MidCap Financial Investment Corp (MFIC) 2017 Q3 法說會逐字稿

Good morning and welcome to Apollo Investment Corporation's earnings conference call for the period ended December 31, 2016.

(Operator Instructions)

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

Thank you, operator, and thank you, everyone, for joining us today. Speaking on today's call are Jim Zelter, Chief Executive Officer; Howard Widra, President; Tanner Powell, 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 broadcasts in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release.

I'd also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. Today's conference call and webcast may include forward-looking statements. Forward-looking statements involve risks and uncertainties, including but not limited to statements as to our future results, our business prospects and the prospects of our portfolio Company. You should refer to our registration statement and shareholder reports for risks that apply to our business and 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 December 31, 2016, and filed our Form 10-Q. I'll begin today's call with some comments about market conditions. I will then highlight the progress we have made executing on our strategy, followed by a brief overview of our results. I will then turn the call over to Howard who will discuss in greater detail the progress we have made revisioning the portfolio. Tanner will then cover our investment activity for the period, and provide an update on credit quality. And finally, Greg will review our financial results in more detail. We will then open the call to questions.

The market environment continued to be competitive during the period, due to limited supply and strong demand for floating-rate assets. Loan funds saw strong inflows, and CLO origination rose ahead of the risk-retention deadline. Issuer-friendly conditions resulted in strong new-issue activity. Despite strong new-issue volumes, yields generally tightened.

Moving to a strategic update, we believe that we are seeing significant benefits from Apollo's unified direct origination team and broad credit offering, as well as from co-investment exemptive relief. Combined, these factors are increasing our relevance to borrowers and sponsors. In addition, we believe that the scale of the Apollo platform makes us one of the few market participants positioned to take on larger commitments, which in turn benefit our shareholders. We are pleased with the progress we have made positioning the portfolio, consistent with the strategy we outlined last year.

First, we continue to meaningfully reduce our exposure to structured credit and renewables. Second, we restructured a nonincome-producing asset into a partially income-producing asset during the quarter. And third, we funded three transactions entered into pursuant to our co-investment exemptive order during the quarter. Since receiving the order, we have entered into eight transactions, including several in the March quarter.

Moving to our results. For the quarter, we reported net investment income of $0.17 per share. Net asset value declined $0.09, or 1.3%, to $6.86 per share during the quarter due to a net loss on the portfolio, primarily driven by our oil and gas and renewable energy investments, partially offset by gains in structured credit and corporate lending as well as the accretive stock buybacks.

Moving to our stock buybacks, during the quarter, we continued to execute on our share repurchase program. Since the inception of our share repurchase program and through the end of December 2016, stock buybacks have added approximately $0.13 to NAV per share.

Moving to the distribution, the Board approved a $0.15 distribution to shareholders as of record as of March 21, 2017. With that, I will turn the call over to Howard.

Thanks, Jim. Let me begin by reminding everyone about the strategy that we laid out last year. Going forward, 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 and life sciences, asset-based lending, and lender finance, areas with significant barriers to entry and in which MidCap Financial has expertise.

As Jim mentioned, we believe we have already made good progress reducing our exposure to renewables and structured credit, areas which we believe need to be reduced. It is our intention to further reduce our exposure to these areas. As we continue to reposition the portfolio, we expect the overall portfolio yield to decline commensurate with the reduction in 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 lending, and lender finance, and approximately 15% in aircraft leasing, with the balance in existing verticals and other legacy positions.

As you may know, MidCap originates a wide variety of assets across the senior debt spectrum, many of which do not need AINV's yield requirement. However, occasional opportunities within life sciences, asset-based lending, and lender finance will be suitable for both AINV and MidCap.

Next, I will discuss the progress we made executing on our strategy in greater detail. First, we continue to work through our oil and gas exposure. At the end of December, oil and gas represented 9.4% of our portfolio at fair value. This compares to 11.9% at the beginning of the current fiscal year. During the quarter, we took advantage of the rally in oil to hedge our exposure and mitigate potential losses. Specifically, AINV purchased put options and sold call options. The options were structured so that the premium paid for the put options offset the premium received from selling call options, producing a costless collar. If oil prices decline, the gain on our hedge should mitigate losses on our underlying investment.

During the quarter, we recognized an unrealized loss on the contracts. If oil prices rise, the loss on our hedge should be offset by an improvement in our underlying investment. In addition, we have visibility into further derisking of our oil and gas exposure over the coming quarters. We've also made progress repositioning nonincome-producing assets. During the quarter, our investment in Spotted Hawk, which was on non-accrual, was restructured. A portion of our investment is now on accrual status.

Second, we continue to make progress reducing exposure to structured credit. Structured-credit exposure declined to 6.7% of the portfolio as of the end of the quarter, down from 7.8% as of September 30, 2016, measured at fair value. During the quarter, we exited our equity investment in MCF CLO I, a middle-market CLO, generating an IRR of 21.9%. Subsequent to quarter end, we exited our equity and debt investments in MCF CLO III, generating an IRR of 21.1%. Since the beginning of calendar-year 2016 and including this most recent exit, we have exited nearly $140 million of structured credit assets. Our remaining structured-credit portfolio consists of two middle-market CLO equity position and three regulatory capital relief trade, and represents approximately 4.9% of the total portfolio at fair value.

