MidCap Financial Investment Corp (MFIC) 2018 Q4 法說會逐字稿

Good morning, and welcome to Apollo Investment Corporation's Earnings Conference Call for the period ended March 31, 2018. (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, Howard Widra, Tanner Powell and Greg Hunt.

I'd like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release.

I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information.

Today's conference call and webcast may include forward-looking statements. Forward-looking statements involve risks and uncertainties, including, but not limited to, statements as to our future results, our business prospects and the prospects of our portfolio companies. You should refer to our registration statement and shareholder reports for risks that apply to our business and that may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our SEC filings, please visit our website at www.apolloic.com.

I'd also like to remind everyone that we've posted a supplemented 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.

As you see in today's press release, we have a variety of important announcements.

To start, I'm happy to announce that Howard Widra, who had served as President of AINV since 2016 -- June 2016, has been appointed Chief Executive Officer as I step down from this role. Howard is also joining the Board of Directors of the corporation. I will continue to serve as a director for the company and as Co-President of Apollo Global management and, as such, will continue to be involved with AINV in a strategic capacity.

In addition, Tanner Powell has been appointed President of the company, filling the vacancy created by Howard's appointment. Tanner will also continue to serve as Chief Investment Officer to the company's investment adviser.

These appointments reflect Howard and Tanner's ongoing contributions to the successful execution of the company's portfolio repositioning plan over the past 2 years and their work at Apollo over many, many years. I look forward to continuing to work closely with Howard and Tanner as they continue to execute the company's strategic initiatives. Congratulations to both of you.

With that, I will turn the call over to Howard to discuss our other announcements.

Thanks, Jim.

I will begin today's call by discussing the changes to our fee structure, followed by an overview of our go-forward strategy in light of our Board's recent approval to reduce our asset coverage requirement. Following my remarks, Tanner will discuss the market environment, our continued progress repositioning the portfolio and our fourth quarter investment activity. Greg will then review our financial results for the period. We'll then open the call to questions.

Beginning with the fee structure. We're pleased to announce several changes to our fee structure, which we believe greatly enhances the alignment of interests between our manager and our shareholders. First, the base management fee has been permanently reduced, and we have adopted a tiered fee structure whereby management fees decrease as assets grow. The base management fee has been reduced from an annual rate of 2% of the company's gross assets to 1.5% of gross assets up to a 1x debt-to-equity ratio, and reduced to 1% of gross assets in excess of 1x debt-to-equity. For purposes of calculating the base management fee, the definition of gross assets excludes cash and cash equivalents.

Second, the calculation of the incentive fee on income has been revised to include a total return requirement with a rolling 12-quarter look-back beginning from April 1, 2018. The incentive fee rate and hurdle remain 20% and 7%, respectively, and there is no change to the catc125 provision. The incentive calculation with the total return requirement will be put into effect on January 1, 2019. For the period between April 1, 2018, through December 31, 2018, the incentive fee rate will be waved to a flat 15%, subject to the 7% hurdle rate. I'll refer you to the 8-K that we filed this morning for the amended and restated investment advisory agreement for additional detail. We believe that this new fee structure demonstrates our commitment to creating value for shareholders.

Moving on. As you are aware, in late March, The Small Business Credit Availability Act was passed, which permits BDCs to operate with a reduced asset coverage requirement or, said differently, an increase in leverage. In early April, AINV's Board of Directors approved our ability to operate with higher leverage, which will go into effect in April 2019. After much thoughtful and thorough analysis, we have developed a comprehensive plan, which we believe prudently implements the increase in leverage and which we believe will enhance returns for our shareholders.

Many of our competitors have sensibly talked about the possibility of increasing leverage in order to access a broader range of assets, and they will examine that possibility as time progresses and origination allows. We are fortunate to be in a unique position to already have all the origination necessary to implement a prudent and lower-risk portfolio growth strategy with the increased leverage and to have insight regarding how those assets perform over a cycle. That is why we have taken such a clear position on our path forward upon passage of the act.

