overall commercial reasonableness of our fees continue to improve (inaudible).

Great. Thanks very much.

This concludes the question-and-answer session of today's conference. I would now like to turn the floor back over to Mr. Jim Zelter for any additional or closing remarks.

Well, great. Thank you, operator, and thank you very much for all the time and questions today. We appreciate your support, and we look forward to talking to each one of you in the near future. Have a good day.

Thank you. This concludes today's conference. Thank you for your participation. You may now disconnect, and have a wonderful day.