MidCap Financial Investment Corporation (MFIC) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Apollo Investment Corporation's Earnings Conference Call for the period ended September 30, 2018. At this time all participants have been placed in a listen-only mode. The call will be opened for a question-and-answer session following the speakers prepared 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. 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. As requested by a number of our shareholders, we have added a new slide to the package, page 11, which provides more information on the assets originated since mid-2016. At this time, I would like to turn the call over to Howard Widra.

Thanks Elizabeth. I will begin today's call by providing a brief overview of our financial results for the quarter, followed by a review of the execution of our portfolio repositioning strategy. I will then discuss a couple of other important announcements from today’s Press Release. Following my remarks, Tan will discuss the market environment, our second quarter investment activity. I will then provide an update on credit quality. Greg will then review our financial results in greater detail and we’ll also provide an important update about the amendment to our credit facility associated with our plan to prudently increase leverage. We will then open the call to questions. Beginning with our financial results, net investment income for the quarter was $0.15 per share. Net asset value per share was $6.47 at the end of the period unchanged quarter-over-quarter. During the period our investment activity focused on senior first lean secured floating rate loans sourced by Apollo’s Direct Origination, utilizing our ability to co-invest with other capital managed by Apollo. Importantly, nearly all of our deployment during the period had a lower risk profile that we were targeting as we prepare to prudently increase our leverage. For example, the weighted average net leverage of originated corporate loans made during the quarter was 4.8x within our target leverage ratio of 4x to 5.5x for incremental assets. Repayment activity was robust and accordingly net investment activity was negative $172 million and net leverage at the end of the quarter was 0.68x. Moving to an update on our portfolio repositioning strategy, when I joint AINV a little over two years ago, we began a process of reducing assets that we designated as non-core with the goal of gradually shifting the portfolio into senior secured loans sourced by Apollo’s direct origination platform. Our objective was to design a portfolio that would have a lower risk profile. At that time we had recently received exempted release to co-invest with other funds and entities managed by Apollo, which we said would allow us to build a portfolio of granular positions while participating in larger deals which are generally less competitive. In the coming years we expect to continue to execute against this strategy. Page 11 in the earnings supplement includes some detail on the corporate lending portfolio that has been originated since I joined AINV in mid-2016. At the end of September, approximately $1.1 billion or 81% of the corporate lending portfolio is in corporate loans originated since I joined AINV. Drilling into those loans a bit, 53% of first lean loans more importantly deployment activity has skewed more towards first lean loans in the past 12 months as we seek to invest in more senior assets ahead of a reduction in our asset coverage requirement. If you look at just the past 12 months, 81% of our deployment has been in first lean. Of this $1.1 billion, 100% are floating rate loans excluding a few small equity co-investments. 62% of the $1.1 billion are investments made pursuant to our co-investment order. The average borrower exposure is $15.7 million, well below the average of the rest of the portfolio, which demonstrates our focus on building a more granular portfolio. The waiting net leverage of the $1.1 billion of corporate lending average is 5.3x with first lean loans at 4.5x and second lean at 5.8 times. The weighted average credit of these assets is approximately 755 basis points, with first lean at 670 basis points and second lien at 855 basis points. Moving to the other announcement in today's Press Release, our Board has approved a one-for-three reverse stock split, which will become effective as of close of business on November 30. AINV is expected to begin trading on a split adjusted basis at the market open on December 3. We believe that a higher nominal stock price from the reverse stock split will attract a much broader universe of investors and reduce the volatility of our stock. We are also pleased to announce that our Board has increased our share repurchase authorization by $50 million, having nearly completed $150 million prior authorization. We consider stock buyback below NAV to be a key component of our plan to deliver value to shareholders. Since the inception of our share repurchase program and through the end of September, stock buybacks have added approximately $0.15 to NAV per share. Turning to our distribution the Board has approved a $0.15 distribution or $0.45 distribution adjusted for the one-for-three reverse stock split to shareholders as of record as of December 20 2018. With that, I'll turn the call over to Tanner to discuss our investment activity.