Third, during the quarter, we used the strength in the market to reduce our exposure in renewables via two securitizations. Renewables represented 8.1% of the portfolio at the end of December, compared to 11.3% at the end of September at fair value. During the quarter, we completed our third and fourth Golden Bear securitizations on what we believe to be excellent economic terms, which reduced our exposure by approximately $57 million. In addition, Solarplicity repaid GBP7 million during the period. Subsequent to quarter end, Solarplicity added some additional leverage which was used to repay a portion of our investment. Pro forma for this pay down, renewables represents approximately 7.3% of the portfolio at fair value.

Finally, we continue to actively pursue co-investment opportunities. During the quarter, we funded three transactions ending in pursuance with the co-exemptive relief order. One life sciences transaction with MidCap, one asset-based transaction with MidCap, and one corporate loan with certain other Apollo-managed funds. In total, we invested $55 million across these three transactions during the period.

We look forward to reporting our continued progress executing on our strategy over the coming quarters. With that, I'll now turn over the call to Tanner who will discuss our investment activity and credit quality.

Thanks, Howard. 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 is less attractive and many of these investment opportunities do not make it past our credit filter. During the period, we invested $201 million in 13 new portfolio companies and 8 existing companies. We exited $195 million of investments, and accordingly, net investment activity was $6 million for the period. The weighted average yield on investments made during the quarter was 10.1%, and the yield on sales and repayments was 10.5%.

Let me highlight a few of the transactions for the period. First, we invested $24.1 million in the second-lien debt of BioClinica to support an acquisition. BioClinica is a leading provider of technology-enabled services, supporting clinical research trials for global pharma and CRO customers. As Howard mentioned, during the quarter, we funded approximately $55 million across three new investments, entered into pursuant to our co-investment exemptive order. First, we committed to $50 million to Wright Medical, of which $9.5 million was funded during the quarter, and we invested $9.7 million in Oxford Immunotec. We also invested $36.2 million in the second-lien debt of power products. Our investment in power products is a good example of how exemptive relief combined with the scale of the platform allowed Apollo to commit to the entire tranche. We've already closed an additional three transactions made pursuant to the exemptive order in the March quarter.

Repayments for the quarter totaled $178 million, which included the repayment of our investments in MCF CLO I, Crowley, Deltek, Kronos, and proceeds from two Golden Bear securitizations. Sales for the quarter totaled $17 million, which included the sale of our investments in Dark Castle Anatomy.

Aviation continued 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. We believe our aircraft portfolio is well diversified by aircraft type, lessee, and country. We continue to see attractive opportunities to deploy capital, as well as monetize select assets in the portfolio.

Let me now give a brief update on our energy exposure. As we've said previously, we continue to seek to reduce our oil and gas exposure when possible. At the end of December, oil and gas represented 9.4% of our portfolio at fair value, or $237 million across five companies. During the quarter, Spotted Hawk completed its out-of-court restructuring, our pre-restructuring first-lien term loan was bifurcated into a tranche A, and a tranche B. The tranche A is on accrual, and the tranche B is on non-accrual. In addition, we invested approximately $7 million into the tranche C first-lien term loan to fund high-return non-op drilling activity. The Company continues to focus on a resumption of growth and returns on invested capital in the current market environment.

I would also like to briefly mention our investment in Venoco. The value of our investment was negatively impacted during the period due to a deteriorating outlook for certain processes that we have mentioned in the past, including the restore of a third-party pipeline. We continue to monitor the situation very closely, and will reevaluate in the coming quarters.

Let me spend a few minutes discussing credit quality in the overall portfolio. At the end of December, we had eight investments on non-accrual status across six portfolio companies. Investments on non-accrual status represented 2.6% of the fair value of the portfolio and 8.2% on a cost basis, compared to 3.9% and 11.1%, respectively, at the end of September. The current weighted average net leverage across our investments increased to 5.7 times, up from 5.5 times at the end of last quarter. And the current weighted average interest coverage decreased to 2.5 times, down from 2.6 times.

The increase in net leverage quarter over quarter is due to several factors, including: one, the repayment of some lower-levered investments; two, the deployment in the slightly higher-levered investments; and three, the addition of debt by several of our portfolio companies to support acquisitions, which drives up leverage ratios in the short term. With that, I'll now turn the call over to Greg, who will discuss financial performance for the quarter.

Thank you, Tanner. Total investment income for the quarter was $68.1 million, down 1.4% quarter over quarter. The decrease was primarily attributable to lower prepayment income, partially offset by higher dividend income. Fee and payment income was $1.5 million in the quarter compared to $3.8 million in the September quarter. Higher fee income was more than offset by decline in prepayment income.

Dividend income for the quarter was $11.4 million, up from $8.5 million last quarter. Higher dividend income from Merx and one of our shipping investments offset a decrease in income from our structured-product investments, as we have been reducing our exposure to this asset class that's part of our repositioning strategy.

