MidCap Financial Investment Corporation (MFIC) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to Apollo Investment Corporation Earnings Conference Call for its quarter ended December 31, 2012. [Operator Instructions] The call will be open for a question-and-answer session following the speaker's remarks. [Operator Instructions] I will now turn the call over to Elizabeth Besen, Investor Relations Manager for Apollo Investment Corporation.

Thank you, operator, and thank you, everyone, for joining us today. With me are Jim Zelter, Chief Executive Officer; Ted Goldthorpe, President and Chief Investment Officer; and Greg Hunt, Chief Financial Officer. I'd like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Investment Corporation, and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release. I'd like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Today's conference call and webcast may include forward-looking statements. Forward-looking statements involve risks and uncertainties, including, but not limited to, statements as to our future results, our business prospects and the prospects of our portfolio of companies. You should refer to our registration statement and shareholder reports for risks that apply to our business and 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 issued our earnings press release and filed our quarterly 10K -- 10Q. I'll begin my remarks with a review of some of our accomplishments since we announced a series of strategic initiatives, approximately 1 year ago. I will then discuss our financial highlights for the quarter. Following my remarks, Ted will then provide an overview of the market environment and will review our investment portfolio activity for the quarter. And finally, Greg will discuss our financial results in greater detail. We will then open the call to questions. Last February, we announced a variety of strategic changes, and we believe we have made significant progress relative to those initiatives. First, we laid out a plan to reposition the portfolio over a 2-year period and provide you with a hypothetical target asset mix, which included increasing our exposure to secured loans. With the market backdrop of lower yields, we believe that we have made significant progress migrating the portfolio to more secured loans while maintaining the yield on our overall portfolio. For example, at the end of December, 40% of our portfolio is invested in secured loans, up from 29% last December. We also invested over $80 million in the equity tranche of 2 senior secured loan vehicles. While repositioning the portfolio as a dynamic process, we believe that we have made significant progress relative to our initial expectations. Second, we have enhanced our origination platform. Over the past year, we have expanded our direct origination capabilities in select industries, which we believe provides attractive risk-adjusted returns as Apollo Investment Management, our investment advisor, established an energy financing team based in Houston. And we established an aircraft leasing team based in New York. The energy team has sourced many assets, which has resulted in the closure of nearly $170 million of investments to date. And at the end of December, energy investments accounted for approximately 4% of our portfolio. In addition, subsequent to quarter end, we completed our first aircraft investment, which Ted will discuss in his remarks. We continue to look for ways to expand our direct origination capabilities. Third, we made several improvements to our funding structure, including the renewal of our credit facility at a lower rate and the issuance of our first unsecured debt offering of $150 million of 30-year retail baby bonds. We will continue to evaluate opportunities to further diversify our capital structure. Fourth, we have reduced our leverage ratio from last December, while maintaining yields and without significantly sacrificing net investment income. While I have just highlighted the significant progress that we have made in the past year, as a credit investor, there's always work to be done. And we will remain focused on improving the credit quality of our overall portfolio. Moving to some financial highlights. For the December quarter, we reported net investment income per share of $0.21. Net asset value was $8.14 as of December 31, compared to $8.46 at the end of December, a 3.8% decline. This decrease was driven primarily by realized and unrealized losses on 2 investments, partially offset by gains on the remainder of the portfolio. During the quarter, we invested $515 million and received $300 million -- $307 million from select sales and $204 million from repayments. As a result, our net investment activity before repayments was positive $208 million. The fair value of our investment portfolio is approximately $2.63 billion at December 31 versus $2.68 billion at the end of September. For the calendar year 2012, we invested $1.26 billion and received $837 million from select sales and $611 million from repayments. So net investment activity for the calendar year 2012 before repayments was $419 million. A robust market environment in calendar 2012 contributed to a higher level of early repayments than we originally expected. Finally, turning our discussion to our dividend, the Board of Directors approved a $0.20 dividend for shareholders as of March 21, 2013. Based on our closing price yesterday and annualizing the dividend, our stock currently offers a dividend yield of approximately 9%. With that, I will turn the call over to Ted to discuss the current market environment in our investment portfolio.

