MidCap Financial Investment Corp (MFIC) 2017 Q2 法說會逐字稿

Good morning, and welcome to Apollo Investment Corporation's earnings conference call for the period ended September 30, 2016.

(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. Speaking on today's call are Jim Zelter, Chief Executive Officer; Howard Widra, President; Tanner Powell, Chief Investment Officer of AIM; 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 of 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'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 reported results for the quarter ended September 30, 2016 and filed our Form 10-Q. I will begin today's call with some comments about market conditions followed by a brief overview of the results and then some additional business highlights.

I will then turn the call over to got Howard who will discuss the progress we have made repositioning the overall portfolio. Tanner will then cover our investment activity for the quarter and provide an update on credit quality. Finally, Greg will review our financial results in more detail. We will then open the call to questions.

Beginning with market conditions, despite an increase in issuance in the syndicated corporate loan market, middle-market activity remained sluggish during the quarter. Transactions led by non-banks have increased in size as yields have fallen underscoring a growing presence of non-bank lenders. Amid limited new issue supply, increased competition for middle-market deals has driven leverage levels higher and yields lower. Given the competitive market environment, we remain highly selective and disciplined as we seek to reposition our portfolio. In today's market, we are finding that capital deployment in originated loans is less attractive, and many of these investment opportunities do not make it past our credit filter.

While the leverage-lending market is currently frothy, we do not expect to deviate from our stated strategy and we will continue to be patient and disciplined investors. Given the environment, we chose to reduce leverage and repurchase stock during the period rather than to deploy capital. Our patience in deployment along with additional expected repayments in the December quarter provided us with ample capital to deploy in more proprietary assets when opportunities become more attractive.

Lower leverage creates the potential for future portfolio growth. We continue to make steady progress executing on our strategy. We reduced our exposure to certain specialty verticals and expect further reductions in the December quarter, which Howard will discuss in greater detail.

We also closed our first two co-investment transactions during the quarter and expect co-investments with MidCap to be an important part of our strategy going forward. We believe the combined origination platform that we have developed will provide a differentiated benefit over the course of a cycle and make us more relevant to borrowers and our sponsor clients and we are pleased with our progress to date. An established relationship between a sponsor and a lender is becoming increasingly important, particularly in the middle market. Sponsors tend to return to a select group of trusted lenders for financing solutions, which is why having a broad product offering is critical.

Moving to our results. For the quarter, we reported net investment income of $0.18 per share, which includes a benefit from previously accrued incentive fees which Greg will discuss in greater detail. Net asset value increased $0.05 or 0.7% to $6.95 per share during the quarter as a result of net earnings, accretive stock buybacks, and a slight net gain in the portfolio. Moving to stock buybacks, during the quarter, we continued to execute on our share repurchase program. As you saw in a previous announcement, in mid-September, the Board expanded the Company's stock repurchase program by $50 million to $150 million.

We are pleased to have expanded our share repurchase program. Since the inception of our share repurchase program and through the end of September, stock buybacks have added $0.12 to NAV per share. Moving to the dividend, the Board approved a $0.15 dividend to shareholders of record as of December 21, 2016. With that, I turn the call over to Howard.

Thanks, Jim. As described in our last call, we intend to focus on senior secured corporate loans sourced by Apollo's direct origination team with a focus on floating-rate assets while adding additional exposure in first-lien loans in life sciences, asset-based lending, and lender finance, areas with significant barriers to entry and which MidCap Financial has expertise. We continue to reduce our exposure to oil and gas, renewables, and structured credit, areas which we believe are not appropriate for AINV going forward.

As we reposition the portfolio, we expect the overall portfolio yield to decline commensurate with the reduction of risk. Given the illiquid nature of many of our investments, repositioning will take time although we may seek to accelerate the disposition of certain assets which are not core to our strategy.