We believe the incremental leverage will allow us to derisk AINV's portfolio by using the incremental investment capacity to invest in lower-risk assets, which should improve our ability to generate stable earnings and NAV. As mentioned, we believe the ability to increase our leverage provides a unique opportunity for AINV given the robust volume of senior, first-lien, floating rate assets already originated by the Apollo platform. We believe that our ability to access MidCap's extensive origination capabilities as a senior lender gives us an advantage over many other BDCs. We expect the majority of incremental assets will be first-lien, floating rate loans with leverage of 4x to 5x -- between 4x to 5x EBITDA and with spreads of 500 to 700 basis points over LIBOR.

Let me take a moment here to remind everyone about MidCap, a middle market-focused specialty finance firm which I cofounded that currently has $8 billion of funds employed and $16.3 billion of commitments under management.

MidCap has an outstanding track record of investing in senior corporate loans. AINV and MidCap can co-invest on a negotiated basis, pursuant to our co-investment order. Today, MidCap originates a significant amount of senior, floating-rate loans within AINV's new target yield that will now be available to AINV. For example, in 2017 alone, approximately $3.7 billion of new loans originated by MidCap were either committed to by third parties at close or were syndicated to third parties post close. These assets will now be appropriate for AINV. Moreover, the combination of MidCap plus AINV, which has increased leverage capacity, will enhance Apollo's overall ability to win deals based on size.

With our new target portfolio asset mix, we expect to operate with a leverage ratio of between 1.25 and 1.4x, well below the adjusted regulatory limit. We expect that it could take between 18 months and 24 months from now to operate within this revised target leverage range.

Regarding our funding plans, we have had preliminary discussions with the lead banks in our credit facility to renegotiate the leverage covenant, and we believe that we will be able to come to a favorable amendment to that agreement for all parties.

Our incremental leverage will most likely come from secured bilateral credit facilities like the facilities used by MidCap on identical assets. We have already received term sheets from a couple of large banks with pricing inside our current cost of funding, which we believe will reduce our overall borrowing cost. This reduced cost of funding, combined with a lower management fee on the incremental assets, means that newly originated assets will create meaningfully -- meaningful accretion to our ROE. We believe that with this go-forward investment strategy, we will be able to deliver higher and more consistent returns for our shareholders.

Turning to our distribution. The board approved a $0.15 distribution to shareholders of record as of June 21, 2018.

With that, I'll turn the call over to Tanner to discuss our investment activity

Thanks, Howard.

Beginning with the environment. Middle-market lending remains very competitive. Middle-market loan issuance was slow during the quarter, while private credit fund raising remained robust. Slight demand imbalances continue to pressure deal structures and spreads. We believe the combination of our strong origination platform, broad product suite and deep sponsor relationships allows us to see a wide array of opportunities. We believe that given our size relative to our funnel of investment opportunities, we can find attractive opportunities in today's competitive market. That said, we expect to only put capital to work if it makes sense for our shareholders in the long term. We remain focused on credit selection while patiently deploying capital.

We continue to be pleased with our progress executing on our portfolio repositioning strategy. In this competitive environment, we are focused on opportunities to capitalize on Apollo's scale and areas of expertise and can also take advantage of our ability to co-invest with other funds and entities managed by Apollo.

During the quarter, we deployed $243 million in 8 new portfolio companies and 9 existing companies. The weighted average yield of debt investments made was 9.7%. $114 million or approximately 47% of total deployment was in co-investments, of which $72 million was in an asset-based transaction for Genesis Healthcare, the largest skilled nursing facility operator in the U.S. This investment is a great example of the benefits we are deriving from our ability to co-invest with benefits of scale as AINV and MidCap combined underwrote the entire $555 million facility. It was mentioned that AINV's current exposure to Genesis is less than $50 million, and given the company's revolver availability, we expect our exposure to remain near this level.

