MidCap Financial Investment Corp (MFIC) 2016 Q3 法說會逐字稿

Good morning, and welcome to Apollo Investment Corporation's earnings conference call for the period ending December 31, 2015.

(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 would also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. Today's conference call and webcast may include forward-looking statements. Forward-looking statement 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 or for were looking statements or projections unless required by law. To obtain copies of our SEC filings, please visit our website at www.apolloic.com.

I would 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, and good morning to everyone on the call today. This morning, we reported earnings for the quarter ended December 31, 2015 and filed our 10-Q. I'll begin with some brief comments on the market conditions and describe how we are operating during this period of volatility.

I will then provide a brief overview of our results for the quarter and discuss some additional business highlights. Next, Ted will discuss our investment activity for the quarter, with a detailed discussion of our energy book, and then Greg will discuss our financial results in greater detail. We will then open the call for questions.

As you are all aware, the December quarter was a period of increased volatility. Global growth concerns, volatility in commodities, including further weakening of oil prices, adjusting Fed expectations, and growing credit concerns dominated market sentiment in the quarter. The leveraged finance markets were clearly impacted by the negative sentiment, as spreads widened and yields rose.

Regarding our oil and gas exposure, we continue to closely monitor our investments and work with our companies as they operate during this period of low prices. Ted will provide a detailed review of each of our core oil and gas investments.

For the quarter, we reported net investment income of $0.21 per share which highlights higher dividend income, offset by a decline in fee and pre-payment income. Net asset value declined 3.4% to $7.56 per share during the quarter as we were negatively impacted by the dislocation of credit markets. The decline in net asset value was driven by our oil and gas investments, as well as unrealized appreciation due to spread widening.

Oil and gas investments accounted for $0.15 of the NAV decline and quoted investments accounted for $0.14 of the decline, and in addition there was also a $0.04 per share accretive impact to NAV from stock buybacks, partially offsetting this decline. During this period, we will be proactive with respect to potential restructurings for future funding requirements in our portfolio. In many instances, we are the lead lender and in position to drive outcomes that will maximize shareholder value.

The challenging market environment did present us with what we believe is an attractive opportunity to repurchase our stock. As you saw in an earlier announcement in December we announced the completion of an initial $50 million buyback program, and our Board authorized a second $50 million program.

Greg will provide specific details in his remarks on our progress to date. We are pleased to have successfully announced and also executed against this program.

Turning our discussions to our dividend. The Board approved a $0.20 dividend for shareholders of record as of March 21, 2016. With that, I will turn the call over to Ted.

Thank you Jim. First, I will discuss our investment activity for the quarter and then I will provide an update on each of our core oil and gas positions. As Jim mentioned, the leverage credit markets clearly impacted by negative sentiment as high yield and leverage loan spreads widened and yields rose.

The middle market, while not immune, is generally insulated from trends in the broadly syndicated market, and typically reacts with a lag to changes in liquid credit markets. Middle-market new issue activity declined dramatically. Nevertheless, we've seen spread widening as banks remain reticent to commit capital, driving demand for private capital.

We believe middle market spreads continue to offer interesting risk-adjusted returns. With this backdrop, origination activity was somewhat muted. During the period, we invested $205 million in 4 new portfolio companies and 19 existing companies.

Our weighted average yield on investments made was 11%, and our origination activity focused on investing in existing portfolio companies, which accounted for 79% of the investments made during the period. We continue to focus on secure debt opportunities, which accounted for 61% of the investments made during the period. During the period, we exited $262 million of investments, of which 53% were proactive sales and the remaining balance was repayments.

The yield on debt investments sold was 11.2%, and the yield on debt repayments was 11.3%. During the quarter, we exited our investment in Citco, Vertafore, and Caza Petroleum. Repayments for the quarter totaled $122 million, which included the full repayment of Golden Hill, a middle-market loan warehouse within our structured product portfolio.

Moving to specific investment activity. As I mentioned, we focused on investing in existing portfolio companies during the period. Beginning with renewal energy, we have two primary investments. Solarplicity, formally known as AMP UK, and Renewable Funding, also known as Golden Bear.

Renewable energy accounted for 7.7% of the overall portfolio the end of the quarter, and we expect renewable energy investments to generally be between 5% and 8% of the portfolio. Our investment approach in renewable energy has been to, one, prioritize asset quality and counterparty risk with government-backed payments or programs where the risk of capital loss is limited; and two, a focus on financing assets versus financing platforms. For the quarter, we invested $44.3 million in the sector.

Moving to aircraft, Merx Aviation continues to pursue a opportunities as well as manage it's existing portfolio, including the monetization and refinancing of aircraft. During the quarter, we increased our debt investment in Merx Aviation by $13 million for bespoke financing arrangement with Delta Airlines. In addition, Merx repaid approximately $9 million of equity during the period, and also played a $3 million dividend.

