MidCap Financial Investment Corp (MFIC) 2021 Q1 法說會逐字稿

Good afternoon, and welcome to Apollo Investment Corporation's earnings conference call for the period ended June 30, 2020. (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 Howard Widra, Chief Executive Officer; Tanner Powell, President and Chief Investment Officer; and Greg Hunt, Chief Financial Officer.

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

I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Today's conference call and webcast may include forward-looking statements. Forward-looking statements involve risks and uncertainties, including, but not limited to, statements as to our future results, our business prospects and the prospects of our portfolio companies. You should refer to our most recent SEC filings with the SEC that apply to our businesses -- with the SEC for risks and apply to our businesses 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 our Chief Executive Officer, Howard Widra.

Thanks, Elizabeth. Good afternoon, and thank you for joining us today. Before we begin, I'd like to say, we hope everyone is healthy and doing well.

I'll begin today's call with an overview of our portfolio and a review of our financial results for the June quarter. I will also discuss today's distribution announcement. Following my remarks, Tanner will review our investment activity for the quarter and will discuss the impact of the COVID-19 pandemic and economic shutdown on our portfolio in greater detail. Greg will then review our financial results and provide an update on our liquidity. We will then open the call to questions. During today's call, we will be referring to some of the slides in our investor presentation, which is posted on our website.

As we all know, the COVID-19 pandemic has been an unprecedented shock to the global economy. We believe our portfolio, repositioning over the last several years, has allowed us to enter this challenging period with a well-diversified senior corporate lending portfolio invested in less cyclical industries with granular position sizes. Despite the significant economic headwinds through the pandemic, our corporate lending portfolio continues to perform well as evidenced by a net gain during the quarter. We believe the performance of our corporate lending portfolio during this challenging period demonstrates its resiliency and quality. No investments within our corporate lending portfolio replaced on our nonaccrual status during the quarter. The corporate lending portfolio, which represents 79% of the total portfolio, is 85% first lien, 100% floating rate and 86% sponsor backed. We continue to work closely with our sponsor clients and portfolio companies, and we have generally been pleased with how sponsors and borrowers have been managing through the current environment.

Away from corporate lending, results for the quarter were negatively impacted by noncore and legacy investments. On our last call, we said that our intention to -- it was our intention to reduce the fund's leverage over the coming quarters. During the June quarter, we made considerable progress deleveraging the balance sheet by exiting approximately $233 million of assets on a gross basis or $95 million on a net basis, which reduced our leverage to 1.66x, down from 1.71x. Since the end of the quarter, we have received net paydowns of approximately $50 million, including one loan with documents in escrow. Pro forma for these additional paydowns and assuming no changes to fair value up or down, net leverage is currently approximately 1.61x.

We have visibility into meaningful additional repayments in the remainder of the September quarter and for the December quarter. We remain focused on further deleveraging to within our target range of 1.4x to 1.6x over the coming quarters.

As the pandemic began, many of our portfolio companies joined their revolvers during the March quarter to shore up liquidity. Many of the drawdowns were repaid in the June quarter. Mid-cap is the agent for nearly all of our revolver and delayed draw-term commitments and is actively monitoring every commitment. For context, as mid-cap, leveraged loan revolvers were 23% utilized before the pandemic. Revolver utilization peaked at 70% in mid-April and has since declined to 48% today. Greg will discuss our liquidity and unfunded commitment exposure in greater detail later in the call.

Moving to our financial results. Net investment income for the quarter was $0.43 per share, reflecting a smaller portfolio given the reduction in our leverage and a lower contribution from Merx, which Tanner will discuss later. In addition, given the total return feature in our incentive fee structure, no incentive fees were accrued during the quarter. The portfolio had a net loss of $25.2 million or $0.39 per share, driven by a net loss on noncore and legacy assets, partially offset by a net gain on corporate lending.

Slide 16 in our investor presentation shows the net loss for the quarter broken out of our strategy. Net asset per value -- net asset value per share at the end of June was $15.29, a 2.6% decline quarter-over-quarter.