Thank you, Jim. Despite fears concerning the fiscal cliff and uncertainty about the U.S. election, capital markets were strong during the December quarter. Strong high-yield bond and loan issuance was met with robust investor demand searching for yield. Dealers responded by bringing opportunistic transactions, and financial sponsors rushed to close transactions after the election before potential tax rate increases. The market continued to be favorable for issuers as evidenced by a narrowing new issue clearing yields, increasing dividend financing and covenant-like facilities. Investors continue to put money into the high-yield market, creating strong demand for both primary and secondary bonds. Secondly, bank debt remained well bid and in line with last quarter. The corporate mezzanine market became less desirable given the strength of the underlying credit markets and the tight spreads found in high yields. Although underlying fundamentals remained strong, we believe continued strength in the high-yield markets is partly attributable to an abundance of liquidity and a search for yield, which has resulted in an increased mispricing of risk in certain segments of the credit markets. Given the environment I've just described, during the December quarter, we continue to focus our investment activity on secured loans rather than unsecured debt. In today's market, we are not seeing value in traditional subordinated mezzanine opportunities, and therefore, we are inclined to take liquidity and complexity risk instead of credit risk. There continues to be a significant spread between liquid and less liquid investments, which has allowed us to continue to improve our security position with little impact to our overall yields or net investment income. There were significant repayments in our portfolio during the period, which impacted the overall portfolio yield slightly, but also generated strong fee income during the period. Given the rally in the overall market, our direct origination capabilities provided us with significant opportunities to deploy capital during the quarter. During the December quarter, we invested $515 million in 16 new and 13 existing portfolio companies, the vast majority coming from primary originations. Approximately 64% of investments made during the quarter were secured debt. We also received $307 million of proceeds from selected sales and $200 million from repayments. Given the robust deal environment, the level of repayments experienced in the December quarter was higher than our normal run rate and flat compared to the prior quarter. The yield at cost on new debt investments was 11%, and the yield at cost on debt dispositions was 10.4% while the yield at cost on debt repayments was 12%. Accordingly, the overall yield of our debt portfolio was 11.9% at the end of December, unchanged from the prior quarter. We continue to rotate out of our -- some of our unsecured investments in the senior secured investments, which we believe have more attractive risk-adjusted returns. As Jim noted, secured investments are 40% of the portfolio at the end of December, up from 37% at the end of September. I will now discuss some specific portfolio activity for the quarter. First, we made a $40 million investment in Kirkwood Fund II, a newly launched senior loan vehicle managed by Madison Capital. This is the second investment in the senior loan vehicle managed by Madison and is similar in structure to the first vehicle. This vehicle has purchased an existing pool of senior secured loans to middle market companies in the U.S. for Madison Capital with approximately $250 million of combined face value. Like the first vehicle, Kirkwood Fund II has a revolving secured financing provided by Wells Fargo. Given the yields on the assets and the structure of the vehicle, we expect to generate mid-teens gross returns on this investment. Our energy team continued to actively deploy capital during the quarter. For example, we invested in a senior and subordinated debt of Venoco Incorporated also known as Denver Parent, to support a management buyout. Venoco is an exploration production company with significant oil and natural gas assets located primarily in Southern California. We also invested in the first-lien debt of Amaya Gaming to support an acquisition. Amaya is a leading provider of technology-based gaming solutions to the regulated -- to regulated gaming. And we exit our investments in Asurion, Clearwire, SRA International and Stork Technical Services. Notable investments that were repaid during the period included our investment in Chesapeake Energy and FoxCo acquisition. Our investment in Chesapeake is a good illustration of the difference between the stated coupon and the realized return on investment. Our realized gross return on our investment in Chesapeake was over 16%, well in excess of a stated coupon of LIBOR plus 700 basis points. Regarding our investment in Cengage Learning, as many of you recall, during the September quarter, we exchanged our unsecured investment into secured notes with higher coupon -- with a higher coupon and longer maturity. In November, the company reported weaker-than-expected earnings, which resulted in Moody's lowering the credit rating by two notches. The note's been traded down resulting in a decline in the value of our position. We subsequently sold some of our position during the quarter, realizing a $24 million loss. A loss of this position, both realized and unrealized during the quarter, equated to $0.30 a decline in NAV per share. We continue to focus on mitigating losses and maximizing recovery for our remaining investment in this company. Lastly, as mentioned last quarter, we established an operating subsidiary, Merx Aviation Finance, to participate in the aircraft leasing industry. Merx has been actively screening new investment opportunities and subsequent to quarter end, made its first investment. In January, Merx purchased a portfolio of 26 commercial aircraft from GE CAS [ph]. I'd now like to review some general portfolio statistics as of December 31. We continue to be diversified by issuer and industry with 71 portfolio companies invested in 27 different industries. The company's total investment portfolio had a fair market value of $2.63 billion with 40% in secured loans, 48% in subordinated debt, 12% in common equity, preferred equity, warrants and collateralized loan obligations measured at fair value. As I mentioned previously, the weighted average yield on our overall debt portfolio at current cost at December 31 was 11.9%, unchanged from the prior quarter. The weighted average yield on our subordinated debt portfolio rose from -- to 12.6% from 12.4% from the prior quarter. And the weighted average yield on our secured loan portfolio was 11.2%, unchanged from the prior quarter. At December 31, the weighted average cash interest coverage of our portfolio remained at over 2x and regarding our risk rating, the weighted average risk rating of our portfolio measured at cost was 2.4 at the end of December compared to 2.3 at the end of September. The weighted average risk rating of our portfolio measured at fair value was 2.2 at the end of December, unchanged from September. With that, I will now turn the call over to Greg, who will discuss our financial performance during the fiscal second quarter.