At the end of December, aviation was 15.2% of the portfolio, up from 14.4% last quarter. Year to date Merx has returned $78 million of capital to Apollo Investment Corporation.

Moving to oil and gas exposure, we continue to work closely with the management teams of each of our investments. As we said before, our portfolio is well diversified by borrower and geography. Our investments are generally structured with strong legal documents, which provide us with significant protections.

We believe our marks reflect the underlying fundamentals of each borrower and the stress in the industry. Oil and gas represented 12.9% of our portfolio, or $395 million at the end of December, down from 15% or $480 million at the end of September on a fair-value basis. The decline was due to the repayment of our investment in Caza, as well as fair value adjustments. Regarding Caza, the company completed a debt and equity restructuring, which included the full repayment of our investment.

The exit of Caza is a good example of our ability to monetize an oil investment at attractive value during a difficult energy environment. We exited this investment at an 11.5% IRR. We're actually pleased with this outcome, particularly given the challenging market environment.

At the end of December our portfolio had eight core borrowers, and 81% of it was in secured debt. I will now provide an update on each of the eight core borrowers.

Beginning with Canacol, a Canadian E&P Company located in Columbia. We have a $73 million unsecured investment marked at 97% of cost. The investment has a risk rating of II. Although it is unsecured, the note has significant structural protections, including limitations on incurrence of debt.

The company's investments and assets are primarily gas related, and benefit from higher pricing and long, fixed contracts with local power plants. In addition, the company recently raised approximately $60 million of equity, representing 20% of the companies market cap, which was in addition to it's already strong liquidity.

Moving to Pelican Energy, an entity financing certain wells at Chesapeake Energy. We have $28 million first lien investment, marked at 83% of cost. The risk rate of this investment remains III.

The company's investments and assets are more tied to gas, with approximately 68% of its assets dedicated to gas products. In order to preserve cash, the company is exercising its non-consent rights on most wells that are being drilled.

Moving to Deep Gulf, an E&P company with wells located in the Gulf of Mexico. We have a $50 million first lien investment, marked at 91% of cost. This investment has a risk rating of II. The company is backed by First Reserve, a strong sponsor exclusively focused on energy.

During the period, the company successfully raised $75 million of new capital from other non-affiliates at $0.91 on the dollar, consistent with where we are marked. The company has no liquidity issues for the foreseeable future.

Moving to Extraction Oil and Gas, an E&P company with assets located in the core of Wattenberg field. We have $52 million of a second lien, marked at cost. This investment has a risk rating of II.

The company has low break-even oil prices of around $30 to $35, and recently raised $100 million of preferred equity below our debt. The company has slowed drilling to reserve liquidity.

Moving to Miller Energy, a gas E&P company with significant oil affects in Alaska's Cook inlet. We have an $89 million second lien investment, marked at 72% of cost. This investment has a risk rating of IV. As previously mentioned, the company filed for bankruptcy in early October and the investment is on non-accrual.

The debt is the most senior position in the capital structure, and we expect the company to emerge from bankruptcy by the second calendar quarter. The company has significantly reduced its G&A, is conserving cash, and deferring projects. The current plan of reorganization has us receiving a combination of debt and equity.

Osage Exploration, an E&P company with assets in Oklahoma. We have $25 million of first lien investment, marked at [18%] of cost. The risk rate of this investment was downgraded from IV to V, and the investment was placed on non-accrual status during the quarter. Due to eliminated liquidity, the company filed for a negotiated bankruptcy on February 3, and this is reflected in our valuation methodology.

Spotted Hawk is an E&P company with core Bakken assets. We have $84 million of first lien investment, marked at 81% of cost.

The risk rating on this investment was downgraded from II to III, despite being in the core of a good basin, having really good drilling results, taking steps to preserve cash. The company's liquidity is constrained, but we believe in the underlying asset value.

And lastly, moving to Venoco, an E&P company with assets located primarily in southern California. As a reminder, last year we participated in a strategic exchange, where we rolled our unsecured notes into second lien notes, and invested additional capital in the first lien notes.

We now have $41 million in first lien investment, marked at 90% of cost, and $46 million second lien, marked at 55% of cost. The risk rating of the first lien was downgraded from II to III, and the second lien was downgraded from III to IV during the period. We would like to clarify a point of confusion in the marketplace around our second lien investment in Venoco.

Our second lien investment has same coupon and maturity of the company's unsecured notes. However, some people have been confusing the two investments with respect to valuation. The unsecured notes are quoted, while the second lien position we owned is not quoted and is valued by a third-party.

To summarize, of our eight core oil and gas positions, two positions, Miller and Osage have been valued on a restructuring and recovery basis, and we anticipate that two investments, Spotted Hawk and Venoco, may need additional capital or go through restructuring. We believe our marks reflect the underlying fundamentals and increased challenges faced by these four companies. We think our remaining four positions are covered, given the factors I mentioned before.