Thank you, Howard. Beginning with the current market environment, the private debt market remains highly competitive, primarily due to the tremendous amount of capital being raised for direct lending. This capital formation has led to the continuation of a highly competitive borrower friendly market where most deals continue to have aggressive structures and pricing. Against this market backdrop we believe larger credits remain the best risk adjusted return opportunities, because there are significantly fewer players who can commence the larger deals. We are focused on opportunities that capitalize on Apollo’s scale and areas of expertise that can also take advantage of our ability to co-invest with other capital managed by Apollo. Turning to our investment activity, excluding revolver deployment from prior commitments and also excluding the sale of a new loan which I will discuss shortly, we funded approximately $153 million during the quarter. The weighted average yield on debt investments was 9.5%. A 100% of investments made were in our core strategies, a 100% were floating rate, 97% were first lean and 96% were investments made pursuant to our co-investment order. As Howard mentioned, although the reduction in our minimum asset coverage ratio is not yet effective, nearly all of our deployment during the quarter was consistent with the reduced risk profile. Regarding the previously mentioned sale, deployment for the quarter included a commitment to Reddy Ice, which was above our target hold size. Post close we sold down a $132 million of our exposure to an already identified third party generating syndication fees and achieving our desired final hold size. As we said before, 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. Co-investment activity during the quarter included Reddy Ice, Fiscal Note and Florida Food Products among other investments. Sales totaled $163 million, primarily driven by the Reddy Ice syndication. In addition, repayments excluding revolver pay downs totaled $295 million consisting of a $47 million repayment from Merx Aviation and $248 million of other repayments. Notable other repayments included Skyline Data, UniTek Global and Westinghouse among others. The weighted average yield on debt sales was 10.1% and the weighted average yield on debt repayments was also 10.1%. Post quarter end our $80 million investment in U.S. Security was repaid eliminating our remaining exposure to unsecured debt. Now let me spend a few minutes discussing overall credit quality. No investments were placed on or removed from non-accrual status. At the end of September, investments on non-accrual status represented 2.6% of the portfolio at fair value and 3.2% of costs. Our investment in Crown Automotive had a significant write down during the quarter due to the company's under performance and is currently actively being reworked and this participation was part of a larger commitment made by the Apollo platform. Moving on, the risk profile of our portfolio is measured by weighted average leverage and interest coverage for a portfolio companies was relatively unchanged compared to the prior quarter. The current weighted average net leverage of our investments decreased to 5.5x down from 5.6x. The current weighted average interest coverage remained at 2.3x. With that I will now turn the call over to Greg who will discuss financial performance for the quarter.

Thank you, Tanner. Our revenue for the quarter was $66 million, up 3.8% quarter-over-quarter, primarily due to a higher average portfolio, as well as higher prepayment income partially offset by lower dividend income. Recurring interest income rose primarily due to a higher average portfolio and rising LIBOR. Dividend income decreased quarter-over-quarter due to a lower dividend from Merx and MC. Prepayment income was approximately $3.6 million in the quarter compared to $900, 000 in the June quarter. Fee income was up slightly quarter-over-quarter and expenses for the quarter were $33.9 million, up 5.7% quarter-over-quarter primarily due to higher interest expense, slightly higher G&A, partially offset by lower incentive fees. Interest expense increased due to an increase in the average debt balance and the movement in LIBORE. The incentive fee rate for the quarter was 15%. As a reminder, the incentive fee rate will be 15% through December 31, 2018. Incentive fees decreased quarter-over-quarter due to a reversal of approximately $1 million of incentive fees associative with pick income from an investment in Carbon Free Chemicals. Net investment income was $32.2 million or $0.15 per share for the quarter. This compares to $31.5 million or $0.15 per share for the June quarter. The net loss in the portfolio for the quarter was $4 million or $.02 per share compared to a net loss of $18 million or $.08 per share for the June quarter. Negative contributors for the quarter included our investment in Crown and [Audio Gap] oil and gas among others. Positive contributors of the performance for the quarter include our investment in Spotted Hawk and Merx Aviation. Net assets per share was $6.47 at the end of the quarter, unchanged quarter-over-quarter. Turning to portfolio composition, at the end of September our portfolio had a fair value of $2.3 billion and consisted of 98 companies across 25 industries. First lean debt represented 57% of the portfolio, second lien positions represented 27% of the portfolio, unsecured debt and structured products were 3% each and preferred and common stock represented 10%. Weighted average yield on our portfolio at cost remained at 10.7% as the impact from rising LIBOR was partially offset by lower yields on new investments. On the liability side of our balance sheet we had $946 million of debt outstanding at the end of the quarter, including the $16 million of Series B Senior Secured notes which matured and were repaid on October 1. Our net leverage ratio stood at 0.68x at the end of September compared to 0.78x at the end of June. Regarding our funding plans for the reduction in our asset coverage requirement, we are pleased to announce that under our credit facility, which is being amended and extended, we have received $1.590 billion of total commitment, an increase of $400 million from both new and existing lenders. The amended facility lowers the asset coverage ratio requirement from 200% to 150%. This amendment followed the passage of the Small Business Credit Availability Act in March and our board's adoption of the lowered asset coverage requirement and will provide a significant capital base to deploy into Senior Secured assets. There will be no change to the borrowing cost in connection with the amendment. We greatly appreciate the support from our lending syndicate in this important amendment to our facility, which allows us to continue to deploy employ assets in the first lean securities de-risking our overall portfolio. We expect the amended facility to close in early November. Lastly, regarding stock buybacks, during the period we purchased approximately $2.9 million shares at an average price of $5.61 for a total cost of $16 million during the quarter. Subsequent to quarter end we repurchased another 0.5 million shares at an average price of $5.49 for a total cost of $2.6 million. Since the inception of our share repurchase program in 2015, we have repurchased $25.2 million shares or 10.6% of our initial shares outstanding for a total cost of $146.7 million. The company now has approximately $53.3 million available for stock repurchases, inclusive of the $50 million increase authorized today. This concludes our prepared remarks, and please open the call on to questions.