Thank you, Ted. I'd like to remind everyone that in addition to our 10-Q, we have also posted financial supplement presentation on our website. We'll now discuss Apollo Investment Corporation's financial performance for the third quarter ended December 31, 2012. Our total investment portfolio had a fair market value of $2.63 billion compared to $2.68 billion at the end of September. At December 31, net assets totaled $1.65 billion with a net asset value per share of $8.14. This compares to net assets totaling $1.7 billion and a net asset value per share of $8.46 at the end of September. The decrease in NAV was driven principally from losses from our investments in Cengage Learning and Delta Educational Systems, partially offset by gains in other investments. On the liability side of our balance sheet, we had $1 billion of total outstanding debt at December 31, up slightly from our September quarter. As mentioned in our last call, we issued $150 million of 30-year unsecured notes in early October in an interest rate of 6 5/8%. At December 31, the company's debt-to-equity or net asset ratio, was 0.63 up from 0.54 at the end of September. Our net leverage, which includes the impact of cash and unsettled transactions was 0.58 at the end of December, up from 0.56 at the end of September. These ratios are within our target range. One investment, a preferred equity position in Delta Educational Systems, was placed on non-accrual in the December quarter. At the end of December, securities in 2 of our portfolio companies were on non-accrual status, representing approximately 3.2% of our portfolio on a cost basis compared to 2.2% at the end of September. As for operating results, total investment income for the December quarter totaled $83.2 million, a slight decrease from the September and December 2011 quarter. The decrease quarter-to-quarter reflected a decline in dividend income as a result of certain holdings within our AIC credit opportunity fund, which paid dividends semiannually, offset in the quarter by an increase in prepayment premiums and structuring fees. In addition, expenses for the December quarter totaled $41.1 million. This compares to expenses of $39.3 million for the September quarter and $45.3 million for the December 2011 quarter. The quarter-to-quarter increase in our expenses was mainly due to a higher outstanding debt balance during the quarter and higher average interest costs. Net investment income totaled $42.1 million or $0.21 per share for the December quarter. This compares to $44.5 million or $0.22 per share for the September quarter and $38.5 million or $0.20 per share for the December 2011 quarter. For the quarter, net realized losses were $9.3 million and were primarily related to the partial share of our position in Cengage Learning, offset by gains on several other positions. This compares to net realized losses of $40.6 million in the September quarter and net realized losses of $275 million for the December 2011 quarter. The portfolio's net unrealized loss for the quarter was $555 million. This compares to a net unrealized gain of $69.1 million for the September quarter and unrealized gain of $300 million for the December 2011 quarter. As mentioned previously, notable contributors to the net unrealized loss for December '12 quarter included our investments in Cengage Learning and Delta Educational Systems. Other contributors for the quarter included our investments in SquareTwo Financial, Penton Media and Ranpak Corp. In total, our quarterly operating results decreased net assets by $22.7 million or $0.11 per share compared to an increase of $73 million or $0.36 per share for the September quarter and an increase of $63.7 million or $0.32 a share for the December 2012 quarter. I'll now turn the call back to Jim, who will provide a few remarks before we open the call to questions.

Thank you, Greg. Over the last year, we believe we made great strides towards achieving many of our strategic objectives. Given the rally in the overall credit market, we believe that our direct origination capabilities are providing us with the best opportunities to deploy capital in today's environment, and we will continue to selectively look for opportunities to grow our specialist origination capabilities. With that, operator, please open the call to questions.

[Operator Instructions] Your first question comes from the line of Rick Shane with JPMorgan. Richard B. Shane - JP Morgan Chase & Co, Research Division: One of the topics that came up a lot during November was heightened dividend recap activity. And now that we're through a lot of the sort of year-end stuff that drove that, I'm wondering if there was a substantial pull forward in terms of deal volume. And so you'll see a little bit of a lag, or conversely, given how tight spreads are, are you seeing more normal and regular way business coming through and that activity starting to pick back up?

Rick, this is Ted. As we mentioned in the -- in your mid-cap conference, post the election our deal activity picked up quite materially, and a lot of activity was trying to get done by December 31. We definitely benefited from a pull -- we definitely benefited in increased dividend recap activity and increased LBO activity in the second half of the quarter. What I would say is a lot of that activity actually spilled over into this quarter. We have not seen, to date, as we sit here today, we have not seen a huge ramp-down in activity. But I will say that we did see increased activity in the second half of last quarter. Now, our expectation is things will kind of trend back to normal over the course of the rest of this quarter. Richard B. Shane - JP Morgan Chase & Co, Research Division: Got it. Okay, that's helpful. The last question is this: You guys provided a really helpful slide in terms of showing how the portfolio rotation is going and how you're, frankly, in a declining yield environment, able to maintain yield. How much dry powder do you think you have left in terms of being able to do that? I mean how far along the rotation are we at this point?