Turning to our distribution. In light of the challenges and uncertainty created by the COVID-19 pandemic and our plans to further reduce the fund's leverage, we have reassessed the long-term earning power of the portfolio and included that it's prudent to adjust the distribution at this time. We believe the distribution level should reflect the prevailing market environment and be aligned with the long-term earnings power of the portfolio. Going forward, in addition to a quarterly base distribution, the company's Board expects to also declare a supplemental distribution in an amount to be determined each quarter. We believe a $0.31 base distribution reflects the long-term earning power of the core portfolio, including Merx. We believe there are several sources of earnings, which will allow us to pay an ongoing supplemental distribution, including the redeployment of nonearning or lower-yielding assets from our noncore and legacy portfolio, the recovery of earnings from Merx and the rebound of fee income to historic levels. The base supplemental distribution construct is intended to provide shareholders with a minimum annualized yield on NAV of 8%, a level which is consistent with some of our peers and allows for some upside via a supplemental distribution. To that end, the Board has declared a base distribution of $0.31 per share payable on October 7, 2020, to shareholders as of record on September 21, 2020. The Board has also declared a supplemental distribution of $0.05 per share, payable on October 7, 2020, to shareholders of record as of September 21, 2020. Again, the Board expects to declare quarterly supplemental distribution and amount to be determined each quarter.

With that, I will turn the call over to Tanner to discuss our investment activity and our portfolio.

Thanks, Howard. Starting with the market environment. Since the March lows, leveraged loan prices have recovered and loan spreads have tightened significantly, which had a positive impact on the fair value of our corporate lending portfolio. Given the economic backdrop, middle market loan volumes during the period were light in both the syndicated market and the private credit market. Activity in the middle market remains slow as sponsors and lenders continue to struggle to evaluate how to price risk. While deal activity has been light, we do see that pricing and terms have shifted in favor of lenders. In addition, borrowers are increasingly seeking asset-backed lending solutions, an area where we, via mid-cap, have expertise and significant market share. Given the composition of our corporate lending portfolio, which is primarily first lien loans to less cyclical businesses, we believe that the credit quality of our corporate lending portfolio has held up relatively well during this period.

However, we have seen an increase in request for loan amendments. To date, AINV has completed or is in the process of completing 23 amendments across the portfolio, representing 15% of portfolio companies. Most of these amendments have been for covenant waivers or resets, generally in exchange for a new covenant. To date, only 4 amendments have impacted interest rates or principal payments. Given the lack of investment activity in the overall market and our focus on reducing leverage, new investment activity was limited during the quarter. New corporate lending commitments for the quarter were only $17 million across 2 companies. Sales were $68 million, repayments were $49 million and revolver paydowns were $116 million for total exits of $233 million. These sales were executed at prices around our marks at the end of March.

Net repayments for the quarter were $95 million, including $31 million of net revolver paydowns. Going forward, given our visibility into upcoming repayments, we expect to be in a position to make new commitments as market activity resumes.

Moving to Merx, our aircraft leasing portfolio company, as discussed on our last call, the pandemic has caused an unprecedented decline in global air traffic, which has led to a widespread lease deferrals throughout the industry. Although aircraft -- air traffic trends have improved slightly more recently, it remains significantly below pre-pandemic levels. Merx has been working with its lessees to provide the necessary flexibility during these unprecedented times. During the June quarter, AINV converted $105 million of Merx' revolver into equity and reduced the interest rate on the revolver from 12% to 10%. Accordingly, at the end of June, our investment in Merx totaled $329 million at fair value, consisting of a $200 million revolver at 10% and $125 million of equity, which also reflects a $4.3 million write-down during the period. This partial equitization will reduce the interest Merx pays to AINV from $36 million per year or $9 million per quarter to $20 million per year or $5 million per quarter. We believe this reduced debt burden will provide Merx with the cash flow release needed to navigate this challenging period. We expect Merx will be able to make dividend payments on our equity investment, improving AINV's return on its overall investment when the industry recovers.