[Operator Instructions] Your first question comes from the line of Rick Shane with JP Morgan.

Hey guys. Thanks for taking my question this afternoon. Just – and I suspect you are going to get a number of questions on the pie charts on page 11. When we look at Merx, we assumed that that is a core business at this point. So the way to think of this is that there is about just under $800 million of sort of non-core, there is the non-core legacy and then pre-July 16 business. Is that the way we should be thinking about this in terms of mix?

No, I think the pre-July 16 business should be looked at with the post July 16 business. I mean its core assets that are – you know that are in our core strategy. We just try to point out what we’ve done since effectively you know the managing team changed and so we were being more granular as well as the exempted relief came in. But those loans are in the same category meaning you know they would fit what we would do today. Some of them maybe a little bigger than we would want to have, but you know there's not that many left anyway. So I would view that as core. I was very – and so I would really focus on the $506 million on that page.

Got it, okay. And in just to shorthand it, what would be two key differentiating factors between the 265 and the 506? Just so we understand you know what makes core versus non-core?

Yeah, the 265 are just sort of you know – primarily you know loans to financial sponsors and you know recaps in equity buyout, sort of normal, on the run corporate sponsor back loans. The non-core stock is actually almost all, two oil and gas and two shipping investment. So they are sort of like the esoteric bulky assets that were affectively equity positions. You know even the oil and gas names which started its first lean were sort of the default capital effect if you will. So they were just vastly different types of investments. So put another way, if those shipping deals or those oil and gas came to us today, we would say we don’t do that. Whereas if these 265 came to us today we would say, sure. We may split it more parts of Apollo where we may do a slightly different part of it, a part of the balance sheet more likely first lean than second lean, but we would do that loan.

Okay, and that brings me to my last question, which is does that 506 represent industry or does it represent structure? So if those deals came to you today, would you say no because we're not investing in that sector or no we just do not do that structure? I just want to make sure that there's nothing fundamentally different in the structures there.

It’s both, it’s both, but it's mostly structure I would say and really scale. You know these are big positions right. So there isn’t inherently anything wrong with having a few first lean senior debt investments in oil and gas. There is for us right now, because we want to get rid of all exposure before we do that, but in a in a broad portfolio, but these are sort of very big positions to companies that were much more exposed to the commodity and much more exposed to development as opposed to – you know as opposed to sort of already yielding assets. Shipping, we are not going to own assets and we are not going to own ships, so I don’t know. So its structure, meaning we don't want to own assets as opposed to land again assets. And then shipping you know is not something that we're going to do, so it’s sort of both. But the problem with answering your question is that the difficulty in answering the question is the problem with the assets. They don't need to fit in any category. They're sort of like they were broad opportunistic opportunities that were outside a core strategy.

Okay, perfect, that actually really helps. Thank you very much.

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

Afternoon. Thanks for taking my questions. So given the math, even when we exclude the Reddy Ice syndication, it does look like sales and repayments were a little bit elevated versus recent quarters. Is that you guys being proactive in ongoing portfolio rotation or is that more just a function of the market?