Expenses for the December quarter totaled $31.7 million, compared to $29.5 million in the September quarter. Incentive fees were higher quarter over quarter due to a lower reversal of previously accrued incentive fees related to pick income in the December quarter compared to the September quarter. As a reminder, our Manager is not paid incentive fees on pick income 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 $2.3 million of previously accrued incentive fees from pick income should be reversed compared to $6 million in the prior quarter. The $2.3 million reversal primarily relates to our investments in Spotted Hawk and Venoco, given AINV here-to-date performance and that the performance incentive fee was accrued at a rate of 15% for the quarter.

Net investment income was $36.4 million, or $0.17 per share, for the quarter. This compares to $39.5 million, or $0.18 per share, for the September quarter. For the quarter, the net loss on the portfolio totaled $25 million, compared to a net gain of $1.6 million for the September quarter. Negative contributors to the performance for the quarter included Venoco and Solarplicity. Positive contributors to performance for the quarter included our investments in Spotted Hawk, MCF III and Golden Bear.

In total, our quarterly operating results increased net assets by $11.3 million, or $0.05 per share, compared to an increase of $41 million, or $0.18 per share, for the September quarter. Net asset value per share declined $0.09, or 1.3%, to $6.86 per share during the quarter, due to the loss in the portfolio offset by a $0.01 per share accretive impact to NAV from stock repurchases. Also impacting NAV for the quarter was the impact relating to our hedging strategy on our oil investments. As Howard mentioned, we essentially purchased a costless collar to hedge our oil exposure. And as a result, during the quarter, we recognized approximately $3.3 million, or $0.02 per share, of unrealized mark-to-market losses associated with the derivative contracts.

Turning to the portfolio composition. At the end of December, our portfolio had a fair value of $2.5 billion and consisted of 85 companies across 25 industries. First-lien debt represented 42% of the portfolio, second-lien debt represented 27%, unsecured debt represented 10%, structured credit 9%, and preferred and common equity represented 12%. The average weighted yield on the debt portfolio at cost was 10.9%, down slightly quarter over quarter.

On the liability side of our balance sheet, we had approximately $1 billion of debt outstanding at the end of the quarter. During the quarter, we amended our revolving credit facility and extended the maturity to December 2021. We greatly appreciate the support from our lenders.

I'd like to pause a moment to review the impact of interest rates on our results. In recent months, the market has seen LIBOR climb. Our balance sheet is constructed to be asset sensitive. At quarter end, approximately 83% of our yielding portfolio was floating rate, measured in fair value, typically, subject to interest-rate floors. And 37% of our debt was floating rate. With three-month LIBOR slowly rising throughout the year but remaining below the average floor of our debt, we experienced net interest margin compression. If interest rates increase above LIBOR -- the LIBOR floors on our portfolio, we should benefit from improving net interest margins.

Moving on, the Company's net leverage, which includes the impact of cash and unsettled transactions, stood at 0.66 times at the end of December, compared to 0.63 times at the end of September. Regarding stock buybacks, we continue to see the stock market discount to NAV as an attractive opportunity to accretively repurchase stock. During the quarter, we repurchased approximately 2.3 million shares. Since the inception of the program, we have purchased approximately 17 million shares, or 7.2% of initial shares outstanding, for a total cost of approximately $100 million, leaving approximately $50 million remaining under the current program authorized by the Board. This concludes our remarks, operator, and 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 and Tanner and Jim, when we look at the new investments that you've made, particularly this quarter, we certainly noticed the second lien bias, which is fine, and you mentioned senior secured. So would you walk us through where you're seeing value in the second lien category, such as BioClinica, K&N parent, PAE, as well as Power Products?

Yes, sure, so I'll take it first.

Without going through the individual credits, just as an overall concept. As we said, the market is getting more competitive, which is a headwind in terms of originating credit. On the tailwind side, our significantly increased presence in the sponsor market, both on a quantitative and qualitative measures, and by that I mean adding people to our team at our originating sponsor, as well as adding capacity in our affiliates combined with our exemptive relief which allows us to win a lot more transactions, when you look at the opportunities that we've had available to us, pretty much all of those deals were proprietary. Some of them may not have been originated by our sponsor team, but they were taken down from the banks on a proprietary basis. And that is consistent with the strategy we hope to employ going forward.

And you'll also note that our hold sizes in each of those deals are smaller than we have historically had before, because our expectation is we will continue to have a much more granular portfolio of corporate loans, and that will be supported by the fact that we will originate a lot more. In those cases, those are larger companies, good-sized companies, buyouts by LBO firms with significant size.

So then, just to make sure, and maybe as a follow up to either Tanner or Jim: the APO platform effectively purchased a majority of -- so, for example, those four deals, one was offered by Jefferies, Goldman, [Bammal], RBC. You're telling me that APO as a global platform purchased more than half of that second lien debt tranche, and that debt is somewhere else in an institutionally oriented loan portfolio that you manage?

Yes, I'll hit that real quick, and again I'll allude to Howard's comment. Don't want to get into too many specifics on individual names. So we did call out Power Products, and that was an instance wherein the global Apollo platform was able to speak for the entire tranche under the exemptive order and gave us an ability to deliver a full solution to the sponsor. The other names, some of which were proprietary, some of which came through the banks, are positioned. Our total hold size was in excess of what was otherwise in the DDP and gave us leverage in the context of getting an allocation and the like. And so the benefits were borne out in that respect.

