Good afternoon, and welcome to Apollo Investment Corporation's Earnings Conference Call for the period ended June 30, 2018. At this time, all participants have been placed into a listen-only mode. [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 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 registration statement and shareholder reports for risks that apply to our business and that may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our SEC filings, please visit our website at www.apolloic.com. I'd also like to remind everyone that we've posted a supplemental financial information package on our website, which contains information about the portfolio, as well as the company's financial performance. At this time, I'd like to turn the call over to Howard Widra.

Thanks, Elizabeth. I will begin today's call by providing a brief overview of our investment activity and financial results for the quarter, followed by an update on our plan to operate with a reduced asset coverage requirement, as well as some additional business highlights. Following my remarks, Tanner will discuss the market environment, our continued progress repositioning the portfolio and our first quarter investment activity. Greg will then review our financial results for the period. We will then open the call to questions. Beginning with our investment activity. During the quarter, we continued to make progress executing our portfolio repositioning plan as we actively deployed capital in our core strategies. In total, we deployed $359 million during the quarter. Excluding Merx and revolver activity, we deployed $200 million, of which 73% was in 7 new portfolio companies; 27% was in 9 existing companies; 100% was in floating rate loans; 86% was in first lien loans; 59% were in co-investments pursuant to our order. Sales and repayment activity was modest. Sales were $15 million. Repayments were $13 million, excluding revolvers. Net investment activity, excluding Merx and revolver activity, was positive $172 million. In addition, we funded $91 million into Merx and received $13 million of net pay downs and revolvers for total net investment activity of $250 million. Net leverage as of the end of the quarter was 0.78x. Moving to our financial results. Net investment income for the quarter was $0.15 per share. Net asset value declined $0.09 to $6.47 per share, driven by losses on our oil hedge and an idiosyncratic credit event at one of our portfolio companies, American Tire, partially offset by unrealized gain on our investment in Merx, as well as a slight accretive impact from stock buybacks. Tanner will discuss the key contributors to our…

Thanks, Howard. Beginning with the environment, middle market lending remains competitive and issuers continue to take advantage of this environment. Most deals continue to have aggressive structures and pricing. This borrower-friendly environment is due in large part to robust capital formation in the middle market debt space. Despite this challenging environment, we believe the combination of our strong origination platform, broad product suite, and deep sponsor relationships allows us to compete more successfully than many others. We believe that given our size relative to our funnel of investment opportunities, we can find attractive opportunities in today's market. That said, we expect only to put capital 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 that 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. In total, we deployed $359 million during the quarter. The weighted average yield on debt investments made was 9.4%, and excluding Merx, was 8.6%. Excluding Merx and revolver activity, we deployed $200 million, of which 59% was in transactions made pursuant to our co-investment order and were roughly evenly split between corporate lending, life science lending and asset-based lending transactions. AINV co-invested with MidCap in all of these transactions. We believe that our ability to co-invest with the broader Apollo platform improves our competitive positioning by allowing us to compete more based on size and certainty of execution rather than just on price. We believe that the scale of AINV and MidCap and other Apollo-managed capital on a combined basis makes us one of…

Thank you, Tanner. Revenue for the quarter was 63.6 million, up 3.4% quarter-over-quarter, due to higher recurring interest income and higher dividend income, partially offset by lower prepayment income. Recurring interest income rose, primarily due to a higher average portfolio. Dividend income increased quarter-over-quarter, due to a higher dividend from Merx and [indiscernible]. Prepayment income was approximately 900,000 in the quarter, compared to 3.5 million in the March quarter, and fee income was relatively unchanged quarter-over-quarter. Expenses for the June quarter totaled 32 million, compared to 29.5 million in the March quarter. Expenses increased, due to higher management and incentive fees, as well as higher interest expense. Management fees increased, due to the increase in the size of the average portfolio. The incentive fee for the quarter was 15%. As a reminder, from the period between April 1, 2018, through December 31, 2018, the incentive fee rate will be 15%. The increase in incentive fees was primarily due to a reversal of 1.8 million of incentive fees in the March quarter, due to uncollectible PIK income. Interest expense increased due to the increase in the average debt balance, given the level of investment activity as the average cost of our debt was essentially unchanged quarter-over-quarter. Net investment income was 31.5 million or $0.15 per share for the quarter, which compares to 31.9 million or $0.15 per share for the March quarter. The net loss in the portfolio for the quarter totaled 18.3 million or $0.08 per share, compared to a net loss of 13.3 million or $0.05 per share for the March quarter. Net asset value per share declined $0.09, or 1.3%, to $6.47 per share at the end of the quarter. Turning to the portfolio composition. At the end of June, our portfolio had a fair value of $2.5…

[Operator Instructions] Your first question comes from the line of Leslie Vandegrift with Raymond James.