Yeah, I'll hit that. I think it’s certainly both, but it has a greater weighting towards the market. I mean I think if you can look at identifiable stats, you know supply has been down and obviously demand for capital is up and you know as we've alluded to in our prepared remarks such that you know you are seeing more difficult environment in terms of new deployment. That said, there's also been a concerted effort on our behalf of trying to de-risk many of the second lien positions that are more liquid and have a bid, but in terms of on order of magnitude it's more the former than the latter.

Got it, and then obviously public markets have been pretty choppy recently. Can you just give us an update on sort of the revenue and growth trend you're seeing in your individual portfolio of companies? I know you talked about NPAs being flat, but just actual, you know if you can aggravate the performance of your portfolio companies and tell us if there’s been any changes.

Yeah, sure. You alluded to the chop in the market, obviously the data that we have in the company is a little bit backward looking, so that might not necessarily be reflected; a couple of points there. You know when we think about our credit book certainly there is a dynamic as exists in any credit book, wherein those companies that are doing best and or deleveraging the most are the candidates for dividends and take out and that sort of thing. But you know a couple of points there, you know in terms of underlying performance, things have held up well. You know I think if you looked at those stats historically there was more earnings growth than what you saw in the most recent quarter. Revenue top line continues to be strong, but the rate of earnings growth has not matched that which we've seen in previous quarters and I think that speaks to trends that many, you know frankly the Wall Street journal and others that have captured with respect to input costs, increasing freight costs and that sort of thing which I think is reflected. But all told, you know still positive, but a little bit more margin compression and/or less earnings growth in that which we saw in previous quarters.

That’s helpful, thanks Tan. And then just one last one for Greg and apologies if I missed it, but on the new or the amended credit facility, did you discuss pricing just for a modeling question?

Pricing has been the same.

Alright, that's all my questions. Thanks for answering them.

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

Good afternoon. Thanks for taking my question. So I wanted to spend some time on Merx. We’re aware that Carlisle recently acquired Apollo Aviation earlier this month and it's not entirely clear to us the extent of AINVs manager or ultimate parents economic interest in Apollo Aviation. So could you clear that up for us as we were curious if the sale had any impact on Merx.

Yeah, it actually is zero. It just happened that that platform happens to have that similar name to our parent, but there is no Apollo involvement in Apollo Aviation.

Okay, that’s helpful to clear up, and then alternatively it does look like Merx is in the market for another securitization. So (a) is that correct? I think it's like maybe about $600 million, and then (b) if it is, how should we think about the impact from Merx, from marginal securitizations to the business, either in the form of a dividend or maybe in the fair value of Merx?

Yeah, sure and I'll maybe give you a bit longer answer. As we alluded to on the last conference call, you know we had an inflection point with our Merx business where we're able to stand up our own capabilities as it relates to servicing and become a full service platform and in connection with building up those capabilities. We're able to refi an existing securitization which was previously known as Abbas and is now known it Mac in the securitization market, and on a go-forward basis we would expect from time-to-time to make use of the securitization market as a financing source for Merx clients and assets. So it’s an important piece of financing. Amongst others, you know that has been one aspect of the market that has benefitted us not only in terms of rates that we can command and leverage profiles, but so to also increasing flexibility within those securitization structures have been a benefit to our investment and hence something that we’ll continue to look to as an option for financing.

That makes sense. And then maybe switching gears, maybe for Howard on strategy. So in terms of your target leverage and the ability to access that additional leverage in April, the situation where assets maybe at Sion [ph] or Sion [ph] itself could find a home on a public balance sheet?

No, you know Sion – first of all, you know Sion has its own capital base and has its own assets and is in divesting of assets, but it’s also you know, it’s an affiliate and so you know post-closing transactions from it, even you know under the 40 act as sort of you know not doable. But you know there are transactions that are, you know that we both participate with Sion out of the market consistent with you know what we're allowed to do under our exempted order, but no, there's not going to be flow coming from Sion.

Helpful and then lastly maybe Tanner. You talked a little bit about some pockets of stress from rising input costs. Is there any notable industry where maybe labor has that input or anything supply chain related that is notable to you?

Yeah, labor – labor on that side of it, I think its pockets and no definitive example. I think that if you look across the spectrum certainly and this is – it reflects what you see a lot of in recent earnings releases for you know kind of S&P 500 companies, but freight has been an increased cost and you have kind of two factors contributing there. Obviously fuel costs going up, but certainly also – you know the secular trends around ecommerce and the like has actually increased freight, the cost of freight, and so you think about businesses that rely on distribution. You know there are distribution businesses or rely on those sorts of business models. Would you expect it to be more impacted by the rise in freight costs?