We expect that our target portfolio will be approximately 50% to 60% in traditional corporate loans, approximately 20% to 25% across life sciences, asset-based, and lender financed, approximately 15% in aircraft leasing, and the balance in existing verticals and other legacy positions. We have already made some good progress towards achieving our target portfolio.

First, we continue to work through our oil and gas exposure. At the end of September, oil and gas at fair value represented 9.7% of our portfolio, down from 11.6% at the end of June. During the quarter, Extraction Oil & Gas repaid their loan at 101 as the company successfully issued high yield bonds. Tanner will later provide an update on our remaining oil and gas exposure.

Second, we have made progress reducing our exposure to structured credit. During the quarter, we exited investment in a credit-linked node generating an IRR of 13.5%. Accordingly, structured credit declined to 7.8% of our portfolio at fair value, down from 9.1% at the end of June. Subsequent to quarter end, we exited another structured credit investment, our equity investment in MCF CLO I, a middle-market CLO, further reducing our exposure. Combined these two positions, reduce our exposure by over $70 million.

Third, we expect our exposure to renewable energy to decrease in the December quarter. Since the end of September, we completed our third Golden Bear securitization on excellent economic terms, which reduces our exposure by approximately $7 million. Also, Solarplicity, which constructed its portfolio on an unlevered basis, is adding some of the expected leverage to its completed portfolio, and therefore, we expect that our exposure should decrease in the near term.

Finally, we have been actively working on a number of co-investment opportunities. During the quarter, we participated in two life sciences lending transactions along with MidCap. We believe life sciences lendings offers disproportionate risk rewards. We are focused on low loan-to-value loans made to borrowers in product development or early commercialization. We do not underwrite science.

During the quarter, we invested approximately $8.6 million in the first lien term loan and committed an additional $6.4 million to Aptevo Therapeutics, a biotechnology company with four commercial stage assets and a strong pipeline. We also committed $5 million to a senior revolving facility to Endologix, a public company that develops, manufactures markets and distributes minimally invasive devices for the treatment of vascular diseases.

We currently have a strong pipeline of life sciences co-investment opportunities. We look forward to reporting our continued progress over the coming quarters. With that, I will now turn the call over to Tanner who will discuss our investment activity and credit quality.

Thank you, Howard. During the quarter, as Howard discussed, we focused on executing on our strategy. Given the competitive market environment, repayments were elevated and we remain disciplined in terms of deployment, and as a result, net leverage declined. During the period, we invested $128 million in six new portfolio companies and 10 existing companies.

Our deployment focused on corporate lending and a couple of co-investment opportunities. We exited $215 million of investments, which were predominantly repayments. Accordingly, during the quarter, we experienced portfolio contraction as net investment activity was a negative $87 million in the quarter. The weighted average yield on investments made during the quarter was 10.3%, and the yield on sales and repayments was 10.7%.

During the quarter, we invested in six new portfolio companies. We invested $17.6 million in the second lien debt of Sequential Brands to support an acquisition. Sequential Brands is a publicly traded brand management company engaged in the licensing and marketing for a portfolio of consumer brands.

We also invested $10 million in the second lien debt of WCI Infinite RS to support an acquisition. Infinite RS is a leading supplier of engineering grade radio frequency technology products to technical and engineering customers. We invested $10.7 million in the first lien term loan of American Media and committed $1.7 million to the revolver. We invested $18.1 million in the second lien term loan of LANDesk Software.

As Howard mentioned, we also co-invested with MidCap in two life sciences companies, Aptevo Therapeutics and Endologix. Additionally, we also invested in several existing portfolio companies including $16.3 million in Golden Bear and $19 million in Solarplicity.

Repayments for the quarter totaled $197 million, which included the forward payment of Extraction Oil & Gas, a credit-linked note, and Premier Trailer. Sales for the quarter totaled $18 million, which included the complete sale of our investment in Belk and partial sale of our investments in Aventine and Tibco Software as we chose to pare back these positions given strength in the market.