Now moving to overall credit quality, the portfolio's weighted average risk rate on a cost basis increased to 2.4 at the end of December, up from 2.3 at the end of the September, and our fair-value remained at 2.2 over the same period. The weighted average net leverage of our investments was 5.4 times, and the weighted average interest coverage remained at 2.5 times.

As mentioned, we've placed our first lien investment of Osage on non-accrual status during the quarter, and also placed our DIP loan in Magnetation on non-accrual status. At the end of this December, investments on non-accrual represented 2.5% of the fair value of the portfolio and 6% on a cost basis, compared to 2.2% and 4.7%, respectively, at the end of September.

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

Thank you, Ted. Total investment income for the quarter was $94.3 million, down 4% quarter over quarter, and down 14% year-over-year. The decline quarter over quarter is primarily attributable to lower pre-payment income, a lower asset base, and two investments being placed on non-accrual status, partially offset by higher dividend income.

There was approximately $1 million of pre-payment and fee income in the December quarter, compared to $7.4 million in the September quarter and $13.9 million in the year ago quarter. Offsetting the decline was an increase in dividend income derived from our investments in aviation and shipping. Our quarterly run rate for dividends should be approximately $10 million to $11 million.

Expenses for the December quarter totaled $46.2 million, compared to $48.9 million last quarter and $53.4 million for the same period a year ago. The sequential decrease for the quarter was primarily result of a decrease in interest expense associated with the repayment of $225 million of senior secured notes. On a year-over-year basis, the decline was probably associated with lower management and incentive fees.

As you recall, our investment advisory and management agreements include two waivers and an offset for fees received from CION. Inclusive of these waivers and offset, our effective base management fee was 1.54% and our effective incentive fee was 17.15% for the quarter. Regarding our funding sources, in addition to the pre-payment of the senior notes, $200 million of convertible debt matured in January 2016.

Both positions were refinanced using our revolver, and as a result, our effective weighted average interest cost has declined from 5.5% to 4.3%. On a year-over-year basis, annual interest expense will decline by approximately $17 million, or $0.06 per share per year, of net investment income from both of these maturities.

Net investment income was $48.1 million, or $0.21 per share, for the quarter. This compares to $49.6 million, or $0.21 per share, for the September quarter, and $56.7 million, or $0.24 per share, for the year ago quarter. For the quarter, the net loss on the portfolio totaled $73.9 million, or $0.32 share, compared to a net loss of $51 million, or $0.22 per share, for the September quarter and a net loss of $76 million, or $0.32 per share, for the year ago quarter.

The net loss of $73.9 million includes $9.3 million of realized losses. Approximately $5.5 million of those realized losses were previously recognized as unrealized depreciation. Negative contributors to the performance for the quarter included our investments at Spotted Hawk, Osage, Magnetation, Aveta, Venoco, and Garden Fresh. Positive contributors to the performance for the period included our investments in Fidji Luxco, Renewable Funding, Golden Bear, and Merx Aviation.

In total, our quarterly operating results decreased net assets by $25.8 million, or $0.11 per share, compared to a decrease of $1.8 million, or $0.01 per share, for the September quarter, and a decrease of $19.5 million or $0.09 per quarter for the year ago quarter. On the liability side of our balance sheet, we had $1.4 billion of debt outstanding at the end of the quarter, essentially unchanged quarter over quarter. The Company's net leverage ratio, which includes the impact of cash and unsettled transactions, stood at 0.76 times at the end of December, up slightly from 0.73 times at the end of September.

During the December quarter, we purchased an additional 5.2 million shares for $31.2 million, and since the beginning of January, we have purchased an additional 2 million shares for approximately $10 million. Since commencing our purchase program, we've repurchased 10.6 million shares or 4.5% of our shares outstanding, for a total cost of $62 million. At the end of December, our portfolio had a fair value of $3.1 billion and consisted of 95 companies across 25 industries.

The weighted average yield on the debt portfolio at cost was 11.4%, down 20 basis points quarter over quarter. The decrease in the overall yield was primarily due to the placement of two of our investments on non-accrual and the conversion of our investment in Solarplicity from preferred equity to secured debt during the period.

This concludes our remarks. Operator, please open the call to questions.

(Operator Instructions)

Arren Cyganovich, DA Davidson.

Thank you. The gross investment activity was relatively slow. I guess not overly surprising. But what are your thoughts in terms of the environment and being able to put the gross amount of investment activity? I know that, on a net basis, you expect to be kind of flattish. But on the gross basis, what are you expecting in this environment?