Got it. And then maybe just -- I hate to be a stickler, but it's always important because a majority of folks love to look at your control of a full tranche as the means to your potential protection in the event of encountering a bump, particularly when the credit markets are overheated. So if you're looking at the BioClinica, the Goldman deal which was a K&N parent, or the Bammal deal, which was PAE, are you saying, Tanner, that Apollo owns more than 50% of that tranche in order to ensure or, let's say, assuage concerns in the event of a credit blip in either of those credits?

No, the hold is higher than what is otherwise in the BDC but would not represent 50%, more than 50%. Those names that you called out there, Jonathan, happen to be names that are in bigger companies. And I think when we laid out our strategy, we endeavor to get originated transactions. But selectively, opportunities will present themselves in bigger companies, where, owing again to what we want to do in terms of granularity in our portfolio, do not enable us to be as big of a particular tranche, but are still what we believe to be attractive risk reward for BDC shareholders.

Got it. Then maybe dropping down to another area of opportunity. You mentioned through the MidCap platform, the sourcing of Wright Medical, which I believe is a $50 million commitment, you've funded about $10 million of it already. Walk us through the all-in yield on that investment, because I'd imagine there are fees, et cetera. And is this -- it says 5.8%, but I'd imagine the all-in net yield to you is going to be something larger. Is Wright Medical a representative transaction in terms of first lien yields that will be coming out of the MidCap platform to AINV? I imagine it probably is, what, 8%, 8.5% or is it much higher?

No, so the yield in the quarter for this deal was over 10%. So the contractual yield of 5.8% is the yield on a fully funded commitment if it got to fully funded, which would not be the expectation over the life of this loan. Because it's a revolver with adequate collateral, but a company with a lot of liquidity. The expectation for yield on the ABL business that will be shared with MidCap is in the 9% range on average. That could take a form of yields like Wright medical, where there are a lot -- between the unused line fees and commitment fees on the whole commitment, as well as other ancillary fees, drive the yields way above the contractual rate.

And there can also be deals which is more fully funded, like a DIP loan for example, that is collaterally and structurally exceptionally strong but has a face yield much higher in that 9% to 10% range. So in either case though, to hit the bogey, we want it to be a certain size for AINV, and we also want the expected yield to hit a certain level. In Wright's case, early on, it's above where we expected it to be for the first quarter, but it should still be well above the contractual rate.

Got it. And then, turning to the renewable energy, obviously you mentioned that the reduction of exposure is important. We appreciate that. However looking at the Solarplicity, when you think about the margin environment you sold down. But can you give us a sense as to the forward outlook for such an investment when we think about just the all-in solar segment that you have exposure to? You're reducing exposure, clearly; I'd imagine because there are some risks in the segment. And we're trying to understand how we should position investors' thoughts related to whether there are forthcoming losses. Because the news isn't that great, and I know the position size here is still relatively large, though reducing.

Well so just to be [timing], we are reducing exposure overall, because this, like CLO equity and some of our other positions, are just levered positions that are effectively more volatile. And it's the highly concentrated position, which we want in terms of one industry, which we want to reduce in the vehicle. The particular -- the forward-looking profile for the industry is actually somewhat dependent, basically, on what jurisdiction you're in. So the Golden Bear transactions have been really lucrative, and we would expect them to be so going forward. And we still have an important relationship with that company renew. Solarplicity, in and of itself, was a very large investment and was written down this past quarter based on 20-year power curve and inflation expectations. Our exposure there is on a cash basis over what we expect over the next 20 years is pretty much set; it's just a question of how that compares to alternative investments,

So what that means is that we pretty much know what we are going to return on a cash basis. The problem is, the value is derived by external sources, and so the volatility in that value is too high. It's like buying a Treasury bond, where you know you're going to get your money back at maturity, but your actual value could change a lot. As a result, it would be our preference to exit that so you wouldn't have to ask that question and I wouldn't have to give a confusing answer. So the answer is we think our mark right now was -- it's consistent with exactly where the curves those inputs are today. We would hope that we could exit that higher because someone will underwrite higher amounts, and there's a chance we could exit it little lower. We wouldn't exit it a lot lower because we don't have to, and we could just take the cash yield we expect. Does that make sense?

That makes complete sense. And then, look, on a go-forward basis, clearly it's becoming a much tighter market. You're stressing the areas where you can easily add value through the APO platform, MidCap, et cetera. Makes complete sense. But I am curious, in light of the competition, in light of the potential changes that we're seeing from Washington, et cetera, should we expect just a general slowing of overall portfolio originations? Just because right now, we've heard from everyone it is an extremely tough time to invest.

I'll start from the top down. There's no doubt that the activity in DC has created a lot of questions, and the demand for product exceeds the supply of product. So that being said, we also see an environment where the backdrop of the overall economic conditions are favorable to credit with lower defaults continuing for some time. So I think, John, and I think what you're hearing the Management Team, what you're Tanner and Howard say here is, we articulated this strategy 6 to 8 months ago: smaller hold size, really lessening -- decreasing our exposure to structured credit, to renewables, to energy, smaller bite size but also having a broader front end, having greater selectivity. And with the questions you've asked here today, you see all that -- the genesis of that in our portfolio.