We believe Merx' portfolio compares favorably with other lessors in terms of asset, geography, age, maturity and lessee diversification. Merx' portfolio is skewed towards the most widely used types of aircraft, which means demand for Merx' fleet should be somewhat more resilient. Merx' fleet predominantly consists of narrow-body aircraft serving both the U.S. and international markets. At the end of June, Merx' own portfolio consisted of 81 aircraft, 10 aircraft types, 40 lessees in 26 countries with an average age of 9.5 years. Merx' fleet includes 75 narrow-body aircraft, 2 wide-body aircraft and 1 freighter.

As mentioned last quarter, the majority of rent deferrals impacted cash flow in the June quarter. We expect a recovery in lease payments going forward, given the significant amount of capital that has been raised by airlines in the public markets and the level of government support around the world. So far, for the month of July, cash flows are at or above expected levels.

Merx continues to diversify its revenue sources beyond aircraft leasing. Merx has built a best-in-class servicing platform, which generates income from aircraft managed on behalf of other Apollo affiliated capital. As you may have seen during the quarter, Apollo Global's dedicated aircraft leasing fund Navigator entered into a sale-leaseback transaction with Delta Airlines for 10 aircraft. As Navigator acquires additional aircraft, Merx will generate incremental income from servicing fees.

Across Merx and PK AirFinance, the aircraft lending platform, which was acquired by Apollo Global, Apollo's Aviation platform has 45 professionals dedicated solely to aviation located across North America, Europe and Asia and providing the expert in-house support to the platform's various aviation strategies. The aviation team has the experience to skillfully navigate this period of market stress and the requisite capabilities to mitigate potential adverse outcomes. In addition, the Apollo Aviation platform will seek to opportunistically deploy capital in the face of widespread uncertainty and market disruption. To be clear, Merx is focused on the existing portfolio and is not seeking new investment opportunities. However, growth in the overall Apollo Aviation platform will emerge as a benefit of Merx as the exclusive servicer for aircraft owned by other Apollo funds.

Moving to overall credit quality during the quarter, our 2 first lien depositions in carbon-free chemicals were placed on nonaccrual status. The company has been facing earnings headwinds due to an unprecedented slowdown for the demand for one of its projects -- products, hydrochloric acid, or HCL, which is used in the fracking process. Due to the decline in oil prices and production, the company's profitability has been negatively impacted by the lack of HCL offtake. At the end of June, investments on nonaccrual status represented $182 million or 6.1% of portfolio cost and $47 million, 1.7% at fair value. Looking ahead, we anticipate the continued need for covenant relief in our portfolio over the next few quarters. We believe these amendments will provide our portfolio companies with the flexibility needed to operate in the economic downturn. We can use such amendments to reprice our risk, tighten loan documentation, add covenants and secure additional equity capital.

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

Thank you, Tanner. Beginning with the statement of operations, total investment income was $56.7 million for the quarter as interest income declined due to the reduction in income from Merx, nonaccrual investments and the decline in LIBOR. The decline in LIBOR was primarily offset by a corresponding decline in AINV's interest expense for the quarter. The remainder of the decline was primarily as a result of muted origination and prepayment activity during the quarter. Approximately, 97% of contractual interest payments for the quarter were collected, and the weighted average yield at cost on our corporate lending portfolio was 8.1% versus 8.5% last quarter, reflecting somewhat the decline in LIBOR to floor levels.

Expenses for the quarter were $28.4 million, down $4.4 million quarter-over-quarter, primarily due to lower interest expense and lower management fees. Interest expense declined due to the decline in the average portfolio and the decline in LIBOR. The average -- weighted average cost declined 81 basis points from 3.93% to 3.12%. Management fees declined due to the decline in the average portfolio, and there were not any incentive fees paid during the quarter. Net investment income per share for the quarter was $0.43. As Howard mentioned, net leverage at the end of the quarter was 1.66x, down from 1.71x at the end of March due to $95 million of net paydowns, partially offset by the net write-down on the portfolio. The net loss on the portfolio for the quarter totaled $25.2 million or $0.39 per share.