Aviation continues to be one of our larger industry exposures, and we continue to be pleased with our investment in Merx Aviation as the underlying portfolio continues to perform well. Our aircraft portfolio continues to be well diversified by aircraft type, less fee, and country.

Let me give a brief update on our energy exposure. At the end of September, oil and gas represented 9.7% of our portfolio or $246 million across five companies, down from 11.6% or $304 million at the end of June on a fair-value basis. The decline was primarily due to the exit of our investment in Extraction. We continue to work through our remaining oil and gas exposure, and we will likely invest some additional capital in Glacier Oil & Gas during the December quarter to support accretive development.

Two of our oil and gas positions remain on non-accrual, Pelican Energy and Spotted Hawk. In both of these cases, we are working closely with the respective Management Teams. Regarding Pelican Energy, an entity financing participation in certain wells at Chesapeake Energy, the company's liquidity remains tight and it has elected to pick 100% of its most recent interest payment. Regarding Spotted Hawk, the company is currently undergoing a recapitalization. Post-recapitalization, the company is expected to serve as a portion of its reinstated debt.

I would also like to briefly comment on Venoco, another one of our oil and gas investments during the quarter. Venoco emerged from bankruptcy. Under the reorg plan, our first and second lien investments were exchanged for equity and warrants, and therefore are no longer on non-accrual status. The company continues to defer all non-essential spending. The valuation methodology was consistent quarter over quarter, but the value was negatively impacted during the period largely due to the uncertain timing surrounding the resumption of operations by a third-party pipeline operator and the associated operating costs.

Let me spend a few seconds discussing credit quality in the overall portfolio. No investments were placed on non-accrual status during the quarter in aggregate. At the end of September, we had 12 investments on non-accrual status across six different portfolio companies. Investments on non-accrual status represented 3.9% of the fair value of the portfolio and 11.1% on a cost basis compared to 4.5% and 11.8% respectively at the end of June.

The current weighted average net leverage of our investments was 5.5 times, up from 5.4 times at the end of the last quarter, and the current weighted average interest coverage decreased to 2.6 times, down from 2.8 times. With that, I will now turn the call over to Greg who will discuss the financial performance for the quarter.

Thank you, Tanner. Total investment income for the quarter was $69 million, down 9.7% quarter over quarter. The decline is primarily attributable to a lower asset base and a decrease in repayment MC income. The lower asset base was anticipated as we reposition the portfolio and continue our share buyback program.

Fee and prepayment income was $4 million in the quarter compared to $6.9 million in the June quarter. Dividend income for the quarter was $8.5 million, down slightly quarter over quarter. Lower dividend from our shipping investments was mostly offset by our higher dividend from Merx and our structured credit investments.

Expenses for the September quarter totaled $29.5 million compared to $40.4 million in the June quarter. Incentive fees were lower due to the reversal of previously accrued incentive fees related to PIK income. As a reminder, our manager is not paid incentive fees on PIK until such income is collected in cash. This provision has been part of the investment advisory agreement since 2012.

During the period, it was determined that approximately $6 million in previously accrued incentive fees from PIK income related to our investments in Garden Fresh and Delta should be reversed. Given the year-to-date performance of AINV, the performance incentive fee would normally have been 15%, but due to the reversal, it was essentially eliminated during the quarter. In addition, interest expense decreased during the quarter due to the lower average debt outstanding balance.

Net investment income was $39.5 million or $0.18 per share for the quarter. This compares to $36.1 million or $0.16 per share for the June quarter. For the quarter, the net gain on the portfolio totaled $1.6 million compared to a net loss of $78.2 million in the June quarter. Positive contributors to the performance for the quarter included Golden Bear and our investments in MCF I and MCF II. Negative contributors to the performance for the quarter included our investments in Venoco, Garden Fresh, Maxus Capital, and LVI.