Other notable co-investment transactions during the quarter included Crowne Automotive, Partner Therapeutics and VPOWER, amongst others.

Consistent with broader market trends, repayment activity was elevated during the quarter. Investments sold totaled $119 million and repayments totaled $238 million for total exits of $357 million. Net investment activity before repayments was $124 million, and net investment activity after repayments was a negative $114 million for the quarter. Excluding the impact of the sale of Solarplicity, net investment activity would have essentially been flat. The weighted average yield on debt sales was 7.6%, and the weighted average yield on debt repayments was 10.8%. Sales and repayments included the pay-down of 2 of our noncore assets, Solarplicity Group and Craft 2014.

During the period, we significantly reduced our exposure to noncore assets, which now represent $434 million or 19% of the portfolio, down from $907 million from when we commenced our repositioning strategy in mid-2016. Approximately 39% of the remaining noncore assets are in 2 oil [mains], which have significantly improved in value and have been hedged to reduce the volatility of their potential outcomes. Approximately 36% are in shipping investment, which was up last quarter as we deployed $42 million in Dynamic Product Tankers during the period to redeem debt from the existing lender, a move which we believe greatly enhances our flexibility. The new loan represents the senior part of the capital structure and, therefore, do not add to the risk position of the assets.

Turning to aircraft leasing. As of the end of March, AINV's investment in Merx was $402 million, representing 17.9% of AINV's total portfolio. During the quarter, we deployed approximately $18.5 million into Merx and were repaid $25 million, resulting in a net repayment of $6.5 million. Merx's underlying portfolio continues to perform well, and the team has been able to successfully monetize select aircraft. Because of the strong performance, Merx paid a $2.5 million dividend to AINV during the quarter. In April, Merx announced the pricing of an aircraft securitization, representing its inaugural role as servicer to a securitization transaction. Merx priced $506.5 million of secured notes and used the proceeds to finance -- refinance 25 of its owned aircrafts, including 19 aircrafts from the ABS portfolio. Investor demand for the notes was strong, and the transaction was well oversubscribed. The Class A notes were rated A, the Class B notes were rated BBB and the Class C notes were rated BB by both S&P and (inaudible). The transaction closed earlier this week. Over the past year or so, Merx has been investing in technical resources and developing to a full-service aircraft leasing platform. As such, we expect Merx will continue to manage an increasing portion of the fleet -- of its fleet, which should enhance its operating performance.

Regarding our energy portfolio, at the end of March, oil and gas represented 8.2% of our portfolio at fair value or $184.1 million across 3 companies. During the quarter, we funded $1.2 million in Spotted Hawk. We continue to work closely with their respective management teams, and we may deploy some additional capital into these names during the coming quarters to support accretive development projects.

Given the increase in the price of oil during the period, we recognized an unrealized gain of $8.9 million or $0.04 a share on our oil and gas investments and also recognized a loss of $8.8 million or $0.04 per share on our oil hedge.

Now let me spend a few minutes discussing credit quality.

During the quarter, our second-lien debt investment in Sprint Industrial Holdings was placed on nonaccrual status. The company has experienced earnings pressure, but with the recent improvement in operating performance, we are hopeful that this firm will recover well above its current mark. No other investments were placed on or removed from nonaccrual status.

At the end of March, investments on nonaccrual status represented 2.3% of the portfolio at fair value and 3.3% at cost.

The risk profile of our portfolio, as measured by the weighted average leverage and the interest coverage for our portfolio companies, was relatively unchanged compared to the prior quarter. The current weighted average net leverage of our investments remain 5.5x. The current weighted average interest coverage decreased to 2.5x.

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

Thank you, Tanner.

Our revenue for the quarter was $61.5 million, down 5% quarter-over-quarter due to lower recurring interest income and lower dividend income. Interest income declined primarily due to a lower average portfolio and the placement of our investment in Sprint on nonaccrual. Dividend income decreased quarter-over-quarter primarily due to a lower dividend from Merx and lower dividends from structured credit investments as we have reduced our exposure to this asset class.