On Page 16 in the earnings supplement, we've broken out the net loss by strategy. Spreads in the syndicated market tightened meaningfully since the end -- since the peak decline in March. And as a result, we saw several reversal of unrealized losses from last quarter. Our corporate lending portfolio had a net gain of $4.7 million or $0.07 a share during the quarter. Merx had a loss of $4.3 million or $0.07 a share, reflecting the continued stress in the aviation industry. Noncore and legacy assets had a net loss of $25.6 million or $0.39 per share due to carbon-free legacy position in our shipping and oil investments. The loss in shipping primarily reflected the decrease in the residual value of the underlying assets and our dynamic shipping investment. The loss in oil -- in our oil investments was primarily due to the weakness in the forward oil curve. NAV per share at the end of June was $15.29, a 2.6% decline quarter-over-quarter.

Moving to liquidity and capital. At the end of June, we had $1.76 billion of debt outstanding, down $40 million from the prior quarter. Adjusting for settlements, at quarter end, we had $243 million of immediately available liquidity, up from $224 million at the end of March and we had $205 million of additional capacity under the credit facility, up from $131 million at the end of March. The net effect on the quarterly activity improved our available borrowing capacity from $350 million to $450 million. And as Howard mentioned, the activity post quarter end has added to our overall borrowing capacity for this quarter.

Moving to -- and lastly, we were pleased that Kroll affirmed our investment-grade rating in July.

Moving to our unfunded commitments. On Page 18 in our earnings supplement, we've laid out the outstanding commitments at the end of June. During the quarter, we experienced meaningful revolver paydowns from our portfolio companies, as many of them chose to pay down their revolvers as they had better visibility regarding the impact of the pandemic on their respective businesses. Of the $275 million of unfunded revolver commitments outstanding at the end of June, $180 million are available to borrowers and $95 million are not available to borrowers. Availability is based on borrowing base limitations and other covenants. There were no significant drawdowns on delayed draws term loans commitments during the quarter, which are generally used to support portfolio company acquisitions and have incurrence covenants. As noted, a significant portion of our unfunded commitments are not available to borrowers. Most of our revolver commitments are subject to borrowing base, and many of the companies do not have the requisite collateral. Delayed draw term loans are typically used to support portfolio company acquisitions and have incurrence covenants and, therefore, we do not expect these facilities to have any material utilization in the current environment.

Turning to the portfolio composition. Our investment portfolio had a fair value of $2.67 billion at the end of June across 149 companies in 29 different industries. We ended the quarter with core assets representing 90% -- 91% of the portfolio. Noncore assets decreased to 9% of the portfolio at the end of June, down from 10% at the end of March. First lien assets account for 85% of the corporate lean lending portfolio. The weighted average attachment point decreased to 0.8x. Investments made pursuant to our co-investment order were 77% at the end of the quarter. We continue to remain focused on preserving liquidity. And accordingly, no stock repurchases were made during the quarter. As our leverage and liquidity continue to improve, we will continue to evaluate repurchasing our securities as appropriate.

This concludes our prepared remarks, and we would like to open the call up to questions.

(Operator Instructions) Our first question comes from the line of Kenneth Lee of RBC Capital.

Just one, following up on what was mentioned during the prepared remarks. You said that you have some visibility into investment repayments over the next few quarters. Just wondering if you could just expand upon that and what gives you some comfort around that visibility.

Yes. Well, this is Howard. We have -- we go through the portfolio, and there's a number of companies that are basically in strategic transactions for sale that are either pending or committed. So they're like their pending closing. So we're talking about things that are, in a number of cases, already under contract. So that can't be broken up and just waiting for some regulatory approval. And in other cases, are being auctioned and are in -- are valuable sort of platforms and will get executed. So -- and it's also -- it's sort of a granular list. So we would expect that to happen over sort of continually over the next few quarters -- over the next quarters.

Got you. Very helpful. And just one follow-up, if I may. In regards to the new distribution policy, you mentioned that the supplemental dividend, a couple of drivers that could help that, including noncore migration as well as recovery in Merx. Wondering for outside observers, what's the best way to think about how the supplemental dividend? Is there a better way for us to, I guess, when supplemental dividend could be -- can you give us any kind of guidance around that?