Got it, that’s helpful. If I could squeeze in one last one, Howard where are you seeing maybe the best investment opportunities today across the mid-tier platform and if I'm looking at you know corporate lending, life sciences lending or asset based lending, because some banks had said that life science lending and then alternatively asset based lending presents some pretty effective risk adjusted returns.

Yeah, I mean I agree with that. I mean I think the areas which are the most proprietary, which means you have a lot of competition and the more barriers to entry tend to be better obviously always in this market in particular where the more commoditized areas are completely sort of over banked. So both ABL and life sciences, which have very low loss given it’s the fog [ph] and so if you can access, those are stronger and so those are the places where there is the least competition, not to say by any means there's no competition. The problem with the ABL market really versus the life sciences market is that the better borrowers in the ABL market get pushed up to the leverage loan market in times when there’s lots of liquidity. So it's not as robust a time to be an asset base lender as it is when there's a distress cycle. So when you get those opportunities are good. So I would say like of all of them, life sciences is the one that has, continues to have very good opportunity and very good risk award.

Perfect, that makes sense. Thanks for the time guys.

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

Hey guys, thanks for taking my questions. First one was on slide 11. You guys have your $1.1 billion corporate lending portfolio originated after July 2016. My question was you know 96% of those investments were made pursuant to your co-investment order or excuse me, 62% were made pursuant to your co-investment order, but if I looked at the Q3, calendar Q3 co-investment, that was about 96% of your investments were made pursuant to that order across the platform. So those numbers I thought were interesting because they seem to indicate that you guys are getting more traction with the co-investment and use of the broader Apollo platform recently. I guess one, is that true or is there something else driving you know the almost 100% of new investments this quarter being co-investments across the platform?

Yeah, I mean I think the largest driver of the difference is that once the new leverage rules we were originating based on sort of the higher leverage, our yield profile went down and so more of the loans that were out in the platform were, you know made sense for AINV, so therefore a larger percentage went there. So we would expect you know a percentage more consistent with this quarter than the average of the last few years going forward because of the yield.

Sure, that makes sense. And then with Merx, you guys had about a $45 million repayment. Can just talk about what drove that pay down this quarter and should we expect you guys to continue to shrink that business anymore in the future and then kind of along with that question Greg you mentioned dividend income decreased this quarter due to lower dividend income for Merck. Is the $2.3 million dividend income this quarter a good run rate to kind of expect for AINV going forward?

Yes, so just to kind of roll back what you asked. I mean I think I'll start with the last one. We have 1.2 out of Merx this quarter, okay. I think you know depending upon the asset movements inside of Merx you can fluctuate you're dividend and/or are we reinvesting the capital within Merx. So I think a run rate you know in the 1.5 to 2 is fine. I think with regard to the $47 million repayment that was a function of the securitization we did with maps. We had put capital in in order to take out some debt and then we’re just repaying that back to us, to complete that transaction.

Just be clear, on the $1.5 million to $2 million dividend going forward, is that just from Merx or is that what you guys expect for AINV as a whole, because you guys had about – if Merx was $1.2 million this quarter, you guys had about $1.1 million outside of that.

Yeah, in the other – so that specifically is Merx. We do have dividend capacity that builds up typically on a quarterly basis in MC, which is our, one of our tanker ventures and depending again, in those businesses you sometimes leave capital down there to do some refurbishments and all of that and that has been running you know just a little bit over $1 million this quarter, it’s about $700,000. So you know I think you know about $1 million, but it could fluctuate depending upon when we dry dock some of the ships and that cycle when they come off lease.

Okay, makes sense. And then with Reddy Ice you guys mentioned about, I believe you said $132 million was sold down this quarter. Can you just kind of walk me through the fall process of I believe you guys only have about – held about $29 million on your balance sheet. Why not I guess hold more of that investment on your balance sheet. I mean it’s only 1.2% of your portfolio today, given that portfolio growth you know is one of the things that I know investors are looking for. Can you talk about the fall process of you know selling off $132 million and not potentially holding more of that on your balance sheet.

Yeah, sure. And I would think first that the effect of opportunity to take more than you're hold and create some syndication income are typically idiosyncratic and have a lot to do with the particulars of a transaction. To your question which is a very good one, I think it speaks to the core tenant of our repositioning strategy and the average physician size that we want to build in and the granularity that we want to build into the portfolio. We share the desire to increase assets and frankly one of the things that we would talk about is some of the assets that are rolling off are much bigger positions and that creates you know that many more deals that we have to do to replace the equivalent deals coming off, but not withstanding it has been you know kind of a core piece of how we’ve tried to reposition the book to you know try to perform for that 1% to 1.5% position with only selective, where we have higher degrees of conviction and / or the risk return is particularly attractive to go about that that 1.5%.