In total, our quarterly operating results increased net assets by $41.1 million or $0.18 per share compared to a decrease of $42.1 million or $0.19 per share in the June quarter. Net asset value per share increased $0.05 or 1% to $6.95 per share during the quarter driven by earnings in excess of the dividend, a slight net gain on the portfolio, and a $0.02 per share of accretive impact to NAV stock repurchases.

Turning to portfolio composition, at the end of September, our portfolio had a fair value of $2.5 billion and consisted of 82 companies across 24 industries. First lien debt represented 42% of the portfolio. Second lien debt represented 22%, unsecured debt 9%, structured products 12%, and preferred and common equity represented 15%. The weighted average yield on our debt portfolio at cost was 11%, unchanged quarter over quarter.

On the liability side of our balance sheet, we had $1 billion of debt outstanding at the end of the quarter. The Company's net leverage, which includes the impact of cash and unsettled transactions, stood at 0.63 times at the end of September compared to 0.66 times at the end of June. The Company's debt-to-equity ratio was 0.66 times at the end of September and 0.71 times at the end of June.

Regarding stock buybacks, we continue to see the stock market discounts in NAV as an attractive opportunity to accretively repurchase stock. During the period, we repurchased approximately 3.1 million shares. Since the inception of the program a year ago and through yesterday, we repurchased approximately 17 million shares or 7.2% of our initial shares outstanding, essentially exhausting the $100 million authorization. This concludes our prepared remarks. Operator, would you please open the call to questions.

(Operator Instructions)

Our first question comes from the line of Jonathan Bock of Wells Fargo.

Good morning, and thank you for taking my questions. Howard, we will start with the new investments. Clearly, the $128 million or $130 million if you look at costs I guess. Secondly, some follow-ons.

It's the sharing arrangement that I'm interested in learning more about with MidCap because they're -- I know you were moving to a very proprietary-driven strategy that offers certainly upside based on MidCap's reach, and so I'm wondering what is the total size of Aptevo Therapeutics? How much did the BDC take down and how much did the MidCap fund that holds it or on the balance sheet of MidCap, how much did they take down? What was a split amongst those direct investments in life sciences?

The split on Aptevo was about two-thirds, one-third. And based on a commitment and the funds employed for Aptevo, and that would generally be about the expected foot going forward based on the relative sizes of the two companies. It was a $35 million term loan overall, not all of which was drawn so that correlates. In this case, AINV did slightly more than its one-third amount. Just based on MidCap's appetite but generally two-thirds, one-third.

All right. Okay. So in that case, do you -- when we talk about the split of two-thirds, one-third, how should we look at what we will expect the mix to be of direct originations on Apollo's balance sheet on the go-forward basis from what we will call the MidCap strategies that you have or can translate? Because there's -- I was always under the impression that MidCap did loans, excuse me, MidCap had loans that they couldn't do.

The strategy was well now, we're moving this great MidCap leader over to the BDC and he is going to do the loans that MidCap couldn't do in the first place. So why is there some sharing agreement between the two, I guess is the question.

Right. That's not totally right. What you just said is a small aspect, so let me go in order.

First, when we're done our complete repositioning, we hope and expect that the assets shared with MidCap will be 20% to 25% overall of the AINV portfolio. And so we will be moving towards that over time. That's the first answer.

When I talk about what those assets are, those are assets that are shared with MidCap, and the only assets that will be shared with MidCap will be the assets that meet AINV's investment criteria. As you know, MidCap originates across a senior debt spectrum on a wide variety of assets, many of which don't meet the yield criteria for the BDC universe generally but some do. And the ones that do are the ones that are in these proprietary niches which we view as relatively unique for the BDC.

Most specifically sort of asset-based loans fully secured by receivables in transitioning companies, one, and two, life sciences loans. And those happen to be areas that have higher yields because of the proprietary nature to a senior debt lender, and AINV's opportunity is to take advantage of that origination to be part of the bigger companies in those sectors. So that's the 20% to 25%.