Yes. So I'll take a crack at it first. So we set -- we try to set the base dividend based on what sort of the corporate portfolio is earning or will earn at the size it's expected to be at plus what we expect Merx to produce currently with relatively sort of moderated assumptions in terms of sort of fee income. There -- and that will enable us to sort of pay that base dividend. We do -- in addition to that, we would expect to generate income from a number of different items. One is returns off our noncore portfolio, which we get some today. What we said in the prepared remarks, we're repositioning that noncore portfolio and earning even more off of those. But even off the sort of a moderated amount of cash that's produced off that, that is incremental.

Merx basically picking back up to a level of distributions above where we modeled it, which could still be below where it was historically, and there's room for upside there. In the interim, there's also sort of upside or -- it's not really upside, there's also further earnings coming over the next few quarters because we won't be paying incentive fee for a little while because of the total return feature. And then lastly, that base dividend was set on a fee level that is relatively conservative based on historical levels over the past 4 or 5 years, and that was with a smaller portfolio.

So our view is that we can support that base dividend with just the very basics of the business, and there should be meaningful opportunities to produce each quarter and come above that, which will then be distributed based on sort of what the Board decides each quarter, meaning the expectation is we would declare some each quarter and potentially retain some to drive NAV up and leverage down each quarter as well.

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

Just in terms of capital allocation going forward, I know the key focus here is delevering. But in terms of new investment opportunities, would we expect those to be primarily focused on the existing portfolio or subject to market conditions? Would you look to kind of rotate some of your portfolio into new investments?

Yes. I mean as Tanner had said, as we get our leverage into sort of the range, right now, we're at the sort of very top end of the range, but as we get payments, we would expect to sort of deploy back into opportunities we think that are sort of effectively cherry-picked for risk return off the top of what's coming through the platform. Those may be in existing portfolio companies, if those opportunities are good and we understand they may be in other opportunities. We have a couple sort of in the pipeline we expect to fund right now in the quarter that's in one of each of those. So disproportionately high return for the risk that we -- that given sort of our visibility into paydowns, we believe we can fund and then continue to sort of -- our path to delevering. So the answer is it's going to be both. It will, for sure, though, be in the strategy that we have sort of articulated now for extended period of time first lien floating rate. It will all be in those categories.

Our ability to deploy, obviously, will be dictated some by the cash that we're able to sort of bring in. But we do expect sort of normal course churning up the portfolio to enable us to invest and sort of cherry-pick off the best of what's coming from the platform.

Got it. And one follow-up for me. So given that sort of investment considerations and then in light of the rate environment, the LIBOR floor you have on your portfolio, do you think the first quarter could reflect kind of the nadir for yields or any sort of outlook in terms of the yield on the portfolio?

So it should, right, because LIBOR won't go any -- well, I mean, LIBOR can't go much lower, but it doesn't matter we have the floor. So our yield won't go lower, and we would expect to be deploying at higher rates just because we're just -- like I said, we're just going to be very selective of what we pick off. The issue is, though, obviously, we're not going to be turning 20% of the portfolio every quarter. So it doesn't -- it's not going to move 50 basis points per quarter up. But I do think that, that's the right assumption that we do as a question of the speed.

Our next question comes from the line of Finian O'Shea of Wells Fargo Securities.

First question on Merx. You gave a lot of input there. I apologize if I missed this. It did -- was the reorg on your provided capital structure, was that just a more conservative play on what cash -- or according to what cash comes in? Or was there a -- was there any form of test strips underneath on the securitization there?

Yes, and that is -- yes, go ahead.

No, sorry, you can go ahead.

Yes. So Fin, so the change was, as Howard alluded to, to more appropriately reflect the earnings power that we anticipate from Merx. And no, was not driven by a -- as you referred to, issues in the underlying financings. We remain to be in good covenant compliance in those facilities. There is some cash, not only unrestricted cash that's trapped in those facilities, but also -- sorry, restricted cash that's in those facilities and the unrestricted cash that sits at Merx to help defer cash needs going forward.

Okay. That's helpful. Then just a follow-on, perhaps for Howard. Reading and listening a bit to the Apollo parent call, it looks like Apollo is starting a new private credit platform, strategic opportunities. How would you describe this as it compares to mid-cap and the private credit group? Is it a different part of the house? Or to what extent are you integrated? And how can we -- how should we think about this as it impacts your current group today?