So I think 12 months ago, we laid out kind of a target portfolio. And if you look at the portfolio today, portfolio today effectively matches that what we laid out. That being said, we continue to see opportunity to move up the capital structure. So we continue to have a bias to be in secured debt. It doesn't mean we are out of the subordinated debt business, it is just where we're seeing value today. We continue to see a -- just a massive spread between liquid and less-liquid risk. And when you go through our portfolio, even though we've done a lot of rotation over the last 9 months, we also -- we continue to believe that we actually have additional opportunities for us to exit out of liquid risk positions or be taken out in new financings and deploy that capital into proprietary-originated transactions. And we think that we can do that in a way that enhances -- that maintains our yields and is better risk-reward for the vehicle.

Now, I would add, Rick, a little bit color behind that. We still own a variety of higher quality second liens of buyouts that were done a handful of years ago that if you look at the yield specification of our portfolio right now, if those assets are -- we believe, are fairly liquid. We believe they're par recovery assets. They're trading at or near par. And they are probably, in aggregate, below our average yield on the overall portfolio. So as Ted talks about optimizing, I mean that's almost 20% in terms of assets that are less than 10%. So we believe between revolver capacity and other ways, we still have a lot of liquidity that can continue to optimize, as Ted mentioned.

Your next question comes from the line of Arren Cyganovich with Evercore Partners.

Just again on, I guess, the competitive front. You mentioned that the mezzanine loan area has been, I guess, increasingly competitive. In light of a lot of competitor commentary that senior secured is also their focus, I'm surprised that, that is not getting a little bit frothy on that side. Can you just talk about the competitive dynamics on the secured side that you're seeing as well?

I think this goes back to our comments we always make about the overall sector, which is, although a lot of our peers have been moving up the capital structure and trying to do senior secured loans, we are a small subsegment of the overall senior secured loan lenders out there. And we continue to see a lot of the large players from pre-crisis continue to be very, very stingy on extending credit -- secured credit to middle-market companies. So when you look at large-cap markets today, when you look at regular way, investment grade or high yields, you see a ton of liquidity come into that space. We have not seen as much liquidity come back into the areas that we typically traffic in and our peers traffic in. So don't get me wrong. We do see our peers on the competitive landscape. It's just there's -- we don't just compete against other BDC's. We compete against the much broader universe, and we haven't seen everybody come back into the space.

Can you talk a little bit about the aircraft portfolio acquisition you made from GE CAS [ph] for this coming March quarter? And what's in there and any kind of size, or are you able to provide any additional details there?

Yes, you'll see full details of that in our upcoming disclosure. What I'd tell you is GE -- we purchased a portfolio aggregating around $900 million of aircraft from GE. There's 26 planes in there. There's 16 lessors. And against that, there's a very -- $650 million of non-recourse debt was raised against it. So the way I describe it we took a mezzanine piece of a highly structured transaction. There's money in there, below us as well. And so, we won't go through -- we'll go through all the details of this on our next disclosure. We think, when we think about the type of return payoff profile of this investment, we think it's a phenomenal franchise transaction for us and a phenomenal risk-reward opportunities for our shareholders.

And then I saw that, I guess Advantage Sales and Marketing is doing a refinancing. Do you expect to be, I guess, refinanced out of that, are there any prepaid fees and maybe just talk about your expectations for this coming year in terms of getting repayments and prepayments from your existing portfolio companies?

So that deal was just announced this week. As it looks like today, what has been stated publicly is it looks like, as of today -- unless they don't upsize the deal, looks like they're only going to be taking out a portion of the second lien. So there'll be a very small piece of our second lien that will be refinanced if that deal gets done -- if the deal does not get upsized. There's always a chance they upsize a deal to take out more of our deal. There's a -- it depends on how much of the deal on our second lien gets taken out will derive fees. We don't think it's going to be a material contributor to NII this quarter. Broadly speaking, but also Advantage Sales & Marketing, that specific piece of paper falls into what Jim was talking about earlier. It's a sub-10% yield in liquid second lien, and that is obviously offset by our origination activity at higher levels this quarter -- higher yield levels. Broadly speaking, we -- what's happening, what we're seeing in the market today, in the syndicated markets is a massive way of repricings in the bank debt space. We are not as affected by that just given the fact of what we own. And a lot of our -- most of what we own, if not all of it, has substantial call protection. So a lot of these transactions, they're repricing the senior secured debt. They're not reprising the second lien debt just given the call protection involved. We've not had a lot of activity to date. That could change over the next 3, 4 months. There's been a big, big wave of repricings the first couple of weeks of this year. I think a lot of people were trying to get stuff done ahead of this Dell transaction, and we have not seen anything out of the ordinary in terms of repayment activity on our portfolio.

Your next question comes from the line of Jason Arnold with RBC Capital Markets.

Just one quick follow-up on the Merx transaction. I was just wondering, composition-wise, can you tell us, is it mostly narrow bodies that you guys purchased? Any particular type of aircraft or any additional details you can provide?