Separately, not really sort of part of what we have laid out but what we talked about informally is that because MidCap had so much origination out there, from time to time it will also see opportunities that will be proprietary that don't make sense for MidCap because it's first lien or because it's deeper in the capital structure than it wants to be that do make sense for AINV that will be proprietary in and of itself. That category of loans would fall outside the 20% to 25% of the ultimum portfolio and it's really just a proprietary access of our corporate book.

Got it. Thanks for that. That answers it and I appreciate you putting a fine point on it. Looking past 3Q and certainly into this quarter, your stock repurchases, without a doubt one has to respect that the forward view in terms of what confidence you're placing in your portfolio as you work out a number of the loans, et cetera.

Curious, so looking at repurchases that we've already seen in the fourth quarter, which are sizable, should that give us an indication that the vast preponderance of we'll call it opportunities outside today really aren't going to necessarily meet the muster of the value that is created through buying back your own stock? Should we see a continued set of just a deleveraging or more importantly just a shrinking size of the portfolio for the time being, and maybe perhaps the originations fall a bit as well just based on that share repurchases amount this quarter to date?

Jon, I think we want to be measured. I think what you are hearing us say is there is a frothiness in the market, and when transactions are marginal in credit quality, and we have the optionality to delever a buyback stock, we find that to be appealing as we sit here right now. And we have longer term objectives of finishing out our buyback program. I think we feel like our book -- I don't want to have this view that we are trying to shrink the book. We feel like our book is in a good spot right now, and we want to continue these trends.

I think we are trying to be very balanced and being intellectually honest about the returns and the accretive nature of where our stock was trading vis-a-vis our NAV and that discount and we want to balance all those constituents out to get to the right spot. The other thing that Howard and Tanner both mentioned is we've looked at being a bit delevered right now as being a potential advantage over the coming months and quarters. And so it's a little bit of a macro overview but I think that we are very focused on -- we outlined a handful of objectives several months ago and we feel like we're slowly ticking them off in order, a couple at a time. It is going to be lumpy, but we're really trying to be very consistent in achieving those objectives.

Clearly, you are and Jim, I appreciate the color. And we also saw a highlight that the successful exit of Extraction Oil & Gas, and I guess one of the questions are, that's a big success. I don't know how many energy investments today can get a high-yield bond issue done. So certainly that's one highlight. I'm curious on the go-forward basis given spread compression, et cetera, just as we have seen, how should we look at the future repayment picture?

More importantly, some of the more ancillary fee benefits that can continue to come off of that for maybe investments, folks thought might have had a little bit of taint to them like Extraction turning out to be much more successful than we would've originally thought. On a go-forward basis, how do you look at repayments, and particularly some of the fee income that could come off of them as we enter into the next two quarters, Jim?

I think that we have in terms of the model that we have internally, we expect it to be a portion of our income but not -- it's always lumpy if we budget a certain amount per quarter in terms of payments and premiums. It is a small amount to our overall net income but it is not an overriding amount. Certainly, we would expect that momentum to slow down as the marketplace gets a little bit quieter and a lot of our credits could come to market have come to market. So that is the tone that I would give on that response.

Appreciate that. Thank you for taking my questions.

No problem.

Our next question comes from the line of Rick Shane of JPMorgan.

Hello, guys. Thanks for taking my questions. I think when we think about the history of AINV, two things. One, along the way there have been some mistakes that have been made strategically but the flip side of that is that I think you guys have been readily willing to acknowledge them and frankly engage in behaviors to do the right thing, whether it was the capital infusion at book from your manager four years ago or the decision right now to buy back stock. Those are probably trends that we will expect to continue.

I am curious, there was a comment made related to oil and gas about it not necessarily being appropriate within the portfolio. Perhaps I'm taking a little bit of a contrarian view, but isn't this the time given the distress and the opportunity that there are going to be chances to deploy capital there going forward? And I understand look, you're going to have to weed out some of the stuff in the portfolio now but shouldn't you actually long term be willing to be there?