So you're right, it feels like it's a very competitive time right now. I would suspect that the net underwriting benefit to a variety of folks in our sector might be lower this quarter than last quarter, as a generic industry statement. But as 2016 showed us, one quarter does not make a year. So I don't want to be in the [cushion] to have a macro view, but we're just trying to get our portfolio nice and tight and clean and well-diversified. And again, to Howard's point, we don't want it to be purely dependent on [propolization], we don't want to be purely dependent on the Street. But being able to have selected that front end, when you have 20 or 30 transactions which you can pick your two to four from, that's where we want to get to and that's what we are doing.

That makes total sense. And then, Jim, just as the departing question: interest deductability and how you play its potential, whether or not it gets approved or not, I'd imagine Apollo has done some form of scenario analysis. How do you look at, at least that specific tax change coming through Washington and how it affects your business? And that's all my questions, thank you.

Well, you've asked a lot, but I'll answer this last one for you.

I think it's a real question mark whether it's going to come into play or not. Some crude work we've done out of the box would tell us that higher multiple buyouts are going to have a greater impact, if that were to take place, and lower valued buyouts. I don't know if the cutoff point is seven, eight, nine times, but certainly it's something we're watching. We're watching a lot of legislative action that may come out of DC. But our view is, when we can find good companies we want to lend to, especially in the United States, we're eager to do so in a variety of environments.

Thank you so much.

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

Hey, good morning.

Just want to touch on MERX, since it's almost 20% of your portfolio. Can you just talk a little more in detail about the outlook for that business and the trends you're seeing? There's a publicly traded air lessor that made some comments about how competitive the market is for used aircraft, and there's likely not that much upside to lease rates, maybe even a little bit downside. But can you just add some color there?

Yes, sure. So as we said in our prepared remarks, about 19% of the portfolio, as we've talked about in the past, has a lot to do with continued outperformance in MERX and the relative shrinking of the rest of the portfolio. Over time, as we've guided, we would like to see that exposure as mid teens. In terms of the current environment, it has become more competitive, as you've seen in a lot of risk assets. We've used that market selectively to monetize a number of our names, credit risk manage around lessees we have less faith in. And going forward, we still selectively see interesting deployment opportunities, cognizant of the broader backdrop that is pretty competitive on the heels of what we think to be a very differentiated team with differentiated access to the market.

So would echo those comments you make in terms of, it has become more competitive. We have used the opportunity to derisk in certain places, but on the margin are still seeing interesting things from time to time that make sense from a risk/reward standpoint.

All right, that's helpful. That's my only question, thanks.

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

Morning, guys, thanks for taking my questions.

Just wanted to get a little bit further into your outlook for yields and your NIM going forward. I know we talked about some headwinds from the portfolio reallocation, and then you touched base on higher interest rates as well. But can you balance those two and tell us your outlook for yields? And then at the same time then dive into your NIM expectations?

I'll just touch on the yields and then -- we had a certain set of expectations for yield as we repositioned our portfolio, which would basically bringing the overall yield of the portfolio in from the high 10%s to the low 10%s, which is what you saw in the origination this quarter. We don't expect -- that is not changing based on where the market is. Given the amount of new business that we have to originate at AINV versus the size of our funnel, which is very large across the whole platform, we believe that the market is allowing us to generate those yields at that risk profile we want. And so we would expect over time for the yield and the portfolio, and that doesn't include fee income but just the asset yields to be in the very low 10%s for new origination and then ultimately the portfolio gravitating to there.

Do you want to, Greg, jump in on the NIM on how it ties in with the cost?

I think that we've looked at our, the right side of our balance sheet, pretty well managed, especially, with extending our credit facility. We have opportunities as on certain of our fixed-rate securities come out of their non-call position. So I think overall the way we've forecasted, and relative to our looking at investment yields, we feel very good about going forward and producing pretty consistent NIM results.

All right, great. And then just one little modeling question.

It looked like the pick income in the quarter declined pretty substantially sequentially. Is that a good run rate going forward or was that down from -- were there any one-time items in that?

There weren't any significant one-time. I think that it will continue to go down over time as we reduce our exposure, especially in solar. So you'll see that coming down.

Great, thanks for answering my questions.

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

Guess I got my name changed this morning.

Couple things. Greg, can you do me a favor? I must have misheard. Can you repeat the percentage that's floating rate assets? I thought it was 57%, is that correct?

Yes, so the way you have to look at it, 70% of the portfolio is made up of both fixed and floating rate. Because you have to take out your MERX investment and your Solarplicity investment, and then when you take a look at that, 83% of that 70% is floating rate. So that gets you your 57%, 58%. But I think it's more appropriate to look at the portfolio comparatively to those -- to originate it -- our corporate originator or corporate syndicated versus some of our verticals that have fixed rates incorporated within their structure.

Okay, got it. I didn't mishear; that was the distinction I was looking for. By the way, I appreciate floor chart on page 12. I think that's really helpful, it's good disclosure.