Yes, sure. So yes, I should -- I'm sorry, I should have mentioned that earlier. It's a very new portfolio of planes, very, very -- only a couple of years old. And the whole portfolio is comprised of either Airbus or Boeing planes. They're of the newest and most liquid vintage. So these are not old, less liquid aircraft. These are the most liquid assets in the aircraft space that currently exist.

Okay, terrific. And then any other color on kind of the growth trajectory? That's kind of a nice, big lump of an investment there certainly. I know in the past you kind of talked about looking a little bit more at the older aircraft that are in greater need of financing. Are you still seeing quite a bit of opportunity there?

I mean, as we kind of outlined to everybody in the last call and as we had follow-up calls with a lot of investors and shareholders, and we want to take this business slow. We want to -- we have a very, very large pipeline of opportunities. This is a space that's been massively affected by the secular changes in the world over the last 5 years. And we are seeing opportunities in the older vintage aircraft. I think it's something that we will approach cautiously. And we probably will do smaller transactions in that space, the -- at least up front. So it is a space that we'll look at. And there's been a lot of opportunities generated out of the American Airlines bankruptcy, for example. We were -- we want to go slow in the space just given it's a relatively new business for us.

Your next question comes from the line of Jonathan Bock with Wells Fargo Securities.

I appreciate the color on some of the education businesses that -- in particular Cengage that generate a loss in the quarter. Can you perhaps give us some additional color on maybe the forward outlook and how you're looking at that credit just in light of I think you did sell some? Really, how does value get realized for Apollo shareholders going forward here?

Yes, it's a great question. So, I mean, if you think about the 2 losers that we outlined this quarter, both of them were in the -- both of them are affected by the education space. Delta, I think we've talked about a lot in the past, which is a -- it's a -- the sector that it is in is just facing a ton of headwinds. Cengage, specifically, was a 2007 vintage deal. Last quarter, as we indicated, we -- consistent with our strategy, we moved up the capital structure into a second lien. I think they came out with numbers that we thought definitely surprised us and definitely surprised the market to the negative. And we -- as a risk mitigation/portfolio management decision, we decided that -- you got to re-underwrite everything in your book with every new piece of information. We thought that our exposure was too large given the new information that we received. We monetized a chunk of our position, which, obviously, realized a loss. On a go-forward basis, I think the way we'll think about it is as new information comes out and new news comes out, we'll reevaluate our existing position.

Okay, great. And one small portfolio question again just as it relates inVentiv Health. Obviously, since it's a very large investment and very important to shareholders in terms of interest income, just maybe give us a sense -- you saw a small, little markdown there. Was that technical? Or perhaps maybe just a quick update on the fundamental story there?

Sure. So in inVentiv -- we actually are feeling better about inVentiv today than we felt 3 months ago. They did a new financing of first lien debt. They've taken out a lot of the covenants and also done some things that the sponsor put in additional money. Now I think the -- this is a name that doesn't really trade too often. Some things in our book that trade all the time, but there's a lot of market discovery. But I would say on inVentiv specifically, relatively chunky holder base. So it's not one with a ton of price discovery. We market to the broker quotes out there, and we feel like that's a fair value, and we feel very, very comfortable with where it's marked. But I would say it -- I wouldn't read too much into the markdown last quarter.

I appreciate you taking broker quotes as you look at the book. Now another question. Ted, you have focused more on esoteric and proprietary transactions, CLO, aircraft leasing. I mean, obviously, that strategy continues to pay off. Of course, as credit risk premiums compress market-wide, terms deteriorate. And this, of course, is even in the middle market. Could you perhaps maybe give us a reasoning as to why you'd want to focus on higher-leveraged CLO equity or aircraft leasing, effectively taking additional leverage risk at a point when credit risk premia has compressed and there's a higher likelihood of a credit mistake to be made?

Well, it's certainly something you -- it's a great question. We think about it a lot. Certainly, the -- it's not only the amount of financing, but the terms and manner in which you receive that leverage, that financing. And I think that we find both in the -- our Kirkwood facilities as well as we did in the GE CAS portfolio. They're very advantageous financing on extremely strong terms where we have a tremendous amount of headroom, where we are in the portfolio, to withstand a lot of volatility. So you -- what we're definitely finding right now is the ability for a financial provider to provide you a tremendous amount of long tenure [ph] financing, extremely low rates. Vis-a-vis where the illiquid opportunities lie, you can stretch that to a great decree on defaults and recoveries, and you're still in a much better position than you would be buying a corporate mezzanine issue with an attachment point of 6.5x on a sponsor-driven deal at a level of return sub-10%. So we weigh that. We weight that all the time. And I think it's because of that -- I mean, the themes that clearly Ted has articulated, that I've articulated for the last 9 months is we just see a breadth of opportunities, as we think our peers are as well, in these types of activities that are away from the traditional norm of our business. So you're -- no doubt we spend a lot of time thinking about the quantum of financing. But again, it's not just the quantum, it's the underlying credit quality, which, in the case of Madison, we're very comfortable with in terms of their historic underwriting standards and their historic returns. And owning the real assets of the aircraft, where, as Ted mentioned, we feel we can stretch that in some dire pretty outcomes, we feel very, very comfortable with where we lie in our position.