Okay. Well, first, let me answer it for sort of BDC. From a BDC's perspective, it sells and it's just another product offering, which is available for the BDC if it decides to ought to do those financings. surrounding the exemptive order it has a right to. From the perspective of where it fits, it's effectively an adjacent product. If you're thinking -- it's basically large market originations to take deals in the billion-dollar range, which historically had not really been done in the private market. And so effectively, what it does, it is -- it allows us to offer at scale to underwrite deals privately and take them down in lieu of sort of capital market solutions for providers. So if you looked at the universe of borrowers that mostly would -- that would be availing themselves of that, they would be ones that would have been BSL borrowers previously, not mid-cap borrowers. And so the origination from those companies, they tend to be sort of large corporates or sponsors that are more diversified than middle market sponsors. So like more like Apollo than they would be the core sponsors we cover at mid-cap in the basic way. So in that way, it's sort of an adjacent product offering. It's basically how do we make sure that we are able to offer sort of scaled solutions in the sort of lower BSL market, upper middle market. So stop there.

Separately, though, however, the coverage, the origination of that product will be -- is an Apollo effort across the board. So it includes the origination resources that we have at mid-cap and in Apollo sort of in our direct origination team as well as sort of the originating we do and the relationships we have in the BSL market with issuers that are there now because one of the biggest holders of those markets. So the sponsor origination of those transactions will be led by our team at mid-cap and Apollo combined that -- and -- but when they reach the size that they would have gone to the BSL market, they'll instead use this solution as opposed to sort of being funded primarily on mid-cap's balance sheet, if that makes sense.

From the BDC's perspective and the people on this call who aren't sort of, as plugged into Apollo, generally, the BDC has a right to sort of take its portion of whatever transactions it likes. It is less likely to do those transactions, both because of yield and structure, then especially when it's only picking off the highest yielding stories, but that are asset secured, if you will, or first lien. But that's not definitive they could do so. Does that, Fin, makes sense?

Yes. That's a lot of color. And third, if I can do that. On the amendments, I think you said 23 have been done are in the works. Is this mostly -- I assume these are mostly within the core mid-cap originated book, nothing legacy. And just a question on any color you can provide. Are these companies tripping covenants? If so, are they maintenance covenants on EBITDA? Or are they getting ahead of a covenant that they might trip later this year? Is it proactive or reactive? Any context you could provide there?

Both. It depends on the company. It is generally -- there is almost never a time where they trip a covenant and we get their numbers and it's tripped. They're going to call in advance and we're going to solve it. In many cases, that tripping of the covenant or expectation is coming multiple quarters down the line, which is really what you're asking. So they're saying, "Okay, we're working through this over the next 2, 3 quarters or whatever, we want to come up with a solution that we know enables us to work our way through it." And so it has been both. As Tanner said, there's 23 and only 4 of them were really sort of major. I don't know what we would call it, it would be sacred rights types amendments. So they tend to be like, yes, covenant relief like that's anticipatory or even something more innocuous than that.

So Tanner, I don't know, would you add something to that?

Yes, that's spot on. And then, Fin, we're very sensitive not to be subjective in the aggregating of data. And so a much smaller subset of that 23 would actually even be more benign as in certain of the borrowers that had access to the PPP program and would need relief there. And so we didn't want to -- we didn't obviously want to cherry-pick, give a more comprehensive proposal. But other than that comment, I would echo or corroborate as Howard described.

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

Just had a follow-up question on the supplemental dividend. I just wanted to clarify that, that supplemental dividend is expected to oscillate on a quarter-by-quarter basis as well as your expectation is that, that will not necessarily 100% payout net operating earnings that there will actually be a supplemental dividend that will actually probably come under net operating earnings, and you will actually use some to build up book value. Is that correct?

Yes.

Okay. And then as far as you guys rightsize your balance sheet, your capital position today, I've been a little bit surprised that you guys haven't made any material changes really to the rightsize of your balance sheet as we've entered into this downturn. Do you foresee the need to make any meaningful changes to the rightsize of your balance sheet? Or are you pretty happy with how it sits today managing through this downturn?

Greg, do you want to go first?