The leverage finance markets really began to get challenged in the fourth quarter of last year, and that really slowed down activity levels, just overall sponsor activity. And we've seen that pick up a little bit in the first quarter. But in our own current situation, we weigh any new origination versus buying back stock. So, spreads have widened in the middle market quite materially. And people are willing to pay up for certainty, particularly around things like unit tranches and for-sponsor activity. So I think our activity levels are really focused in the core and middle market sponsor business, by and large. But I would say also, we are really, really being prudent about new originations, as you've seen vis-a-vis hoarding liquidity and potentially buying back stock.

Thanks. And then, could you give me a little bit more detail as to what elevated the dividend income for the quarter? I'm sorry. I missed the specifics on that. What specifically was higher than your normal run rate?

Yes. So it's a good question. We have our Solarplicity investment, which was originally preferred stock then converted to senior debt. That was one piece, and also our investment in Golden Hill. Our equity investment there, which was repaid during the quarter, which was a structured products warehouse. Those are the two larger differences, when you look at it quarter over quarter.

Doug Mewhirter, SunTrust.

Hi, good morning. First question. I noticed that the publicly traded aircraft lessors have come under quite a bit of pressure. The whole market is down, but it seems like if you look at AerCap and Air Lease, they've really taken a hit. Is that just mostly sentiment, or is there something internally in the aircraft leasing market, which is maybe showing worse internals or worse fundamentals? Because I don't follow that industry that closely to really know. What are you seeing from Merx's perspective? Are they playing defense, or are they still finding opportunities?

I'd say the answer is a bit of both. Fundamentals still remain very strong. And if you look at December passenger data, for example, it was very strong. So I think you have not seen real weakness, and the order book size, vis-a-vis passenger demand, actually are pretty matched.

That being said, if you look at our activity levels in Merx and that portfolio really hasn't grown that much over the last 12 months. I think that is a completion of -- we're being a little bit more cautious about deploying capital in that business.

Number two is we have seen some certain instances where it's been more competitive. So, I don't think you'll see the amount of our Merx portfolio really go up or down that much. We continue to see idiosyncratic opportunities, but when we go through all the fundamentals and we see what valuations are and we see kind of what we're seeing in the business, we don't really see real weakness.

The other thing we're obviously focused on is, again, we own the actual physical airplanes. So theoretically, you are not taking country risk. But I think there's a big focus in the management team to really look at our lessors and really do real, hard credit underwrites of our lessors, particularly in jurisdictions and emerging market economies which are more challenged.

So our lessors all pay us in US dollars, so we're not exposed to currency risk. But again, some of our lessors are in countries that -- or in the space in general, there's obviously lessors all over the world, and so we're trying to be more prudent about where we are actually leasing aircraft.

Okay thanks. My second question, could you talk a little bit about Aveta? I noticed you took a markdown there. Looks like it's still accruing, though. Is this something you can get through relatively quickly? Is it something structural that changed? Does it deal with regulations that might be more of a longer-term problem?

So take a step back. This is a quoted security. It is marked in line with a quote. It is a managed care provider in Puerto Rico. For various reasons, the whole sector -- it's not company specific, it's sector related. It has underperformed. That being said, if you look in the fourth quarter, the company's debt was actually upgraded and there's just a number of changes. So I don't it's something that is going to turn around very quickly, is our own opinion here.

That being said, given its first dollar risk, the leverage level through our piece is at a level where we feel comfortable with. But I don't feel like a turnaround is -- I don't think -- we're not expecting a big fundamental turnaround, overall, anytime soon. But, we also are not overly concerned, vis-a-vis where we are marked.

Okay. Great. Thanks. That is all my questions.

Kyle Joseph, Jefferies.

Morning, guys. Thanks for taking my questions. I was hoping to get a little more -- thank you for all of the color on both energy and aviation. I was hoping to get a little more color on the portfolio performance outside of those industries. If you could talk about, A, a little bit on revenue and EBITDA growth trends? Then if you could branch that into more of a discussion on your outlook for the broader macro-economic environment? That would be helpful.

I'll answer the first part of that, and I will push over to Jim for the second part of it. So again, our companies, outside of oil and gas and aircraft, are largely levered to the US economy. A lot of the headwinds that are being faced by -- that the stock market is worried about everything else, in terms of China and currency risk and global growth slowdowns. A lot of that doesn't overly impact our companies, because they generally do business in the United States and are on the -- in middle market.

That being said, revenues for our portfolio performed actually pretty well, this past quarter, for instance in our core corporate book. I would say we're seeing a little bit of, like, margin stability. We've had margin growth the last couple of years. We're having a little bit of margin stability, or even in some cases, slight declines. And it's all Company idiosyncratic. Some of it is wage inflation. Some of it is related to other factors.

But in general we're not seeing economic weakness in our overall portfolio. But obviously that is backward looking. And I will pass it over to Jim on macro.