That's very helpful. And so perhaps, I think we're very aware of the risks that could be posed in the event of a default environment, which is relatively benign. Of course, if we're looking at a CLO structure or a structured product, where your liabilities are essentially fixed by a low-cost provider, walk us through what happens to equity in the event that asset spreads continue to compress in that vehicle? Is there the possibility of a write-down? And maybe how did you -- how are you gauging risks of repayment, particularly if those entities are still within their reinvestment period, and what that does to the equity itself?

Well, that's a long discussion. You're getting very detailed and you are correct that if one is buying CLO equity, depending on if it's a version 1.0 precrisis versus 2.0 postcrisis, your ability and your constraints -- I mean, certainly, precrisis CLO equity right now, with what's going on in the broad, syndicated loan marketplace, certainly the limitations of those vehicles in terms of your ability to reinvest, that's a concern. We don't own any of that paper. We own all postcrisis generation 2.0 where we have a variety of [indiscernible] and reinvestment mandates to really offset that. But you are raising a very valid question about hopefully understanding the ability to reinvest to make sure you had that equity of value. I think in -- we are, as a platform, a very large participant in the space, and there are many transactions that we looked at and passed on because the original collateral was too high a price or there were limitation that you really couldn't reinvest appropriately to assure yourself of a solid equity return. The Kirkwood vehicles are a bit different because the intense repricing that Ted described in the broadly syndicated market, it really has not impacted that market. Certainly, levels are a bit tighter year-over-year, but they're nowhere near -- I mean, again, we're very active in that space or platform. We see where new pricings are coming out in broadly syndicated deals, LIBOR 300, even a bit lower with a real adjustment in floors. So I think, again, you raise a very valid issue. We take that into consideration as we decide what assets we want to buy in those vehicles and take that concern into our equation to make our final choices.

Your next question comes from the line of John Stilmar with JMP Securities.

Just to hopefully close the lid on Merx, should we be thinking about Merx investment as an equity fairly similar to what we might see in public comps that are out there? Or perhaps, should we be thinking about it like a preferred investment that might be a little -- marginally higher in the capital structure than maybe a traditional public equity? Just wondering how -- what was kind of expected with regards to capital structure for this investment?

Yes, I mean, I think the way we think about it is we think about -- well, I think that the transaction that we just completed, I think it's more of the latter than the former, which is we think about it as higher up in the capital structure, very attractive attachment point, capped upsides because of where we sit and really good downside protection given there's equity below us. And on that specific transaction, we felt like that was the right place to be. So we don't feel like -- in the Merx entity, we don't think that entity is really supposed to be doing equity risk as we define equity risk. We think that's much more of a mezzi, mid-teens-type risk vehicle for us. And we don't think it's the right vehicle to be taking private equity or equity-type risk.

And I would add I think I would concur. We're trying to buy mispriced debt risk, not mispriced equity risk in this business. And there's a fine line. You need to have the experts on staff, which we do. But Ted is exactly right. When we think about the activities, it's that mispriced debt with very solid downside protection but a capped upside in return.

Perfect. No, very helpful. Secondly, as you start moving to more asset-based loans, which, by their very nature, move from fixed or the unsecured mezz traditional product to a LIBOR-based with typically some floors, is there an interest rate outlook or a macro view that's driving part of that? Or is it really just a relative value with regards to credit spreads themselves, and sort of the comfort level of risk? Just wondering if there's anything sort of macro that's helping drive that decision or is it really, just as you sit today, there is just a stronger relative spread per unit of risk value that you're ascribing in part of this rotation?

Well, this is having -- when you think about our traditional -- the term you use is ABL -- well, we've not really done any ABLs that's receivables and inventory per se. But when you think about secured financing with hard assets, I think it's a combination of both. I mean, we certainly -- having both done this for the long time, we see where the rate environment is right now. There's a reason why we issued debt in the fall, where we think that's a good choice for us in our capital structure. I think a little bit is the view on floating versus other types of assets. But I just think it's about -- and I think Ted said this a number of quarters ago, we just want to make sure if there ever are trouble -- if there ever are defaults, we want to meaningfully increase our recoveries than we historically receive in this vehicle. We don't want to just take that subordinated risk where the recoveries were dramatically lower than we can accept such that I think there's a little bit of implied view on a rising rate environment and a view on owning hard assets, if we can.