Okay, understood, and then just one final one. Greg, I know you had mentioned in the past you guys were at least thinking about redeeming your 2042 notes, but I know you wanted to wait till you guys had an amended and potentially larger facility in place. That looks like that's going to be in place in November. You guys anticipate you know using borrowing from that credit facility to now repay those bonds or what are the kind of updated faults on that going forward?

It’s not our plan at this point to use the credit facility in that vein. I mean I think one of the things which we’ve modeled is that we’d like to keep a level of unsecured debt outstanding. Now we may do it in a different form you know to avail ourselves of some better rates given the six and seven-eighths coupon on it, but it's not our plan to use the credit facility to take that at this point.

Okay, those are all my questions. I appreciate the time today.

Your next question comes from the line of Ryan [ph] Dodd with Raymond James.

Hi guys. Going back to page 11 if I can. On the 506 and all the way back to Rick’s question at the beginning in essence, what's left of that 506? If we look at you know something like Spotted Hawk or something like that, it just seems to me that you've cleaned up a lot of the portfolio over the last couple years. Are we into the phase where the remaining non-core legacy assets, kind of the more troubled assets, the ones with the longer tail well might be so to speak stuck with that 506 for a relatively long period of time as you work through those assets rather than they just redeem and go away.

You know, I don't know that they are the ones that obviously have taken longer to exit. You know really you know two of them are oil and gas and two of them are shipping and that’s the largest amount of them and so obviously they're part of the underlying markets. You know the underlying market for oil and gas has gotten much stronger and so is sort of the possibilities to sort of exit or reduce are better than they were you know six months ago or a year ago and you know and shippings – you know shippings recovery has sort of started more recently. So I don’t know, I certainly wouldn’t call them any more sort of challenged than the other ones. I mean when we you know – when we sort of started this we went through and we were trying to be you know very careful about where we marked everything. We felt right about marking it, where our marks were. For the most part our liquidation of our marks have been pretty good on this first $450 million that we exited. The challenge with marking equity positions is that, you know they are not like loans, they don’t get a 100 cents or not, they can be volatile and they can revolve within the quarter and that's our challenge with them. But you know, so it's a long winded civil way of saying I don't think they're necessarily worse, but obviously by definition they’ve taken longer than the other ones. I don't know how much longer. They are not going to be gone – you know all four of them are gone next quarter, that's for sure, but you know we're still hopeful for sooner rather than later.

Okay, got it, really helpful. A couple of questions about comments kind of made. On the larger credits where the opportunities are, that’s also to the point where there can be opportunities where a check size is going to exceed the whole side of either AINV or Apollo as an entire platform, if you want to keep that at a granular position across everything. So does that, so you don’t point that syndication opportunity is also idiosyncratic, but this is time in the market where if large credits are where the opportunities are and maybe they want to hold the same, the full amount, is it realistic, and not should we expect it, but is it realistic that that point of the cycle when larger credits, the attractive one is the point where syndication and sell bounce may generate some incremental fee revenue.

You know I think generally speaking, you can see it is correct. I would still caution that those opportunities for syndication typically are the more, are still idiosyncratic. I think when we try to emphasize the benefit of being part of the scaled platform, when you kind of think about it, more in terms of semantics and the ability to drive that much more certainty to the counter party, be it then a sponsor or company or whomever is a real advantage and not to say that there isn’t competition still there, but it tends to be a less competitive piece of the market. And if we look at kind of the five bigger deals that we did in the particular quarter that ranged from $20 million to $30 million of commitment for AINV, in each of those situations the platform was committing to an excessive $75 million to a particular deal, kind of speaking to the dynamic that you described and a place where you know providing that certainty, being able to speak for that size, advantages us and position us to win that business or be selected as the lender of choice in those situations. So that’s the comment with respect to the market and where we have been trying to focus our time and energies and what again continues to a competitive market.

Okay, I appreciate that. And on Crown Automotive obviously Mark, you mentioned in the comments it just – I can see in your remark came down pretty substantially. Any color you can give that? Is that a raw material or component cost issue for them or is it something idiosyncratic to that business?