Yes. And I think, Ryan, I mean, I think we continue to look at it. And one, I think it was really important for us to update our Kroll rating, which we were able to accomplish in July, and also create our own liquidity within the portfolio. And I think, our next step will be to look at maturities. One of the things we haven't wanted to do was latter another 5-year maturity on top of the 5-year maturity we have with the 350s. So we are looking at that on -- from a latter point of view. And then we're also looking at spreads. We know that there's been for $1.8 billion issued. And so we are looking at our cost of capital overall. So I think it's something we continue to look at and may or may not act in the next few quarters.

But I will say, Ryan, like we do feel like our funding situation is stable. We have ample liquidity. We have good relationships with the banks. We've sort of shown them our capabilities of sort of operating in this environment. And so our decision on what to do is going to be driven by opportunity as opposed to sort of a real immediate need, which I think is helpful because some of the things that were done immediately by some people were fairly costly. And so I would, as Greg said, we'll continue to evaluate it. We would expect to sort of diversify and make some choices over the next couple of quarters, but we want to do it in sort of a -- at the time of our choosing because we think that will be much more cost effective.

Okay. Got it. Howard, in your prepared remarks, you kind of commented on and said your corporate lending portfolio continues to perform pretty well. My question is, if you look at Slide #16, you guys had about a 7% increase per share in your corporate lending portfolio write-ups in the quarter. When you compare that to the $0.97 decline in that same category, the corporate lending portfolio, in your prior quarter, I was a little bit surprised just given the recovery in loan prices, tighter credit spreads, we've seen several other BDCs earmarked their portfolios up a bit higher given just the improving market conditions. So can you comment on why your portfolio didn't really seem to recover very much of the big decline? I'm talking about specifically your corporate lending portfolio.

Yes. Well, I think -- first of all, I think, last quarter, as a percentage basis, we didn't go down quite as much. So our -- sort of our pickup would not have been quite as much from -- like on sort of -- on a gross basis. I think -- so I think that's the first thing. And I think the second thing is that we, frankly, probably have -- so a little bit more pent-up upside than some of the other people who reported have. Down the road, I mean, I think we have -- our approach to this has been to try -- to make sure that the valuations are driven by fundamentals as well as sort of the market flows because that's more relevant. And so the recovery of a lot of these companies happens over the course of June and July. And so we were not as forward-looking as maybe I think some of our competitors might have been.

(Operator Instructions) Our next question comes from the line of Matt Tjaden of Raymond James.

Just a quick one on Merx, if I can. That new $5 million interest expense, was Merx able to cover that through cash flow? And then as a follow-up to that, if not, is there any risk of that toggling to pick?

Yes, sure. Thanks for the question. So a couple of notes here. The first would be -- and I alluded to this in my prepared remarks, the experience in July as a number of the previously agreed to deferrals were expiring has been above our expectations. But would caution everyone that there's still more deferrals to expire. And how many of those lessees ultimately come back online, we'll have a lot to do over the next 3 to 6 months with where things correct or how air traffic recovers. And so we endeavored in that $5 million appreciating that there might be a need for capital at some point in the future, as it's past dependent, to reflect a more steady state supportable earnings number.

It's not our expectation right now that it would go -- that it would go pick. But I would imagine, as you can probably well appreciate, it will be a little bit past dependent. And again, to stress, while we don't want to extrapolate too far, the early experience with lessees coming back online has been positive and exceeded expectations. And really, 2 sources of strength there, again, alluded to this in our -- in my prepared remarks, but the amount of government funding, particularly in the U.S. has helped buoy lessees and their cash flow profiles. And then also in China and Asia, more broadly, things are close to 90% of pre-COVID levels and the cash flows associated with lessees, the leases to those particular counterparties have held up really well and would expect to buttress earnings going forward. And so those are the drivers for the outperformance to date, but again, distress will be past dependent.

And that was our final question. I'd like to turn the floor back over to Mr. Howard Widra for any additional or closing remarks.

Thank you, and thanks for everybody for listening to today's call. We all thank you for your continued support and interest in this environment. And obviously, please feel free to reach out and call any of us if you have any other questions. We hope everybody stays healthy and safe. Have a good day. Bye.

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