Yes. Also, I'd say then -- and I'd say one more comment, which is we are not macro people, and we are not -- we don't have a crystal ball on interest rates. But just given where LIBOR is today and given where interest rates are today, we think it's smart to have a decent amount of floating rate exposure in your portfolio. And -- but we have to offset that by current yields. And as of today, we are seeing -- if you can get the best of both worlds, which we've been lucky to be able to do over the last 6 months, which is floating-rate assets with high current yields, that's very good for us.

And then my final question, just with regards to sourcing. You clearly have articulated the energy team and the burgeoning aircraft leasing business. But wondering if there are other sources or other leverage points throughout the Apollo platform or the capital markets platform that have allowed you to source transactions, whether they be in -- you're obviously very active in commercial real estate, you're very active in the CLO market, other arms of the management company. I was wondering if any of those elements have fostered or could be talked about with regards to originations or strategy or structuring, at least in this quarter or maybe even the quarter to come.

We -- one of the big strategic priorities of our vehicle is to maximize the value being a part of the broader platform. And what I would say is, we are getting a ton of transactions and transaction activity. As you guys know, we turn down probably 95% of the transactions we see. We are sourcing and closing a number of things that are sourced by the broader platform. So I'll give you an example. This past quarter, we did an investment in a health care transaction, which traditionally health care has not been a huge vertical within the BDC, and we sourced the deal this quarter that was closed that was a first lien senior secured health care deal that we think is extremely attractive.

Perfect. And then I guess, Jim, to that point, since you've been overseeing this structure through several -- for the 2 management teams, I'm wondering if you've seen an increase in the velocity relative to Ted's comments. Clearly, it seems that there's an absolute amount of sheer volume and that's certainly very representative of the market. But have you seen an increase in the velocity of that relative to the past? And if you could put some parameters around quantifying that sort of, broadening or narrowing scope.

Well, I certainly think going back to the firm's investment in the stock a year ago, there's the heightened sensitivity of the importance of this vehicle to our overall platform. I don't want to put a number on it, but it's safe to say that we're not going to be happy if we're sitting here a year from now and the only platforms we're talking about are energy and aircraft. So the onus is on us. I mean, there's clearly a theme which we've really tried to be transparent and strategic with our approach. But yes, I mean, there's not a number per se but certainly just a heightened sensitivity around the platform about the importance of this vehicle and the desire to really execute on what we've laid out strategically.

Your next question comes from the line of Douglas Mewhirter with SunTrust Robinson.

Most of my questions have been answered. I had 2 questions. They're more clarifications, really. Just to be clear, in the aircraft leasing investment, should I look -- see that in terms of numbers as a -- just your investment in the equity, is what shows up in the portfolio or investment in the vehicle? Or are you going to actually look through that to the actual assets that are behind that in terms of recording the assets and liabilities in the portfolio accounting?

Just the investment in the vehicle itself. I mean, we invest -- AI -- Apollo Investment Corp. makes an investment in Merx, which then is the equity in the actual underlying pool of assets.

Okay, that makes sense and that's what I thought. Also maybe just a broader picture question. I know that you mentioned you're not macroeconomists. Do you think as interest rates rise, and we've seen this, as longer-dated treasuries start to tick up, spreads are -- credit spreads are still extremely tight and there could be some widening. Do you think -- how do you think the repayments would go, the refinancing activity? Do -- I mean, obviously, as interest rates get really high, that the opportunity for refinancing will go down, but there might be -- again, there might be a rush to the door of people trying to lock in what they can.

I think a lot of refinancing has been done. That being said, you've got 3 years of a pretty robust high-yield market and bank refinancing market. I don't have the exact number on top of me what percentage of last year's high-yield market was refinancing. I think north of 50%. So a lot of refinancing has happened, but many portfolio companies as sponsors [ph] have not had the runway to show the growth. So I do think you'll see -- at the beginning of this year, if you would ask me do I think the amount of volume year-over-year would increase or decrease in the broadly syndicated markets? I think it was the how you hear that it would broadly decline a bit. You have the big LBO that gets announced. Do we unleash the big LBO calendar now? We don't know. But I think it's our view that a lot of refinancings have taken place. We think the impact has pretty well been seen. But whenever you have -- a lot of the corporate balance sheets are in good shape right now, and those companies, when they get the confidence to buy businesses, that's good for leveraged capital structures. So that being said, I think we've seen a lot of refinancing take place to date, but there's -- there always will be some taking place.

Your next question comes from the line of Robert Dodd with Raymond James. Robert J. Dodd - Raymond James & Associates, Inc., Research Division: More of a strategic question and then one quick follow-up. On the education side, obviously with recent Delta, Cengage, I mean, those assets have been with you for a while, for the most part, and you've tended to stick with them. In the past, Apollo, when they've had -- when there's been troubled assets, the tendency has been to dispose of those, exit very quickly and thus kept non-accruals looking pretty good but at the expense of losses. I mean, with this write-down on Cengage and then exit a piece of it, is that a shift in strategy on your approach to the education investments? I mean, are you looking basically to clean those out and so we start the process of getting rid of them? Or can you give us some color there?