Yes, so the raw materials did not help, you know. You can look back even before the tariffs, with respect to aluminum and steel. Those commodity prices were spiking earlier this year and late last year, so that certainly didn’t help. This particular situation I would frame as more of the idiosyncratic and profitability issues associated with ramp of two platforms. And so to answer your question specifically and at the risk of being redundant, the raw materials didn’t help, but we are certainly compounded by idiosyncratic issues in terms of profitability at that company.

I appreciate that, thank you.

Your next question comes from the line of Christopher Testa with National Securities.

Hi, good evening guys. Thank you for taking my questions today. Just curious, so you had mentioned that you know 62% has been co-invested. I was just wondering if you could break that down a little more detail on how much about co-investment came through mid-cap and how much excluding mid-cap if you have those numbers available.

No, we can get that for you but the vast majority in mid-cap, you know almost all. I can’t give you exact parentage, but it’s anecdotal if it's not.

Okay, alright, no that's fare. And I know you guys had mentioned before that you know you're more bullish on life science relative to ABL given the larger ABL borrowers, obviously that’s going to be more competitive. Are there any sort of I guess you know industries or subsectors where you're not paying as much competition in ABL where Apollo might have a distinct advantage now that you have co-invest?

Well you know so for first of all you know we are sort of the dominant player in healthcare ABL lending, regardless of market cycles. So we always see the best and biggest opportunities there and that's why we saw Genesis early in the year which is a significant dealing and you saw Right Medical and so you've seen some flow of that in the BDC, and so that contuse to be the case, to be large opportunities there. You know in terms of sort of the industries that are more likely to want to borrow ABL right now are retail, and oil and gas you know sort of providers into those industries, because those are the ones that are sort of less favor. You know the truth is there is still some completion there. In those deals if you have retail deal in the assets there is going to be competition. Doesn’t mean there isn’t transactions to do, but there is still some competition. But it would the out of favor industries for leverage lending have interest in them and they are not more than three or four lenders that can do frankly more than $50 million of an ABL outside of bankruptcy that requires cash dominion. So there – you know those deals that are out there that are available, it's just us and a few others who can do them. It’s just not that many of them.

Got it. Okay, that’s great color, thank you and you guys have hinted that you know with Ryan’s question upon you know potentially reveling one of the more costly note. Not doing it with a facility potentially doing it with you know I guess another unsecured note. Just, you know are you looking at that you know in terms of kind of getting your footing with the new leverage facility first and putting more, I guess lower yielding assets on the books before that even becomes of thought or is this something where you know you're looking to do the sooner rather than later saying and as rates continue to trend up and we’re even seeing some whining in spreads which could potentially you know increase borrowing costs for the entire sector.

You know Chris we are constantly looking at it. But I think you are right and that the priority was to updating and amend our credit facility, which we have done and then we will take a look at you know we – given the number of banks within our credit facility, we have a number of proposals with regard to any of our sub, particularly the baby bonds and we are looking at alternatives there, so we'll see what happens.

Got it, and then sticking with the financing side of things, obviously Apollo is a household name and you know Golab [ph] have received no action relief from the SEC to – excuse me, they received you know no action relief from the SEC in order the do with securitization. Is the potential that could be within your wheel house you know going forward in terms of potential financing sources, given that you have more flexibility there?

Yeah, I mean I think it's always something that we look at right. Because if you think about us going up in the first lean, it becomes a very tight spread business. So if the cost of – is it availability – we’ll potential take advantage of it.

Got it, and will there be any one time cost for mending these facility next quarter?

No, I mean there are one-time costs to amend this facility. Our policy has been to capitalize those and the amortized then over the life of the facility.

Got it, okay. And just last one for me. You know as you guys have obviously successfully transitioned a lot of the portfolio and especially away from the non-core assets. One thing that’s remained relatively stable has been the non-sponsored portion of the business, around 18% of where investments are being sourced. Just curious you know does that encompass a lot of the non-core stuff. So should we expect that to sort of go away as energy and shipping kind of roll-off or is that something else entirely? Just curious you know how we should be looking at that portion of the book?

Yeah, I mean I think that’s right. I mean we are not sort of – you know we haven’t classified it that way. The large amount of what we are calling the corporate book has been sponsored. We also, our ABL and life sciences and lender finance could be classified as you know as non-sponsor, but we classify them by their product category. So when you are talking about cash flow non sponsored deals, if you exclude that non-core – the non-core stuff, it is pretty negligible. Whether ultimately the market opportunity there over time changes or our focus on that market changes, it's possible, but that isn’t our focus right now.