Prepayment income rose during the quarter, consistent with the increase in repayment activity. Prepayment income was $3.5 million in the quarter compared to $2.8 million in the December quarter.

Fee income declined slightly to $1.3 million in the quarter compared to $1.5 million in the December quarter.

Expenses for the December quarter totaled -- or for the March quarter totaled $29.5 million compared to $30.8 million in the December quarter. Expenses were down primarily due to lower management and incentive fees. The decline in management fees was due to the decrease in the portfolio -- side of the portfolio. The incentive fee for the quarter was 15%. And the incentive fees for the quarter also included $1.8 million reversals of previously accrued incentive fees related to PIK income from our investments in Solarplicity and Sprint Industrial.

Net investment income was $31.9 million or $0.15 per share for the quarter. This compares to $34 million or $0.16 per share for the December quarter.

For the quarter, the net loss on the portfolio totaled $11.3 million or approximately $0.05 per share compared to a net loss of $28 million or $0.13 per share for the December quarter. Given the increase in the oil -- price of oil, there was a $0.04 per share positive impact on our oil investments during the quarter, which was offset by a $0.04 loss per share on our oil hedge.

Away from oil and gas, there was a $0.05 loss per share on our investments during the quarter. The largest driver of this negative performance was from our remaining Solarplicity investment, which we had restructured during the quarter. The restructuring has provided the company with the runway to execute on its new business plan.

Consequently, net asset value per share declined $0.04 to $6.56 per share at the end of the quarter. The decline in NAV was attributable to a $0.05 loss per share on the portfolio, partially offset by $0.01 share accretion due to stock repurchases.

Turning to the portfolio composition. At the end of March, our portfolio had a fair value of $2.2 billion and consisted of 90 companies across 24 industries. First-lien debt represented 50% of the portfolio, second liens represented 31%, unsecured debt represented 5%, structured products represented 3% and preferred and common equity investments represented 11%.

The weighted average yield on our portfolio at cost increased by 20 basis points to 10.7% primarily due to increases in LIBOR, partially offset by the repayment of higher-yielding assets. During the quarter, 1-month LIBOR increased approximately 30 basis points and ended the quarter at 1.9%. 3-year LIBOR increased approximately 60 basis points and ended the quarter at 2.3%.

Since we have more floating-rate assets than floating-rate liabilities, an increase in LIBOR generally is positive for us. However, as LIBOR increases, there is usually a lag effect before we see the full impact of the interest than we receive from our borrowers as borrowing rates generally reset either monthly or quarterly. Assuming no change in our balance sheet composition from the end of March, an additional 100 basis point increase in LIBOR would translate into incremental annual net investment income of approximately $0.04 per share

On the liability side of our balance sheet, we had $790 million of debt outstanding at the end of the quarter. Net leverage, which includes the impact of cash and unsettled transactions, stood at 0.57x at the end of March compared to 0.62x at the end of December.

On our last earnings call, we indicated that it was our intention to redeem our 2043 baby bonds when they become callable in July. Due to change in allowable leverage and changes to our funding strategy, we no longer intend to call those notes in July. As Howard mentioned, we're in the process of renegotiating our revolving credit facility and exploring additional borrowing arrangements.

In April, S&P downgraded AINV in connection with our plans to operate with higher leverage. While we are disappointed with S&P's actions, which we believe is rooted in their view of the industry and not AINV specifically, we do not believe that their action is an impediment to our successful execution of our go-forward strategy. We look forward to working with all the rating agencies in evaluating the impact of the new leverage rules.

Lastly, regarding our stock buybacks. During the period, we purchased approximately 2 million shares at an average price of $5.73 for a total cost of $11 million during the quarter. Since the inception of the buyback program, we have repurchased approximately 20 million shares or 8.6% of our shares outstanding for a total cost of $120 million, leaving approximately $30 million available for future repurchases under the board's current authorization.