Yes, so I'll take a crack at that one, which is if you'll remember, both of these educational investments were made in 2006 and 2007. Again, the world looked very different. I think our -- I don't think it's a change in strategy. I mean, I think number one is on Delta, specifically, it's an illiquid investment. We don't think the right thing to do for our shareholders is to monetize that just given the -- where -- the value that's ascribed to it. In Cengage specifically, I would say listen, we think that it's very important to re-underwrite positions every day. And to the extent that the risk-reward changes, and we think it's a smart thing to do to either monetize that position or do what's best for our shareholders versus holding on to it in the face of new information. So I think we underwrite our portfolio every day. Certain of our positions are more liquid than others, and so it allows you to do -- the more liquid positions, obviously the more flexibility in what you can do with them. I don't know if it's necessarily a -- we are not in the business of trying to manipulate our nonaccrual numbers or anything else. We're in the business of maximizing our investment portfolio for shareholders. Robert J. Dodd - Raymond James & Associates, Inc., Research Division: Okay, got it. And hopefully one hopefully silly question. Are there any Dreamliners in the Merx portfolio that they acquired?

There's none. It's a good question, though.

[Operator Instructions] Your next question comes from the line of Greg Mason with Stifel, Nicolaus. Greg M. Mason - Stifel, Nicolaus & Co., Inc., Research Division: In Greg's comments, you mentioned about the AIC credit fund dividends. And if -- I think in 2011, those were running about $6 million every 6 months. I think in September, there were $4 million. And I know in your disclosure I think there's some commentary about some more leverage rolling off in 2013. So could you give us some color on how we should think about the dividends from the AIC credit fund in March and next September 2013, how we should think about that level?

Yes, I think the -- as I think we've disclosed, our Boots investment, which is disclosed within there, has sold down with the transaction of Boots by Walgreens. And -- but that will be running off. And so the level that -- so the previous quarters will be coming down. And I think you'll see that level as we report our fourth quarter numbers to you. Greg M. Mason - Stifel, Nicolaus & Co., Inc., Research Division: And then there also some of the First Data debt that was in front of you, I think, that had a maturity in 2013, at least in the disclosure. Is that -- some of that leverage going to roll off as well? And will that impact the dividend?

That is correct, yes, yes. Yes. So the -- I think in the Q when we lay out the actual underlying assets, that the detail is pretty transparent there. And it's inappropriate, as you put your model together, to assume that would run off and then we would either hold it on the balance sheet or sell the asset. Greg M. Mason - Stifel, Nicolaus & Co., Inc., Research Division: Okay, great. And then can you talk a bit about I think in your disclosure, you said you had 16 new investments. When we look at the schedule of investments, I think we only find 10 new ones that show up. Can you talk about is that 16 all brand-new portfolio companies? Or are there some in and outs inside of the quarter? And can you just kind of reconcile those 2 numbers for us?

Yes, the delta there is there's a couple positions here in the quarter that we entered into, mostly in the subordinated debt space, that revalued very quickly, and we exited the position at the end of the quarter. So we -- that's the difference. Greg M. Mason - Stifel, Nicolaus & Co., Inc., Research Division: So can you talk -- in terms of looking at the originations and the sales, how much of those were just kind of in and outs versus core portfolio changes?

A very small percentage. It's about 10% of our overall originations were what you described as in and outs. And just to explain in more detail, I mean, there's periods of time where we may want to participate in a primary new issuance, where we may not get the allocation that we want as a core position, or the allocation we get may revalue very quickly. And if that happens, from our perspective subsequently -- I had made this comment a couple of times in this call -- we re-underwrite the positions. So, if you like, at 11% and it trades to a 9.5% yield on a subordinated debt, from our perspective, that is something we'll monetize and realize a gain on. Greg M. Mason - Stifel, Nicolaus & Co., Inc., Research Division: Great. And then finally, not to continue to rehash the Merx acquisition but just as we think about origination and portfolio growth next quarter, do you have a dollar amount that you invested? I mean, if I look at $900 million of aircraft, $650 million in front of you, that's $250 million potentially left. What is your investment in that kind of remainder?

So I think I've said that as the number has not been disclosed. There's a -- we'll disclose it in our upcoming quarter. And obviously, there's a confidentiality agreement involved. We -- the thing I think that's fair to say is, the value of the aircraft is $900 million. You point of the $250 million residual would assume that we paid the full amount of value. And the other thing I'd say is obviously, there's equity below us in the transaction. So the number is going to be somewhat less the number you just outlined. So first of all, I want to thank all the participants for some great questions. Certainly, the goal we laid out a year ago in terms of strategy and repositioning, certainly the broad questions today, we really appreciate the focus and the detail of really understanding our business. We appreciate the support from all our investors and look forward to talking to you next quarter. And with that, thank you very much.

Thank you. This concludes today's conference call. You may now disconnect.