The answer is yes and no. As a firm, we would agree with your premise that the time to be an investor is after there has been a variety of destruction in a business. We conceptually agree with that.

However, when we really looked to the BDC model in terms of predictability of NAV and ROE, we're not of the view that this is the right vehicle to take those contrarian value opportunities. I want to make sure that we are not saying we're never going to make an oil and gas senior or second-lien loan. But when you have a credit that is predominantly determined based on one input, a commodity price, that is not the type of credit risk we want to take in this business. And so I just think that as Howard and Tanner and I laid out, those strategies where you are really determined on one or two key variables to credit, that is something we think is a good match in this vehicle.

Let me just add two more things. One is, the concentration we have in oil and gas right now as a percentage of the portfolio is higher than we would want it to be in a normal -- regardless of if we were sort of bullish on an industry are not. Part of the goal is to bring it down even if we were to invest some.

Secondly, we do have five investments in oil and gas and some are levered to the upside. We may selectively invest in them. We certainly will look to sort of monetize some of that upside. We feel like we have some exposure to that upside without investing new capital.

Got it. And so what I am hearing is as we think about NAV and ROE, the emphasis going forward is going to be to potentially give up some ROE but mitigate that through lower volatility.

Yes, we want to focus on NAV stability, and to do so we are going to make sure we're prudent with the risk we take in our credit assets. If one takes that next step and said okay, yes, if there's a 15% ROE asset but it has great volatility, we're probably going to learn to be a little bit more conservative about adding that to the portfolio if we already have exposure to that sector.

I don't disagree with that view given the BDC -- the nature of BDC assets and investors.

Thank you.

Our next question comes from the line of Kyle Joseph of Jefferies.

Good morning, guys. Thanks for taking my questions. Most of them have been answered. I just have some specific modeling questions if you don't mind. Greg, I know you touched on the dividend income in the quarter but can you give us an idea of the run rate going forward here given some of the structured sales and whatnot?

Yes, I think it is going to be probably -- in probably $7 million to more $9 million depending on the capital needs that we may [leave] down at some of our investments that (inaudible) on a quarterly basis.

All right. And then on cost of funds. Oh, sorry go ahead.

But as we do change our structured product investments, it will go down. That will just be a function of that going forward.

Got it. And then in terms of your cost of funds outlook varying the credit facility, are you looking to turn that out or are you happy with that outstanding? What are your thoughts there?

Well, when we look at the right side of our balance sheet today, 60% is made up of fixed-rate debt. Two are on two baby bonds that come due. They don't come due until September of 2017 and June of 2018. And we will consider that the environment at the time to see if we change that to a more floating rate under our existing credit facility.

Got it. Can you guys provide any update on Garden Fresh? I know I saw some articles in the quarter recently about the company progressing through bankruptcy. What is your outlook for any potential recoveries there?

It is sort of going through its process right now which will be a 353 sale, and the prospects are consistent with the mark right now, not significantly different.

Got it. Thanks very much.

I was just going to say the performance has leveled out just when we declined so it doesn't change the outlook of the change that much.

Great. Thanks very much for answering my questions.

Our next question comes from the line of Ryan Lynch of KBW.

Good morning. Thank you for taking my questions. When we look at that the three unique buckets, that's the MidCap you guys can co-invest with MidCap, the life sciences, the asset lender and lender finance. You obviously closed two life sciences investments this quarter with MidCap. Out of those three buckets, though, is life sciences where you guys see the most opportunity or out of those three buckets, where do you guys see the most opportunity with co-investments with MidCap and why?

Again, ultimately, I think life sciences as an asset base will have sort of equal size from a portfolio lender financed, potentially a little bit less. There will be a number of loans, the most life sciences opportunities but the larger opportunities are in asset-based when they make sense. And lender financed actually also are larger size and in all cases, they have very low loss given defaults so it's easier to do some larger size. The challenge for the lender financed assets is a lot of them are 30% assets. You are constrained some in your focus there.