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

(Operator Instructions) Our first question comes from the line of Jonathan Bock of Wells Fargo Securities.

Fin O'Shea in for Jonathan Bock this morning. And I appreciate your leadership on the leverage issue with the breakpoint there and all the color you provided on that. Just for a little more on that matter. With the incremental -- the 1% breakpoint going after 1:1, the thing we noticed today is that your leverage is, net-net, 55 debt-to-equity. So can you kind of walk us through the incremental assets from here to 1:1? Are they going to be similar to what we see today and then go lower risk? Or will it be full-on lower-spread assets?

I think the way we think about it -- and obviously, it depends on particular assets as they come through, but the way we think about it is that we expect it to operate between 0.7, 0.75 prior to this leverage change, assets that are consistent with what we see before, and we still expect that to be sort of the base of the business in terms of building where the earnings stream is from and then layering on top of that the assets that sit in the range that we talked about just now, meaning first-lien assets between L-500 and L+700. So there's sort of 2 parts embedded in your question. And so if you go from 0.7 to 1.4 of leverage, that's about between $900 million and $1 billion of assets, which is why we said we thought it took 18 months to 24 months based on sort of the flow that we've seen consistently over the last few years and continue to see to build that up. So we expect to get back to 0.7 in the normal course without regard to that new origination at any time. And the reason why I say at any time is, without Solarplicity paying off this past quarter, we would have been very close to that, right. We have big positions paying off, and we're not putting on as many big positions. And so, for example, if we were to exit Spotted Hawk, our leverage would go down. We'd view that as positive. And it may take a little while to climb back to 0.7. But we expect to get down in the normal course. We will put on top of that, and it's somewhat -- anyone's guess is as good as ours, but in somewhat linear fashion, that additional $900 million to $1 billion book.

Okay, I appreciate that color. And then on the 2043 notes you just commented on that you'll no longer call in July, is that just a pause with all things under consideration? Or do you now view that, that structure makes sense on your balance sheet in light of the S&P and higher leverage?

No, it's just a pause at this point as we kind of look at our capital structure with our sources of financing going forward.

Okay. And then just one more sort of market question we're trying to understand here. CLOs, as you know, are experiencing cash pressure given the gap on 3-month and 1-month LIBOR. On middle-market direct lending assets, is the optionality to the issuer between 3-month and 1-month, is that typical on the structure?

Yes, it is. And predominantly, it's -- as those 2 indices work closely together, there was a bias for 3-month. We've seen a little bit gravitation to 1-month. But generally speaking, they do have that flexibility.

Okay, yes. And of course, we would -- you'd see less of an impact given much lower rates of leverage. But it was something that we're trying to come to grips with as LIBOR goes up and those benefits accrue to you. And that's all for us this morning.

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

I just wanted -- in terms of the core investments you guys are making, just wondering about EBITDA and revenue growth trends you're seeing there. And any sort of changes since we last talked?

No, I don't think -- Kyle, I don't think that there's been a material change. You obviously have a dynamic credit book where some of your outperformers are the ones that are the highest propensity to get sold out or to get refinanced out. We see it as still a positive growth environment but relative relatively muted as it relates -- and so that goes to earnings trends. In terms of specific leverage, our leverage was relatively flat owing to the fact that the deals that we're doing were relatively higher leverage. And I also note I think it's something that we and our peers see as there's a greater proportion of sponsored deals are executing on roll-up strategies. And a lot of times, those acquisitions are leveraging as well. But to answer your question more specifically, definitely positive but muted in terms of the magnitude of that underlying earnings growth.

Got it. And then can you update us on your appetite for share repurchase given the changes in leverage you addressed earlier?