Hi, good afternoon and thank you taking my questions. You had a good quarter for originations, and obviously, you're still waiting on the clock there until April to be able to increase leverage, but given that we're looking at that in the next 12 months or so, what's that pipeline like for those really senior secured ABLs at the higher [ph] coupons looking like right now? I know we've heard in the past that there's possibly been more competition out there. Just curious what the outlook was this quarter.

I think the outlook for origination for this quarter looks similar to this past quarter, although the outlook for sort of repayments is probably higher, but it looks similar. I mean, one of the, I think, the strengths of this past quarter was not only being able to do a number of first lien investments, but they came through a bunch of different verticals. They were either asset-based or life sciences or through our sponsor channel. And so that diversity sort of should continue to feed reasonable volume going forward, despite the competitiveness. And so, we continue to feel pretty good about where we are in terms of our ability to originate in the near term.

Okay. And then in the meantime, while you're waiting for April, what is the willingness to increase leverage a little bit now? I mean, in the past I know you have targeted around 0.75, but willing to go until like maybe below 80s between now and then?

Yes. I mean, we're willing. I mean, we expect to move to 1.25x to 1.4x leverage over, we said, like over 24 months or so, and so from where we were at 0.6. And so that won't be exactly linear, but it should be somewhat linear. So, we would expect to be moving up towards those levels or even higher, closer to the 1.1 as we move towards the first calendar quarter next year and as we move further today.

Okay. Thank you. And then on Merx, I know they repaid some after the quarter, and so you're back down to 0.75x net leverage right now, but just on the size of that investment versus portfolio, how big do you guys feel comfortable going right now, given, I mean, it's had great performance, so it's not an issue of quality there, but on quantity?

Our goal for it long term is to be 10% to 15% of the portfolio. That will be accomplished in two ways. One, through obviously, the growth in the portfolio through the increased leverage so that can actually happen either if it stays at the same size. But I think it will also be through – now that Merx has a servicing platform as well, the use of third-party capital outside Merx for some of those trades will be very accretive to the returns and overall accretive to the value. And so, there's even more incentives to sort of spread that out. So, between shrinking that investment over time in a way that makes sense given how we're growing the portfolio and to the overall growth in the portfolio expected, that is not aspirational. It's a goal that we intend on achieving as we grow the portfolio.

Okay. And then just lastly, on the rating agencies. It's good that you get a great rating from Fitch and you get it from Kroll. We've heard from peers that possibly there are others willing to look, are you guys in talk with any others? Obviously, S&P has made their thoughts known, but out of the other rating agencies out there, are there still talks going on?

No, there are none. We were very comfortable with the Fitch and Kroll rating at this point.

Okay. Well, thank you for taking my questions.

Thank you.

Your next question comes from the line of Kyle Joseph with Jefferies.

Good afternoon guys, and thanks for taking my questions. Just from a high level looking out a few years, if you could give us a sense for your thoughts on portfolio yield as you guys increased leverage and target a more, call it, conservative portfolio, combined with rising rates. And then if you could also do the same thing on the liability side and give us a sense for where you anticipate your cost of funds trending.

Yes. So, on the asset side, we have continually sort of said that we are projecting to be at 10%, which has been admittedly somewhat sort of a rough estimate because LIBOR is going up. And so, you'll see despite over the last two quarters or even maybe the two quarters of significant change in the composition of our portfolio, meaning first lien, as well as spread, our LIBOR has gone up 50 basis points or 60 basis points and our spread has gone up about 20 basis points. So, in other words, we've got 40 basis points compression versus LIBOR, but we stayed above where we were previously. And so, we continue to sort of have, sort of a strawman 10%, despite the fact the LIBOR, especially with a few more raises this year, make that likely to be a relatively conservative assumption.

Yes. And then, Kyle, in our prepared remarks, as we mentioned in the past, we talked about kind of targeting deals kind of L+500 to L+700, which matched to Howard's comment on the all-in 10% in the rising rate environment.

Got it. Oh, yes. And then, I was going to say and then on the liability side as well, if you can.

On the liability side, I think the way we're looking at it, you know subject [ph] targets with LIBOR moving, we shouldn't be that far off where we are today at the 5.25 depending upon how we mix the bilateral facilities and depending upon how much of the unsecured that we keep outstanding.

Got it. And then, Greg, it looked like dividend income ticked up in the quarter. Apologies if I missed it, but anything onetime there? Or can you give an outlook for the run rate there?