Now that said, I hear your thesis on that. But from a practical perspective, when we look at the asset sensitivity, it's not the 70% of 80% it's the 57% that's floating rate. And when I think about the value drivers in the BDC sector over the last two years, it is concentration and energy, it is leverage, and it is asset sensitivity. And when we look at the strategy -- when we look at the knobs that you have turned, you clearly reduce leverage, you clearly reduce energy exposure. But on an overall basis, your asset sensitivity is lower than your peers. Ultimately, is that a strategy you will pursue as well? Do you see that as a value driver?

Yes. Again, Greg is answering the question because he's answering what we could control this minute. So if you look at our long-term portfolio, and we have effectively, aircraft being about 15% of the portfolio, putting aside whatever legacy detail there might be left, the remainder is 85% of either corporate or MidCap loans. And the expectation is over cycle, those will all be floating rate unless there's some real unique exception and opportunity. So everything we're originating going forward is floating rate, and so that is a real value driver.

And so I think Greg is just pointing out the fact that we're much closer to there than it may look with the 57%. Certainly you're right in terms of the levers; if the rates move we only lever the things that are listed as floating rate. So yes, when we see our portfolio and how it looks at our end date of all of this when we're just doing everything else boxed up to our strategy, we would expect everything but loans to be floating rate.

Got it. I really thought perhaps -- and you answered my question with yes and move on, which would have been great. Thank you, guys.

Thank you.

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

Good morning, guys.

So you wrote down your investment in Solarplicity, and then on the call here you stated that the input drivers were related to inflation expectations. So what specifically are those inflation expectations inherent in the mark today? And then, what changes in CPI would cause this mark to be written down further?

Yes, so we don't want to get too granular on this particular name. But as Howard alluded to, the mark on that particular investment is influenced by longer-term power prices. As well as, given that the underlying assets have an inflation adjustor, one has to make an assumption on where inflation goes from here. So don't want to get too specific, but do want to also harp on the same point that Howard made: as we look forward in transitioning the portfolio, given the profile of the investment and what can ultimately influence a mark, this is the type of things you want to be doing less of, and wanted to capture that point as well. So it is linked to those two things, and don't want to spend too much time getting too granular on those.

Okay. And then, you did comment that, subsequent to quarter end that some of your investment there was repaid. How much, I guess I could run the math because you gave the percentage, but how much was repaid?

GBP17 million, between GBP16 million and GBP17 million.

Okay. And then just staying on here, this one is for Greg.

Just curious, given the size of Solarplicity, and then the income contribution historically, why did the Company not need to meet a condition of a significant subsidiary which would require the disclosure similar to MERX?

Well because we don't own more than 25% of the equity of the company.

Okay.

That's really the threshold is your equity ownership.

And then how much, I guess I could look at the K or the Q, is it -- how much equity ownership do you have?

We're just slightly under 25%.

Okay, that's what I thought.

And then you wrote down Venoco, I think $26 million in the quarter. The company's been in bankruptcy for a couple quarters. So what happened specifically? I know you'd mentioned a little bit in your prepared remarks, but in the company's performance or outlook, to cause the mark now? And then could you talk about the outlook for this investment, and why we should feel comfortable with the remaining fair value risk and the income to continue to accrue?

Yes, so if we go back to our prepared remarks, and we've talked about this name for the last couple quarters, it actually did emerge from bankruptcy. But our outlook for the investment and what generated the writedown in this particular quarter was what we were able to surmise about various processes affecting the company, including restart of a third-party pipeline, which actually affected other operators in California. And also, as will not come as any surprise, the political environment in California has also weighed on how we think about the investment. As it relates to outlook, I would tell you that it's something that we monitor very closely. We're spending a lot of time with, but past that, can't really comment too much further.

Okay, fair enough.

And then maybe here, for Greg, can you break out the drivers of the controls and affiliated dividend income from your portfolio companies?

Well, the drivers, if you think about it, come with control basis. There are investment in aviation, and also investment in shipping. And the way we look at it, we're either going to invest back into those entities and [pot] opportunities or we pull capital out when we feel that we can deploy it on more effectively at AINV. So that's principally the drivers.

So I think we've been pretty consistent that those shipping and aviation can drive somewhere in the neighborhood of $4 million to $5 million worth of dividend income a quarter. That can fluctuate, depending upon, especially in aviation, as Tanner mentioned, where we monetize certain of our assets as we are repositioning. And there are gains on those sales, we may have the opportunity to have more dividend income. But that's a function of what we want to do with the capital, either leaving it in MERX or bringing it up to AINV.

And then so how should we think about the recurring dividend here from both affiliate and in control?

Right, so I think when you think of coming out of our two controlled investments, or basically three, when we look at our shipping, it's $4 million to $5 million. And then you have the run rate on the only other structured products we have are the Reg track great credit trades and also a couple of CLOs.

And how much is that?

Yes, $4 million to $5 million a quarter, and that may end up being $2 million a quarter. So we're probably at a run rate more at 7%, 7.5% right now.

Okay, that's what I thought. So 7%, 7.5%; so we have got $11 million here, so about $3.5 million to $4 million in one-time from recaps in the quarter?