I think we have the same appetite. We've done it consistently when we think it's the right value. The increase in leverage certainly doesn't change that because it creates more capital available on less equity. So I think we have the same appetite. When it's a good investment from a return perspective for the shareholders versus making additional loans, we'll continue to do it.

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

Look, we're at an interesting inflection point. We're clearly late in the cycle, but the cycle can continue indefinitely in terms of good credit. We are seeing -- we have seen, empirically and anecdotally, heightened competition. We see that in terms of spread. We see that in terms of covenant. Now there is potentially an increase in supply of capital coming in as leverage limits are increased. I'm just curious, both strategically and tactically, how you think about this over the next 12 or 24 months. Presumably, credit's always been tight. So what are the next dials to turn?

Well, so something we talk about consistently and the change of BDC leverage, one, because it's lagging over time; and two, because it's only part of the capital formation in this competitive environment, and it has been building everywhere is figuring out how to differentiate without competing on credit or on pricing. And it has sort of become increasingly clear that size is the thing that does that. And so we have been very focused on having as much capital as possible available for the safest part of the capital structure in buyouts to be able to speak for as much as possible. And given MidCap's presence in that market and increasing capital available, we have been able to sort of create a product that's not unique but far more differentiated than the vast majority of the people we compete with and think that sort of that trend will continue. So that's the first thing. And as it continues to get competitive, you want to make sure that you have enough of a differentiation where you're not chasing the market. You can offer something that allows you to get the best pick. The other thing is to be invested in origination and have as broad and as deep a set of origination team as possible. We have a lot of people in the sponsor space. And then outside of the sponsor space, we have probably as much origination resources across asset-based lending and lender finance and life sciences and aviation and opportunistic credit across all the Apollo -- the whole Apollo universe as anybody. And so you certainly have to be more selective. You certainly have to be aware of that. You have to have some lines you have to draw, but the best defense is to have something, a product that most people don't have.

Got it, okay. And as we are in this rising rate environment, this is a question we've asked a couple of times, I am curious if you are helping your borrowers help themselves by asking them to take swaps and hedge out some of the risks that they're taking on the floating-rate liabilities that they're incurring. Is that part of the strategy for you guys?

Well, it was a convention in the sponsor market, when LIBOR was at 5 years and years ago, to have people hedge or at least hedge half an exposure. That convention has not returned. And so it's a challenge because if it returns for one person in the market and no one else does it, then you're not going to win your transactions. So -- but it is an important thing to consider. So for example, the underwriting is underwritten with a LIBOR [carve] and what they can cover, not just sort of flat LIBOR, and the importance of them making sure that they have the cash flow available either through a hedge or their cash flow to pay their interest is part of the underwriting. And I think you'll -- I think it's a great question. I think you'll probably see in the market that starting to return over the next 12 months to 24 months as rates continue to creep up.

Got it. And then again, look, I do want to acknowledge you guys breaking ground in terms of approaching your management fee structure as you increase leverage. I think that's an important signal to the market.

(Operator Instructions) Our next question comes from the line of Doug Mewhirter of SunTrust.

I had 2 questions. First, on the higher leverage and your origination strategy. It sounds like, the way you describe it, that most of the incremental loans will be more directly originated mainly through the MidCap platform. And it sounds like there's some sort of pent-up demand, which explains why you're fairly confident you can sort of lever up in a relatively quick manner in the grand scheme of things. I guess would you consider -- or that part of the strategy, to the extent that maybe there'll be some air pockets in the origination environment where you wouldn't be able to ramp up, that you would add tradable credit to that pile, so first-lien loans, that you would buy up a trading desk that you saw were right? Or are you going to stick to directly originating for this higher-leverage bucket?

Yes, I think the plan is to lean into the direct origination platform that Howard has built at MidCap. I think what we've said historically is that from time to time, there are those names that maybe are in the -- a Nether region of traded versus originated that still may compose a portion of our book. But as it relates to our intention going forward, it should be disproportionately from the MidCap portfolio and, again, senior secured, floating-rate assets.