Yes. I mean, I think the only run rate is Merx. Merx is probably more a $2 million run rate on a quarterly basis. Again, that's a function of leaving capital down in the business or pulling it out. With the transactions that occurred, we had some very favorable earnings that came out of that, and that's why we did take a little bit larger dividend this quarter.

Got it. And then lastly for me, given leverage changes, can you give us an update on your appetite for repurchases? Is it still going to be dependent on valuation? Or given that you guys can increase leverage, do you have more appetite?

No. We've always – we have the same appetite, which has been – we've had a rather pretty good appetite for it, but at prices that we feel like makes sense versus alternative investments. So, we were pretty active last quarter as the stock traded down, and we will continue to be. Obviously, the increase in leverage eliminates any sort of cap on that theoretically, but we remain sort of viewing that as a good use of our capital when the stock trades at the right price or the wrong price, I guess.

Got it. That’s helpful. Thanks very much for answering my questions.

Your next question comes from the line of Ryan Lynch with KBW.

Good afternoon. This quarter, you guys had some really nice portfolio growth. You saw a nice increase in leverage. And I believe you said that this was kind of the first quarter where you kind of implemented the new strategy or where you did a lot of co-investments and did some lower-yielding, lower-risk investments. I know it's only one quarter in the first quarter, but if I look at NII or net operating income this quarter, it actually went down sequentially. So, is your intent with the 2 to 1 leverage or increased leverage target, are you intending to actually grow ROEs, or is the intent to kind of keep ROEs the same, but add on more balance sheet leverage and just de-risk the portfolio?

I think there will be both. I think the ROEs will get better and we will – so the leverage will both lower our yield and our risk and increase our ROE. We're certainly going to split that. I think you saw NII this quarter down a little bit because fee income was disproportionately low. You could see a little runoff, as well as actually not so much of other syndication fees, which we get as well. So, it was meaningfully lower than it has been in other quarters from what we expect in our run rate. So, I wouldn't read into the NII at sort of like permanently eating up all the ROE benefit from the leverage.

And it's also the calendaring of deployment to more towards the end of the quarter.

As well, yes.

So, just to be clear, you said there was also that most of the deployments were later in the quarter this quarter?

That's correct. Yes.

Okay. And then one on the liability side. I know you kind of touched on it a little bit, but I believe, Greg, you said that you are looking to renegotiate your current facility, as well as potentially add on some more bilateral facilities. The current facility is priced at L+200. Either with that renegotiation or the other bilateral facilities, do you think you can get that spread any lower than 200? Or is that basically where you think that these new bilateral facilities will come in? Or when this gets renegotiated, it will stay at 200 spread?

I think new spread will be about the same. I won’t think it's going to get better.

Okay. Alright. Those were all the questions from me. Thank you for your time.

Your next question comes from the line of Casey Alexander with Compass Point.

Hi, good afternoon. Are you resizing the hedge based upon how your energy investments are changing in value? And when you net it all out, has the hedge really worked?

So, the answer to the first question is yes. We are resizing the hedge both on how the performance of those companies are doing, so what's happening at those companies, as well as whatever hedging strategies they have, that's one. And so, we are consistently looking at it. Two, if you look at sort of the value of our hedge, we sort of underlined one of the reasons there's been that sort of NAV loss currently is because the short-term prices have gone up, which has hurt the value of the hedge, but the long-term prices have not gone up as much, and so – which is used to value our investments. If you look at the amount of NAV loss we've had on the hedges, and you subtract out the gains we've had from an increasing price of oil, the loss is in the sort of the teens. And then, about half of that loss we attribute to basically the underperformance of one of the investments, so it's not related to the oil hedge, but related – and we've actually done that work to sort of look at it, to try to sort of correct for and would have performed at and if that's been the case level as opposed to well below that on some new exploration they've had. So, the hedge has been close to neutral. Not quite there, but when you take into the account, like, [indiscernible] that's at 6 30. If you did it today, it would be much closer to that even amount, which by the way, is not what our goal was. We did not want to hedge it fully out. We wanted to hedge it less than that. So that's still not quite where we would have liked it to be, but that's the result of having the short-term/long-term mismatch, which is what we're trying to originate. I mean, that, we were trying to put in place. Does that answer it?

Yes, it does. Thank you. And that’s my only question. Thanks.

[Operator Instructions] Your next question comes from the line of Terry Ma with Barclays.

Hi. Can you sort of talk a little bit more about your strategy to expand leverage? It looks like it's a little bit different than some of the other BDCs that have announced so far. You're targeting a higher-leverage range, but kind of pursuing lower-risk investments. I think some of the other guys have indicated a lower-leverage range and no change in strategy.