Without getting too macro with regard to this portfolio, as Ted has mentioned, I think that we are obviously -- we live in a market where the headlines for the last 60 to 90 days have been dreadful and negative and concerning about two things: really, Asian growth and the impact of what is going on in the oil sector with currencies. And I think we're respecting that. As Greg said earlier, and Ted said, we are really trying to hunker down on our portfolio, husband liquidity, and be very thoughtful about existing investments before you make new ones. And certainly, I expect we're going to be in this environment for a period of time.

We, as a firm, are now predicting a major recession in 2016. But certainly, a lot of the recent activity, you wonder if it could be a could cause and effect issue, where the concern about global growth turns into more of a recession. As Ted said, our domestic portfolio is not showing dramatic signs of strain as one would see as you approach a recession, notwithstanding our commodities and energy book domestically.

Thanks. That's very helpful. Then just in terms of portfolio composition and investment strategy from here. Saw some changes in the portfolio. I think the percentage of fixed rate investments actually went up in the quarter, and then it looked like you guys sold a decent chunk of the structured products investments. Is that anything strategically that's changing, or is that more of a function of timing of maturities and whatnot?

I think it's somewhat the latter. I think today -- and I hope you all recognize and appreciate the color that Ted gave on our line-by-line on our energy book. I think right now we are -- when we have a maturity like that in our structured credit book or when we have a case like Caza, certainly we want to be thoughtful about that capital. And we also gave ranges of what we expect certain strategies to be, as Ted talked about renewables, Greg talked about Merx.

We don't believe that there is any dramatic change in the overall portfolio construction, right now. It really is more about the around the edges, trying to really optimize and create an efficient, liquid portfolio as we continue to invest in a pretty turbulent environment.

So our activity level, I think going forward, will be mainly in secured debt. But really as Jim said, the repayment of Golden Hill, which was a very large structured products investment, skewed the numbers in this past quarter.

Okay. Thanks very much for answering my questions.

Terry Ma, Barclays.

Hey, guys. I just wanted to get a sense of your appetite for buybacks? I think you mentioned spreads are wider right now, so the investment environment is potentially looking more attractive. I just wanted to get some color on how you thought about that, and maybe what areas look more attractive, relative to buying back your stock?

When we think about our stock buyback, obviously, we think it's very attractive. As Jim said in his commentary, the market volatility is obviously -- provide us an opportunity to buy back our stock at a pretty big discount. And I think what we mentioned in the last call is -- our intention is to use the buyback program. Obviously that is weighed against liquidity, overall leverage, and other factors.

As Jim mentioned earlier, if you look at our investment activity, it was predominantly focussed on existing portfolio companies. A lot of our excess liquidity is used to buy back stock.

I would just add, we're happy. There's a lot of fanfare about announcements. We're happy that we've actually announced and executed. It is certainly accretive to us, looking where our stock is priced right now and our dividend yield. It is a very attractive investment. You just have to balance that, as Ted said, with the other objectives of liquidity and leverage. At this point in time, we intend to continue our execution of the existing plan in place.

Got it. That is helpful. And then just on the management fee waivers, has there been any talk about maybe potentially making that permanent rather than renewing it every year?

Well, certainly -- I'm glad you asked that. Our Board, working with Management, goes through a pretty arduous process every year. They are very cognizant and up to date on the current marketplace and what has happened away from us in various other vehicles and entities. And balancing that out with the waivers that have been put in place historically, those will both be big inputs into the yearly process that occurs later in this year. So that's the best I should be really answer right now.

Okay. Got it. Thank you.

Christopher Testa, National Securities.

Good morning, thanks for taking my questions. Just with the weighted average debt to EBITDA coming down slightly, just how much of that is from structuring of new loans at possibly lower capturing points versus improvement in your existing portfolio?

I mean I think the answer is a combination of both. I think this past quarter was mainly driven by EBITDA growth versus investments. Because as we mentioned, new investment activity is pretty muted. But you are seeing more discipline on the leveraged side of the market overall. I don't think leverage levels have come down dramatically, but you're definitely seeing much better structures, much better leverage terms on new investments. But our specific leverage is mainly being driven by just organic EBITDA growth.

Okay. And how much of the more disciplined leverage levels is coming from the actual companies possibly pushing back on not wanting more leverage as opposed to Apollo actively seeking lower leverage levels?

I think it's more the latter, to be honest, because oftentimes we are dealing with sponsors. I think it's more the latter. I think in general, there's a -- except there's a very different discussion than 10 years ago for everyone to max out on leverage. I think people want to be prudent about the amount of leverage put on companies.

But I think a lot of that has to do with the fact that I think the overall middle-market sector is just being more disciplined about terms and conditions they are giving borrowers. It is more being driven by, I would say, ourselves. I think it is more being driven by the market, vis-a-vis borrowers.