And let me just make one point. And just the sponsor origination that we have and have built over the last 2 years is not just MidCap. It's Apollo-sponsored origination. Their sponsor originations are both -- from both places. It's all coordinated through one team, and we have gone to market by offering what AINV could historically offer and what MidCap can historically offer as well as other products of sponsors. And that has been what we felt like, in addition to size, has helped us get additional wallet share from sponsors. All that this does now is basically say, there's more of these loans that MidCap and its managed accounts and its third parties that syndicate to, there's now a portion of that, that AINV can take a piece of. But it's already been part of that flow, and it's already sort of a coordinated, institutionalized sponsor coverage effort as Apollo. It just so happens that MidCap was the centerpiece of that because it has the most capital and the most unique product.

That's very helpful. Shifting gears a bit for my second and final question. The -- your energy investments, your -- it looks like with higher oil prices, that is -- that's definitely a good thing for your energy investments. But now you're sort of in a -- in sort of a gray area in terms of what management might want to do with the companies or what you might want management to do with the companies. And I was trying to get on an idea where their heads are at in terms of, oh, oil prices are up, so let's go buy some more properties and grow our way out of the problem versus take an attractive offer from a bigger oil and gas company and get it off our balance sheet. So it sounds like you would want to reduce your noncore assets as long as you get good prices, but I know that management generally likes -- the management of the companies would generally want to sort of grow them themselves. I'm not quite sure where the balance is at this point in time.

Yes, sure. I'd answer it this way. And you mentioned it has and continues to be our intention to reduce our exposure to noncore assets, including oil and gas, and that is a strategic priority for us. That said, we have -- every situation is unique, and we are interested at -- we're not interested in moving those assets at fire sale prices. And as we have, as we alluded to in our prepared remarks, from time to time have put in money to support development activities within those companies and will continue to do so. So to your specific question, I would say, yes, it is still our strategic priority to try to reduce. We are amenable and working closely with management teams to accomplish the -- to put ourselves in a position to best execute and derive value from this situation, which includes, from time to time, continued support of those assets.

Our next question comes from Robert Dodd of Raymond James.

Hopefully you can hear me, and the line seems noisy right now. But just focusing on -- almost following up to Rick's question but less about the net next 12 to 24 months and more about today. I mean, the new assets you're talking about, the potential new assets L+500 to 700, in today's market that seems like a -- to cover a wide landscape of kind of assets. I mean, can you give us a bit more color on the kind of things we're looking at? L+5 (sic) [L+500] is a noncyclical health care ABL or something like that and 700 is a stretch senior for decent size company, et cetera, but that does touch a lot of landscape there.

Right, agree. So let me try to sort of narrow it a little bit. Even prior to this change, we have been focused on -- to the extent that the size and yield meet to do asset-based lending and life sciences lending that yields what we have said at 10%, which is really sort of like L+750 with fees. And we will -- we expect to continue to do that. The other thing that changed there is we potentially have a little higher hold sizes because our overall book is bigger. So we can be a little bit more concentrated there or we can have bigger loans with the same concentration. With regard to sort of the leveraged loans, what we're referencing is basically first-lien, either senior or senior stretch loans between 2 sponsors, between L+500 and L+700. The L+500 deal, I agree, looks way different than the L+700 deal. The L+700 deal is few and far between. So I would focus more on deals that are between 4x and 5x leveraged than are L+550 to L+600. I think that sort of narrows it more. And those are sponsor buyout deals or recaps for companies that are moving sort of slightly above leverage from the bank market, traditional nonbank-sponsored finance loans that are first lien. Obviously, there are liens getting done in those markets that are L+450, deals getting done in those markets that are L+450, that those wouldn't qualify. And so why did those deals get done at L+450 and other ones at L+550? Sometimes it's speed of execution. Sometimes it's size. Sometimes it's more stable cash flow. Sometimes it's lower leverage. It's all of those things. And obviously, price follows credit. But it -- you should think of it as pretty standard first-lien sponsor lending and not other things that are sort of outside of that.