Right. Well, that's right. I think that's right. I think that's the result of us having the opportunity to successfully make those changes in the strategy given how much origination we have and how it fits that strategy, and how well that fits with what we think we've wanted to deliver for shareholders over the past couple of years. And so, I think a lot of other people are saying, okay, I can increase leverage. I can run it safely at a little bit higher leverage that returns some yield. If I lower my management fee, my ROE will go up. Everybody wins. But who knows about if I’ll get there or not? I'll open up that door. For us, we feel like, and I think we went through this some last quarter. We feel like there is clearly this origination there to drive exactly this strategy. And that strategy is consistent with running at 1.25 to 1.4 as opposed to 0.9 to 1.25, as what you're seeing in most other people's announcements. And so, because they're really saying, we're going to do more of the same. Maybe we're going to, let's say, move further away from how we do it, do a little bit more of that thing. For us, we're saying this exactly fits into what our strong points are. We have this origination, and this origination lends itself to not only getting the leverage from the market, but being safer, we think, as a portfolio at 1.4x than our competitors' portfolios will be at 1.1x.

Got it. And do you have a target ROE given your leverage range once you expand leverage?

Yes, it's like low double digits, 10, 10.5, 11. Again, it goes to back to your question before, where if you work it off 10%, we put together a conservative model that hopefully we'll be able to achieve, but it's in that low double-digits range.

Okay. Got it. And then on Merx, how comfortable are you with the airline cycle and the risk there? I think the low factors have pretty much topped out. I think the last quarter saw their two airline bankruptcies. So, can you just talk about your concentration risk and how comfortable you are with the cycle?

Yes, sure. So, a couple of points there. First and foremost is notwithstanding the cycle, we have endeavored to ladder our lease maturities such that we do not have a disproportionate amount of our assets coming back to us in any one year. The second point would be it has been a pretty benign environment, and frankly, not just benign, but from a secular standpoint, carriers are in a better place as rationalization is taking place across the carrier landscape. And so, too, has demand been exceeding GDP nicely. This has afforded us the opportunity to credit-risk manage the portfolio. And our more recent assets that we put on the books reflect that want me to go up in terms of quality, and so that will be borne out in younger planes and higher-quality counterparties. And then, the third point would – and at the risk of overemphasizing, the ability to layer in the servicing, where from a balance sheet standpoint, we can put less balance sheet to work and create similar ROEs to that, which we were producing before, all things being equal, is another strategy that helps us to plan for and think about the, as you referenced, cyclicality in the carrier market more broadly.

Okay. Got it. That’s it from me. Thank you.

And our last question comes from the line of Fin O'Shea with Wells Fargo Securities.

Hi guys, good afternoon. Thanks for taking my question. First, on the noncore composition. That just edged down a couple of percentage points, but you had very meaningful net originations, especially compared to recent quarters. Can you, kind of – was that maybe due to some of the other than Glacier Energy, names appreciating or can you help reconcile that for me?

So, Fin, if you're talking over the last couple of quarters, we made reference to this, I believe, on the previous call in the case of a subset of our shipping investments, we found an opportunity to actually buy-out the debt ahead of us at a slight discount, which resulted in more capital going into that particular. Also, our investment in Spotted Hawk has been marked up slightly over that period, which will be another contributor to that. What is a good point is, we have also originations, but that percentage being relatively the same.

Got it. Thank you. And then just to expand on Leslie's earlier question on the Kroll rating. Just noticing, the subset of your peers that has been holding out for the S&P rating, just assuming therefore that that's more meaningful, can you give us a sense of how much the Fitch and Kroll combo moves the needle in terms of maintaining your more flexible revolver capacity?

Well, I would say, on the Revolver capacity, it doesn't affect at all. It's unsecured, so that it doesn't. It really affects our sub-debt and our ability to access that marketplace. We have talked to a number of our bondholders, and they are comfortable with both a Fitch and Kroll rating for their purposes. And we don't see it – it's not affecting us as we go forward. I mean, I can't really project what will happen.

Thank you. So, it's not a matter of the – I think, Howard described as secured bilateral, the more asset-based facilities versus the revolver? It's more so the just general revolver versus sub-debt?

Yes, it is.

Okay. Thanks so much for taking my questions.

Okay, thank you very much.

Thank you, operator. On behalf of the team, we thank you for your time today, your continued support. Please feel free to reach out to any of us, if you have any other questions. Have a great day.

This concludes today's call. You may now disconnect.