Well, you have recaps; you have MCF, you have MCF1 out and MCF3 coming out as we mentioned.

So basically the pool of assets generate that income as accretion.

Yes.

Exactly, okay. And then prepayment fees, it appears if I back into it, about $600,000. Is that correct for the quarter?

Yes, approximately. And you'll notice, if you looked at the activity for the quarter, the activity was more on our structured products and not in our loan portfolio. And that's why you're not seeing the difference in prepayment income quarter over quarter.

Yes, I deduced that from the presentation of the supplement. So that's good disclosure. That's it for me. Thank you very much for answering the questions.

Operator, we're ready for the next question.

Our next question comes from Robert Dodd of Raymond James.

Hello, everybody.

Just to go back temporarily to Solarplicity, and I think some clarity can be nailed down here. If it's just mark to market and volatility to do with forward curve projections, et cetera, that does not indicate any deterioration or change in the underlying credit and its ability to repay, et cetera, right? So the question is, if it's no deterioration credit or weakness of the Company, was the repayment post quarter end, $16.5 million, call it, or $20 million round numbers, was that made at par or at the mark of [78%]? Obviously if it was par, cash flow is fine. But was there a discount applied on that repayment or was it repaid at par?

No, that's leverage on the investments. So that's effectively the repatriation, if you will, some of our cash, but it's not par or it's not -- that's apples and oranges. So it's basically expected leverage on the investment in order to generate an expected return over time.

We now have, with all the work complete on the whole portfolio, we now have an exact expected amount of cash flows on the whole portfolio over time. Because there's no more work to be done and no more expenses to be employed, so now we know that. That has been finished basically over the last six months or so, and now with this leverage on it we now know exactly the cash flows going out with the simple leverage. And so we know the cash flows we expect over the next 20 to 25 years, and so the only thing that changes is, why I said it's like a bond. That part is now set, now the only thing that changes are these exogenous instance. And so I don't think it would be -- I don't think you can back into your answer, which is, is Solarplicity worth back at its cost or worth what it's marked at today with those questions.

The answer is, by the end of the 20 years, all our money will be returned plus a rate of return. It's just a question of what that's worth versus an alternative investment over an extended period of time, which is why, again, we would like to exit it so you don't have to ask that question.

Okay, got it. Secondly, on the ABL side, you gave target yield here, I think 9%. Two quarters ago on the call in the commentary and the Q&A, you said 10% to 10.5%. Obviously there's a range. Is this new number, it's lower than you said before, is that a function of mix, competition? Are you going to do -- obviously the range, I think, was 7% to 12% or higher; is the expectation that you're going to do some of the lower risk or move more focus on the lower risk ABLs or the lower coupon ABLs? Or can you give color on what changed?

Nothing changed. The 10% was for the MidCap transaction generally, which includes the Life Sciences ABL and lender finance. Life Sciences tends to be on the higher end of that range, ABL on the lower, which is why we said the target is around that. And really we try to use 9% as the threshold; not to say we couldn't do ABL a little bit lower, but it's pretty much a threshold. So nothing has changed, so 9% is the threshold and ABL is on the lower end of the MidCap-related products.

Got it, thank you. One last one if I can.

An asset that's been on non accrual for a long time, obviously Griffin. No major changes there, except the new administration obviously has made some noises about regulation on the college front as well. No granular detail. But on Griffin, what would it take, or is it feasible at all, for that asset to, say come back on non-accrual or improve? Or do you have any ideas on the regulatory front that could shift that would be materially beneficial for that asset, or is that just not going to happen?

You're right to point out that there -- and that's exactly some of the questions around tax. There have been rumblings about potential regulatory change with respect to for-profit that would enhance the prospects for those particular companies for that industry. I think as reflected in where we have written down Griffin, even accounting for the possibility of a beneficial regulatory change, there's a very limited window in which we would see significant moves such that, that investment would come back on to accrual. I would caution that the changes proposed, I think to your question, it would have to be substantially higher than is anticipated in any reasonable scenario to really see any enhanced value. So I'd caution accordingly.

Got it. Thank you.

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

Good morning.

First one, you talked about on the demand side for launch, you said competition is obviously very strong for new loans, which is pressuring some price in and leverage, et cetera. But with the new administration coming in and new Congress, certainly the equity markets are excited about the US economy and US growth. So I just wondered, are you seeing any of that same sentiment in PD sponsors? Or are you seeing them any excitement about the outlook for new transactions from the PD sponsor side?

I think people understand the less regulatory, repatriation, lower tax benefits. And so we all understand and sponsors collectively understand the upside. I think because there's no specific rules on the books right now, it's hard to navigate. So the macro is understandable to see; equity market is excited by it. But in terms of actual, what deregulation means for the financial services business, what a benefit to a tax regime, again, we all see the benefits. But I don't think we could say we've seen a specific strategy being taken. Certainly the animal spirits are elevated. But in terms of what that actually does in terms of portfolios or individual investments is too early to tell.