Okay. That is helpful. About how much of your non-energy investments -- how many of those have exposure to regions were oil and gas is a significant part of employment in those areas? And do you see that as an issue that could potentially impact non-energy and non-metals and mining companies, going forward?

Yes. We've actually looked of at that, and the answer is we don't feel like we have a lot of -- I call it knock-on exposure. We look at not only the risk that you cited, but also things like companies that service those industries or companies that have indirect exposure to those industries like housing in the Bakken and places like that. When we go through portfolio in our corporate book, we see very little in the way of knock-on exposure.

Okay. And I know that you've been picking up on the non-sponsor side of the business, given the sponsor size has been very challenging, to say the least. Is there some sort of infrastructure that needs to be built out to capture more non-sponsor finance business, or is this something that is just kind of occurring naturally as the sponsor side slows and therefore your non-sponsor business is taking up a greater composition?

I would say -- listen, over the last four or five years, the Firm has invested a lot of money and headcount into building out other verticals away from -- so it requires additional investment on behalf of the manager. That being said, in our case a lot of infrastructure already exists. It is one of the benefits of the Apollo relationship. So a lot of these kind of non-sponsor verticals exist within the Firm, which is why we're very happy to be affiliated with Apollo.

Okay. Last one for me. Sorry if I missed it. How much of the NAV decline was from spread widening versus actual portfolio company deterioration?

I would say as we go through it's probably about half of it was in our more liquid securities. That was from spread widening than it was from the underlying fundamentals of the companies.

Okay great. That is helpful. Thank you. That is all of my questions.

Leslie Vandegrift, Raymond James.

Good morning. I just got a couple of quick questions. First one -- I don't know if I missed at the beginning, but what is the weighted average EBITDA right now on the current portfolio and the newer investments in the quarter?

On a weighted-average basis, the EBITDA there is 5.4%. On the majority of the investments made during the quarter were into our specialty verticals, whereby they are more equity and debt focused, shipping and renewables. So they don't have an EBITDA measurement basis.

Okay. And I believe it was extraction, you guys were giving the color on at the beginning. You were talking about the price deck having a break-even of $30 to $35 marked at cost of the end of the quarter. End of December, oil was just at $35. Can we talk about how we get to the marked at par cost there, with it kind of being at its break-even level?

Yes, so if you recall -- I remember you asked the question about Caza last quarter, too. We mark these things on -- what's much more important when we mark these positions is the forward curve, vis-a-vis the spot. If you look at where the forward curve is, even today but also as of December 31, the forward curve was pretty far above where spot was. The spot -- just because we value these things on a reserve basis, that company specifically has got a lot of embedded reserves. The forward curve has much bigger impacts on valuations. And also, you saw during my remarks, the company also raised a substantial amount of capital below us, $100 million. The company obviously shored up their liquidity in a pretty big way.

All right. A final question. With price decks being low right now and looking at the forward curve being higher, there, looking at possibly increasing some energy lending getting back in right now?

I think from the management team's perspective, it's a big focus of ours to shrink our overall oil and gas exposure or maintain it. I don't think you will see us -- we are open to doing new business. We are open to doing new loans. But quite frankly, we lend against what we think are very, very high-quality assets and very, very high-quality management teams. The high-quality assets today, A, aren't really looking for new debt. They are doing other things like cutting CapEx, selling assets, looking to sell the whole company. So I think we're open-minded to it, but we don't really want to increase the overall percentage of our portfolio devoted to energy.

Okay. Perfect. Thank you.

Ryan Lynch, KBW.

Hey. Good morning, guys. Approximately how much of your dividend income this quarter could be considered non-recurring?

I would say it's probably $5 million to $6 million of it.

Okay. And can you guys talk about how the competitive environment has changed from maybe a year ago, from a competitive standpoint? Is there a big pullback on competition, are participants still acting rational, and are you guys still seeing banks being active in the market?

Yes. So I would say -- you have to bifurcate the market in a bunch of different ways. In terms of first lien senior debt, we still see it as very competitive, very, very competitive, where terms and -- spreads have widened a little bit, but that's still very competitive.

For what I call stretch senior unit tranche second lien, that market has become a lot less competitive. Because there's certain players in that market who aren't in the market at all times, and a lot of those people have fallen away just given what has happened in the rest of the market. So I would say it's bifurcated by types of risk, and so it depends on which asset class we're talking about.

Okay. And then just one last one, following up on Terry's question on fee waivers. And I do appreciate the fee waivers you guys have provided so far. But I just wanted get your thoughts on potentially implementing a total return hurdle or high watermark?

I would say, like I said in my last question, the Board and Management are assembling a lot of information with regard to the process it goes through on an annual basis. We are cognizant of what is going on in the market out there today and historic fee structures and current free structures, along with the impact of our waivers. I think the Board is weighing what they think is in the best interest of the Company and our shareholders.

Okay. Thanks for your time today.