Now just a...

Just to be clear. Not to say that there can't be a loan that comes up every now and then that fits those other categories, but the vast majority will be in that category.

Got it, got it. Really helpful color. On the -- one of the other things you mentioned, the incremental buying could be secured bilateral and at rates lower than your current borrowing facilities. I mean, can you give us any more color on that? Because obviously, you've got a pretty cost-effective revolver already. But I don't know that traditional BDC-type revolvers have come down that much. So, I mean, is this a traditional revolver-type structure? Or is it more of a securitization structure or warehouse or something like that?

No, I mean, we're referencing not cheaper than our current revolver but cheaper than unsecured debt.

Okay, got it. I understand. I understand. Okay. Okay. That's -- so I just -- I miss heard that. Last question, if I can. I mean, one of the things, obviously, is you can't go over 1:1 until April. On the BDC balance sheet, there are obviously ways around that, off-balance sheet warehouse facilities, the [SLF]-type structure, the BDC and then buying the assets. I mean, should we expect, for lack of a better term, you to get creative to manage -- because the -- obviously, originations are happening at MidCap right now, and they have been happening. And you could potentially capture some of those and be ahead of the game, so to speak, once the 1-year anniversary of the board approval passes. Or is it just going to be kind of steady and no creative adjustments to how to capture that?

Yes, I mean, I don't think we'll do anything created to fix the short-term problem of having too much origination that has long-term implications. There's not a whole lot of reason for that. I mean, obviously, if we get to -- if we have -- we're at 0.9 leverage in August. That's a good problem if we love all our loans and it's grinding or in reverse. And we'll deal with that when that happens, but we expect it to just sort of be -- everything we tried to do over the past 2 years and have continued to try to do is to be sort of simple and vanilla and clear. And we'll stay that way even at the expense of doing something sort of quick and creative like a short (inaudible), a stop gap.

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

We had -- Fin was kind enough to ask questions because I lost my voice. But I wanted to congratulate on the reduction but then ask a follow-up, if you can understand me. And if not, I'll do it over email. The question is, Howard, as you build out MidCap, I'd imagine you have a number of third-party funds that are -- have been in the works, SMAs, et cetera, because MidCap is certainly a large originator. Question is, give us a sense of the funds that the L+550 loan will be shared with and whether the available capacity on the BDC balance sheet is 1/3 or 1/2 in comparison to those other third-party funds that MidCap is now managing.

Well, it's always changing, right, because we're continuing to raise money. And then also, sort of the allocation policy and the exemptive order take into account some of sort of priority. But I would say that it is for leverage lending itself, the BDC is probably about 15% to 20% of the capital available for those loans.

And I would just add, Jon, that from our perspective, that flow, as you can hear that the consistent theme that the team has articulated this morning, that flow was there. So it's just really a matter of turning on the larger faucet for the BDC to be able to buy those. So we feel we have plenty of capacity to increase ours without having a diminished impact on the overall because we're going to still maintain an appropriate diversity. And as Tanner mentioned in his notes and Howard as well, even in these large syndications, we're going to be consistent with our goal of 1% and 2% positions at most. So the ability for -- on a several hundred million underwriting for the BDC to take $30 million to $40 million, that's totally appropriate. And whatever the -- $25 million to $40 million, whatever the number may be, that number is clearly not going to drive the train, but we're bringing that capital to the overall front end, which is the critical aspect.

Got it, got it. Guys, congratulations and clearly understand. We appreciate the accretive math above 1:1.

And that was our final question. I would now like to turn the floor back over to management for any closing remarks.

Okay. Listen, thank you, operator. In behalf of the team, we thank you for your time today and your continued support. Please feel free to reach out to Greg, Elizabeth and the entire team, and we look forward to talking to you in the future on various questions. Have a great day.

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