So I think all of them has a lot more -- there is a lot more opportunity than certainly the general corporate markets. And expect all of them to be relatively equal size of the ultimate portfolio. So that's really the -- in each case, the competitive marketplace is relatively unique. Meaning it's not the same competitors in each space and it doesn't necessarily move with the capital markets so things change a little bit up and down but over a cycle, we think there's a fairly good opportunity in all of them.

Okay. Understood. And then your guys' non-sponsored transactions, they've actually increased over the last couple of quarters from the mid 50%s to this quarter it was up to 61%.

Is that more of a function of you guys trying to transition your portfolio around because I would've expected the non-sponsored transactions to start going down, and the sponsored transaction as a percentage of your portfolio to start going up. Where do you guys see that leveling out? Do you expect the sponsor-backed transactions to start increasing in the future?

We do. This is just a result of some of our delevering so Merx, which is non-sponsored becomes a bigger percentage of the portfolio. I think your expectations for what the trends are in the future are correct, and it's what we'll see as we -- we will invest more and more in transactions that will be sponsored and the composition will change. I think this was just part of the repositioning and a mathematical anomaly.

Okay. And then just kind of a broader question but with the changes in management that you all made as well as the changes in some of your strategies as well as you guys mentioned some unified sponsor-calling efforts with MidCap. What has been the reception of the sponsors in the marketplace for your all's changes and outreach going -- you guys changed in strategy as well as your outreach. What has been the reception from the sponsors in the market?

I will jump in here. I think it's gone extraordinarily well. I think as we alluded to in our comments in the script and we've talked about previously, one of the challenges or one of the competitive differentiators is to have as many arrows in your quiver when you go and talk to these sponsors and the combined sponsor effort and the ability to do things across the capital structure and address different client needs, address different sponsor needs, has been very well received.

That of course is against the backdrop of the current market environment, which both Howard and Jim alluded to as being pretty frothy and hence less to show in terms of actual activity. As far as the messaging and as far as the [rest] activity, it's gone very well we look forward to executing on that strategy in the near term.

Great. Those are all the questions for me.

Our next question comes from the line of Robert Dodd of Raymond James.

Hi, guys. On the target, I mean life sciences is 20% to 25%, that is the co-invest with MidCap, and I then I presume the other deals that MidCap would invest in would fall into the other traditional lending bucket, that 50% to 60%. If you could break it down another way, how much of your target portfolio mix whenever you get -- next quarter obviously, would you expect to be coming through the MidCap channel. Obviously, it's going to be bigger than the 20% to 25% but is it one-third, or 40%? Can you give us any color on just how much you expect to get through that origination platform or relationships?

I guess I would answer and I think we need to continue to educate this group. Just because something may come from MidCap it can come from MidCap but they might, not be the actual co-investor of it.

We have a unified front-end and certainly as you think about the world, there is a MidCap. There are certain assets to go into MidCap. There are certain assets that go AINV, and then there's an intersection in the middle. So certainly, we want to have a unified platform and a unified calling effort, and whether it is a quarter to half of our product that ends up in AINV may be assets that we actually sourced through that dialogue of that channel along with sourcing -- along with MidCap in the balance sheet.

So that is the vision which we have, and I think it is important, not every asset is the same. There may be certain assets like life sciences, as Howard has described in the past, that's a vibrant business for MidCap but certainly the ability to speak for larger pieces enhances that commitment that MidCap makes and we do together. So there is no set percentages, but certainly we want to see more and more of the dialogue that results in sponsor activity landing on our balance sheet, the AINV balance sheet coming from that unified approach.

Great. I appreciate it. Great. Thank you. Appreciate that.