You are welcome.

Chris York, JMP Securities.

Good morning, guys, and thanks for taking my questions. I would like to get an update on how you guys are thinking about the management of balance sheet leverage, considering that debt to equity expanded to about 0.8 times and that either stock repurchases or additional fair-value write-downs in core energy positions will push you closer to that 1-to-1 ratio?

Yes. I think it's a great question, and thanks for asking it. We're very focused on it. We have said in the past that we wanted to operate closer to 0.65, 0.75. So we are on little bit on the outer range, right now. We feel comfortable.

But I think that what the message you are hearing from all of us today is we are really focused on the current portfolio and optimizing liquidity and husbanding liquidity as we can. And while we like to buy back stock and make new investments, the first dollar in, we're going to be focused on making sure that we are appropriately leveraged. So with that regard, the ability -- we're happy we did buybacks in stock right now. And with pre-payments slowing down, we're going to be laser focused on where we end the quarter and our liquidity in our existing book.

Every quarter and any BDC has to weigh the options of making new investments, adding leverage, in our case buying back stock. And in this case, we're certainly -- I'd probably prioritize making sure we're focused on our leverage a little bit higher than our stock. But those are really neck and neck right now before we think about new investments.

Makes sense. And then switching gears a little bit. So outside Spotted Hawk and Osage, you don't have any near-term maturities in your energy portfolio. Maybe put a frame of reference for us in thinking about what needs to happen in the price of crude? Maybe this year or 2017, where you guys start thinking about the potential to get all of your money back?

I think it's name by name. So some of these assets will be auctioned off at some period in time. But I think the answer is -- there's no near-term maturities, so obviously the bigger focus with all of these companies is on liquidity. So every company is doing everything that they can to manage liquidity, and obviously we are being a very vocal with our borrowers about them managing their liquidity.

So as we always mentioned, each of these companies is going to different challenges and different processes to potentially raise new money or do other things. So it's hard to say if oil stays at X for X period of time, what happens exactly. But a lot of these companies -- you're right. The more acute issue is liquidity versus maturity issues.

Got it. That is it for me. Thanks, guys.

Jonathan Bock, Wells Fargo Securities.

Good morning, and thank you for taking my questions. I'd probably reiterate a bit of the congratulations in that keeping the fees low, focusing on the waivers, as well as buying back stock. That is credit that should be given to you, Jim, Ted, and Greg, and Elizabeth, as well as your Board. So I know, as you go in to discuss future ways to add shareholder value, it's certainly a great inertia and people are very pleased. So thank you for that.

Rather than just beat the horse on stock buyback versus new investment, I'd like to ask you a question about the Solarplicity investment. Only because, when we think about project finance, and we see that this was funded a bit later in the quarter. Trying to understand the relative risks that come in building out a solar platform or solar farm or solar project, excuse me, over the next three years in light of the low cost of energy. Clearly you've paid attention to what the oil markets are doing. You obviously had that diligence. But the question really sits, as to how can that investment go wrong?

That's a good question. So let's just describe what the investment is. As I've mentioned before, we have basically two solar platforms, and really they focused on assets, not on platforms. We're not looking to make venture capital bets here.

So on Solarplicity specifically, the UK government has got a feed-in tariff, whereby they'll contract with you to pay you a certain price per megawatt hour if you produce power using green energy. And so these assets are -- we have a long-term PPA with the UK government. So if oil goes up or oil goes down, it doesn't effect the actual PPA. So the risk is that the UK government rips up the contract, which they have never done before. And that really is the big risk. We are not taking things like cost acquisition risk or ramp risk or other things, because again, we are mainly exposed just to the assets.

So I agree with your question. Your question is, there is a lot of stress in the solar space, so people might scratch their heads a little bit. But again, if you look at the underlying risk we're taking in both of our platforms, we're really -- again, the assets we're purchasing are contracted assets.

So that's fair. And I think of the $600 million, you were $150 million of it. Who were your other partners that you went alongside to finance that project?

In that one, it is just us. We control it. We have a partner who is an operator, but we don't have a financial operator.

Okay, got it. Okay. So clearly attractive investment focusing on the government, which -- and it is hard to say what happens, but at the end of the day the past is generally prologue. But then you kind of want to ask yourself a question, because an investor look at the Solarplicity investment say that is excellent. But then perhaps look at a stock buyback versus an investment in Belk, and they might ask why did you buy Belk?

Belk is a very, very small position. It is first lien senior secured risk that we were able to buy at a big discount. I think it is a fair question. But again, I think -- if you look at the size of the Belk position, it's --

$10 million, it's small. You are right.

-- as opposed to the overall portfolio.

You are right. I appreciate that. The next question we've got, kind of focusing in on underlying credit quality. I think you mentioned Magnetation on non-accrual. Understand the difficulties in metal and mining. Am I correct? This is the DIP loan that went on non-accrual, right?