Okay. And then, just wanted to, and I might have missed this, with your guys oil calls and puts that you guys layered on this quarter, you said it was basically a costless collar you put on, is the goal that just to reduce a portion of the volatility in your $250 million oil and gas portfolio? And how much of an impact can that have? You guys still have about a $250 million portfolio of oil and gas investments. So how much of an impact can that costless collar have? And is that a strategy you guys anticipate continually to add to that, both the puts and calls, to actually grow that derivative book?

So it is, yes, just to mute the volatility. And the answer is, the hedging of the portfolio, there's some of the portfolio which is potentially on the cusp of being refi'd. So we're looking at the overall portfolio that we have -- we are more deeper into the value of the company. And there are hedges at the company level as well that the companies have taken on to try to lock in their performance, so we are trying to tie into that. So at the end of the day, it's not an exact science but it's not an art, either. So the amount that we took on we think potentially mutes the returns either way:15% or 20% of our overall exposure that's outside debt we expect to get repaid somewhat soon.

Okay. Those are all the questions for me, thanks.

Our next question comes from Doug Mewhirter of SunTrust.

Hello, good morning. Most of my questions have been answered. I had a semantics question.

You said, when the demand for the product is exceeding the supply, I just wanted to confirm: the demand being the institutional investors seeking yield or looking for credit investments, meaning more money is coming in. And the supply being private equity deals or leveraged credit deals. Am I interpreting that correctly?

That is correct.

Okay, and a second question about your oil hedges, and my last question.

Is there anything that we have to be aware of in your hedges from a regulatory perspective? In other words, is there maybe an extra capital charge that maybe not be apparent from how you're holding it on the balance sheet? Or does that impact your 30% bucket in any outsized way just because it's not a traditional BDC financial transaction?

Yes, as Howard said, while it is a 30% basket asset, it was just meant to, one time, to dampen the volatility of the impact as we go through our broad strategy of reducing our exposure. Don't expect to do it again. We feel like, again, costless collar was effective when we looked at the fundamentals of our handful of companies when we had a broader equity exposure. But those run off at December 31, 2017. There's no either hidden agenda or hidden reason why we did it.

Okay, thanks. That's all my questions.

Thank you.

Our last question will come from the line of Christopher Testa of National Securities.

Hey, good morning. Thank you for taking my questions.

Just looking at the structured products portfolio, you'd mentioned that MCF3 will repay subsequent to quarter end. Is that both the residual interest as well as the class E notes? And my second question on that would be, are you seeing, given the rebound in structured products, the ability to sell out of some of the other positions as opposed to waiting for them to repay?

So the answer to your first question is yes. And then on the second, and I think tied us into the broader strategy change, we are evaluating our existing exposure, given, as you rightly alluded to, the strength of that market.

Got it. And can you remind us on how much in the repurchases are remaining after the quarter end?

Approximately $50 million.

$50 million, great. And so how much AUM is available across the private funds, whether it's MidCap or just the other Apollo funds?

Well, we have a broad set of businesses, and APO is a public file or a public company. You can see the breadth -- we have a very large credit platform, and a variety of activity in the performing and mezzanine space. So I think it would be probably best served for you to look at the documents on the overall APO presentation.

Okay, great. And just touching on that and the ability to invest with exemptive relief, do you think the ability to potentially take down larger slices of investments, given the exemptive relief, will help somewhat mitigate pricing pressure as it's obviously much harder for lenders to move up market as opposed to down market?

Yes, that's our expectation and it's has been our experience at least over these three months that we've been able to, as the markets got really overheated, that we have been able to -- the opportunities have been able to close we feel like at are at a premium to what some other people can do. We don't have quite the appetites that we have across the board. And so we -- that's thus far.

And do you think that could potentially generate more unit tranche and stretch senior opportunities for you in Apollo's portfolio?

Well, to go back for a second, our combination of products we have between MidCap and AINV and managed accounts and funds across Apollo, we think is as broad as almost anybody in the market. And so our ability to be relevant to sponsors and deliver very broad things is a positive feedback.

So the more we can do that, the more relevant we can become. And so for AINV as a $2.6 billion fund, being actually a linchpin of that but not a huge amount of the dollars, gets a disproportionate benefit of that size. And so, yes, we expect to be able to deliver solutions at all levels of the capital structure amongst our different vehicles, and that's the whole intention of having this combined origination and the exemptive relief being the important centerpiece of that.

Okay, great.

And it's not only on pricing and terms, but again, as you can see, what we've laid out, the whole sizes that Tanner and Howard talked about around the $25 million, $30 million, we like that. So having the broader front end it not only potentially helps you in pricing and terms, but also gives you a greater ability to have a diverse portfolio. So those are two distinct but equally important attributes.

Got it. That's great, thank you.

And just touching on Venoco again, you'd mentioned one of the issues was restarting the third-party pipeline. Just wondering if you can disclose any visibility you have into how long that should take them to get that restarted and have that pick up again?

Probably really best not to comment on it. There's a whole host of issues that are included in that, so it's probably best to comment like we have thus far.

Okay, great. That's all for me, thank you for taking my questions.

First of all, thank you for the broad collective questions today. We appreciate the following and the support of our analysts, but also all of our investors. And we appreciate the process going through as we've continued the process of our strategic initiatives. Thank you very much for your time and questions, and 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.