Going back to following up to one of your responses to Jonathan's questions, you said being delevered could be an advantage over the coming quarters or years. I recognize that in the sense obviously in a frothy market, you can chase income yield today, drive up your leverage, get more income yield, more income ROE at the expense of losing money later and having a lower long-term GAAP ROE. So I totally respect the focus on generating returns over the long term and taking advantage later of liquidity that you built today.

The question is, to misquote someone I'm sure, the market can remain irrational longer than you want to maintain that liquidity. So if the market continues frothy, high leverage multiple flow or yields, how long are you willing to sit on the sidelines at below your target leverage before that becomes a problem for how you want to manage the business long term?

I agree with your premise, although it's not like were sitting on the sidelines. We did have a good quarter. We made our dividend. We bought back some stock and we delevered.

So it's just a question of how we're spending our time. It's not idle time. It's just time dealing with our balance sheet rather than making investments.

So, you're right. We're not suggesting that the market is going to turn all of a sudden, but maybe just because we have been in these seats for a long time and have seen a bunch of cycles, that it just feels to us right now that the breadth of activity you are seeing is probably pointed more towards an extreme period than a traditional mainstream period.

And we just prefer to wait for what we think are broadly speaking better opportunities. Not going to happen tomorrow unless there's a turnout tonight that I don't expect. I think we are just trying to make sure that we really are in this business for the long term having lived through a few cycles and reaching probably at the wrong time.

Got it. Thank you.

Our final question today will come from the line of Chris Testa of National Securities.

Good morning, guys. Thank you for taking my questions. Just looking at the portfolio going forward, how much do you anticipate aircraft leasing comprising as a percent of the portfolio?

Currently as we alluded to, we are at 18.9%. That having ticked up has more to do with the rest of the portfolio declining. And continued very good strong performance out of Merx.

Over the longer term, what we have guided to is 15% or mid-teens so you would expect a modest decrease from here as we continue to think it is very attractive risk reward asset class for us.

Got it. You guys have obviously been disciplined this year and have passed on some opportunities. Just a question on have most of the opportunities you passed on been more in the sponsor or non-sponsor arena. And the second part of that question, are most of those from pricing, which you guys seem to be willing to accept lower pricing for lower risk, or is this from the structures being pushed by B borrowers?

The answer to the second question is yes. When the markets get frothy, the pricing goes down and the structures get more aggressive, both. And so and I think you've heard this from some of our competitors as well, so you just see a lot more transactions that just from like a balanced risk-rewards perspective seem off.

Certainly, you're never going to invest in any credit where you feel like there's not the underlying value to get in but certain things are -- certain ones are more aggressive than others and those deserve higher pricing, but right now the balance between the structures available to the borrowers and the pricing that the market allows are just not balanced. We, like I believe, are the better parts of our competitors that have big, broad pipelines and see a lot of things are just turning down more deals at very early stages in the process, or just quoting outside the market and therefore not funding as many deals. So the answer in that regard is sort of both. So it's sort of credit and yield.

Great. Thank you. Just with the attachment points roughly around 5.5 turns, you guys are now focusing on less cyclical industries. Should we expect that to remain stable as a function of you focusing on less cyclical industries or to trend down a bit as you're being more senior secured and first lien going forward?

Yes, I would say when evaluating new credit, we consider it holistically and there are certain sectors that can accept higher levels of leverage, and in fact, one of the things we look at very closely is CapEx adjusted leverage as certain industries are less capital intensive.

Ironically enough, your comment as we do less cyclical all things being equal, leverage might otherwise tick up because certain of those names are capable of having higher leverage levels. So I would answer your question by saying it is hard to project a specific direction. But less emphasis on cyclical, all things being equal probably does not bring that number down substantially, and again, each time we underwrite a credit, we are thinking holistically, we are thinking about CapEx adjusted leverage and risk reward.

Great. That's all for me. Thanks for taking my questions.

Thank you very much for joining us today. We look forward to talking to you in the near future.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.