Correct.

So I'm just curious, because we're not credit operators such as you, but how do DIP loans go on non-accrual? You supersede almost everything else.

John, that's a good question. I think that's you can understand our desire -- certainly, we have had a more engaged discussion on various credits. This is one that is still in process.

But you are right. Usually DIP loans are, one, they are senior secured ahead of everything else, and historically they have been good investments. This has had some challenge because of the underlying fundamentals and what is going on specifically in the company, but I think it is probably best, because it is an ongoing situation, that we don't have a further discussion on that, publicly.

That is -- totally understand that, and I understand those rules. So then the next set of questions, and Greg, this would be helpful for us to understand. Because at times, we'll hear from BDC's saying -- we're going to value this company on an asset basis, and if you sell all the trucks and you sell all of the wells and you sell the power lines, and there is this magical buyer, and then often we hear this, quote unquote, in an orderly market.

And I'm curious, as you go through the valuation process for some of these oil and gas investments, is the value that you are generating based on a sale that you could transact today, or your valuation firm says could happen today? Or, does it assume that you break this up and in six months everything is going well, and then what we are going to do is sell it to the MLP's because they are hungry for assets anyway?

And I hate questions of fair-value. Valuations are like opinions. Everybody's got one. But in a period of credit tumult, the market always wants to focus on today versus six months from now, just like you do when you underwrite new investments. So help us understand that process, particularly as it relates to energy assets. Because people believe those values continue to fall.

Right, Jonathan. And I think we've had this discussion before around valuation. When you think of fair value, you think of, first of all, the underlying cash flow of the investment. The underlying asset values that are there. And we take that into account as we look at the positions that we have. Relative to a willing buyer out there and seller, if there are markets that are so disjointed, where we have fundamental asset cash flow coverage but the technicals in the marketplace are saying something different, we wouldn't value it that way. We would value of based upon the fair-value of the underlying position that we have. So that is the way we go about it. Hopefully -- does that answer your question?

I appreciate it. It is a bit of a question with no easy answer. You can kind of understand that relative to what you are doing for your shareholders with buybacks, et cetera. Generally, when you set that precedent, people want to make sure and could come alongside to understand that NAV is best mark. But when you have management teams perhaps taking other liberties elsewhere in their book, it just creates a bit of a cloud over the entire space.

And I appreciate you trying to answer that. It is not an easy question to answer, but one that every client is asking. Then lastly, just in light of some structure --

John, it is Jim. I do think I really want to be clear. I think you're asking a critical question, but I think -- and I don't want to sound defensive, but I believe that we have a best-in-class valuation process. And the energy space is one where there is a lot of inputs. Certainly a company's liquidity and ability to stay afloat is a critical one right now. And we certainly wanted to point out the confusion on Venoco, which we are focused on because when one comes under potential questioning about a valuation, we take that quite seriously here.

But I am of the view, and I think our Board shares it, that the broad valuation process as a big public company that we go through, not only in our current book and our energy book and our Merx and structured credit, we believe we are best-in-class. We have valuation firms tell us that. So certainly in periods right now of extreme volatility and extreme cynicism and concern, the valuation process should come under consideration. But we stand, hand on heart, knowing that we believe we have best practices.

I appreciate that, and thanks Jim for the additional color. And then just lastly, as it relates to the structured products book, particularly the Golden Hill. Certainly a positive. I've also noticed there's quite a bit of return that you've received in the Madison Capital bills. I think those have been around a while. I don't even know if they were even named Kirkwood before, but my mind is it continues to go.

But I would say that -- here's a question. So you received some good middle market returns on those CLOs. Ted, in light of the near-term dislocation that could possibly curb middle-market credit, would it be your view to perhaps expand that partnership with Madison Capital in light of the performance of the MCF deals that you have had?

We're always open-minded to it, and obviously so we have dialogue with lots of different people about lots of different structures. Anytime you do a structure like that, again, that was -- you have the benefit from two things: one is great assets and also great liabilities. I would say, we're just not today really looking to expand the amount of embedded leverage in our overall portfolio. So I don't think you'll see us do another Madison/Kirkwood transaction in the near-term. But obviously, we're always open-minded to it.

And I would add, Jonathan, I appreciate your having the insight to differentiating between the middle market Kirkwood transactions, Madison, versus the largely syndicated, which are a really small amount in our book. And we differentiate the value of those based on the structure and the leverage and the underlying collateral. And those have done quite well for us to date.

MadCap's seen as an excellent operator, and credit to you for investing in those partnerships. So that is it for me, guys. Thank you so much.

Great. Thank you, all. We really appreciate the detailed questions and the knowledge of our company and support. Certainly, a challenging environment but we appreciate having these opportunities to talk about our portfolio and our strategy. So thank you very much.

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