Okay, great. Those are all my questions. Thank you for taking them toning.

Your next question comes from a line of Terry Ma with Barclays.

Hey, good afternoon. As you go forward and execute on your strategy to deploy higher leverage, how should we think about the mix of assets over time between the new assets under higher leverage versus the ones you are doing right now with an average spread about 750?

So the way you should think about is that when we get to whatever the end state is, we would have Merx, we would have all the non-core assets gone and we would have 80% to 85% first lean.

Got it. But is there a kind of like a general mix between I guess, because you are going to originate lower first lean assets right or you're just not going to do the 750 spread assets that you're doing right? You are just going to migrate all towards lower spread.

Yeah, I mean I think we are going to migrate all towards lower spread. I mean I think the way we think about it is the blending average of our spread across that 80% first lean and say 10% second lean and 10% Merx, so takes Merx’s out, that 90% is around 10%; that’s the yield to around 10% yield, not LIBOR percent around 10% yield. So as we talk about this in other calls indebted in that is some natural conservatism because LIBOR is going up, right but we are talking about 10%. What that would translate to is the first leans around about the spreads we're doing right now and the second lean is around the spread that we're doing right now and that’s one is also about 10%.

Okay, sure.

We have a bunch of it, and we think that’s inherently fairly conservative, because we are little over that 10% number even combined with what we originated and you know LIBOR is on you know moving up as opposed to down and you know we have, we saw some legacy assets obviously as that’s happening, that are in that core older assets that have higher yields.

Okay, got it, that makes sense. And then on the Merx, can you give us some color on how renewal rates are trending as leases expire. Are they generally replacing up or down in its environment?

Yeah, difficult to make a broad comment and you know I would put in context, I think this is one of the things that the team has done a really good job which is lattering the maturity. So we talked a lot about diversification by plane type, carrier, but also a core part of our management of that business in that book has been in how we lattered the maturities. If at any given year, it’s kind of only six to eight planes that are coming up for renewal, and because – I think this is one of the attribute to the business that creates some of the barriers. A lot of the fact and circumstances are idiosyncratic to that particular plane type or that particular situation it's tough to paint with a broad brush. I would say however generally speaking, you know aircraft values have been going up and if you were to look at kind of depreciation adjusted lease rates or lease rate factors, they’ve generally held up pretty well in what has been a pretty good environment for aircraft values and demand for equipment.

Got it. Okay, that’s helpful. Thank you.

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

Hi, good afternoon. The amended credit facility is expected to have the same interest rate terms as the last one or are the industry rate terms changing at all on that?

No, it’s the same.

Okay, great. Secondly, Crown Automotive, that went by very, very quickly. Can I get some color on what’s happening with Crown Automotive?

Yeah, sure. So as I alluded to before you know it has been an issue with respect to profitability associated with the ramp. This is a deal, the company is an auto supplier, a tier one and tier two auto supplier and we funded the loan alongside the broader Apollo platform. We actually have a first lien loan behind a small ADL. The company has benefited from you know attractive platforms, but you know as is sometimes the case, the management and the profitability, how profitable you can manage to that, that ramp has been impacted by a number of factors and the company has been in covenant breaches and is working through the clarity issues, which we are working to actively address with the other stakeholders.

Okay. Secondly I’d see in your presentation that in your investments on non-cruel status is Spotted Hawk which you mentioned during the presentation had a mark-up this quarter and is currently carried at fair value above its cost. But is there any opportunity – obviously, it must be performing better or its fair value would be above its cost. Is there any opportunity for that to return it to fully - to a cruel status?

Well that is - it's picking its interest. So its carried above its cost because that’s included the interest that’s been picked but hasn’t been recognized, and so it's still be back into the sort of the NAV. Obviously if the value is there, you could argue, you should be picking it and taking it in. There is another couple of million dollars above costs upon recognized pick-in’s interest before you would then be done marketing that up and marking up the common equity after that. But I think our thought would be it’s a more conservative approach obviously to keep it non-earning and effectively treated like that, like the equity position in the capital stack. So I would think of that – I would think of the mark-up on that as if it’s a market-up on equity.

Okay, alright great. In relation to the share repurchase program, if I read it correctly you have assorted of a portion of the share repurchase program that’s operating under 10 B-1, so it can operate during blackout periods. But is there also a discretionary portion of the share repurchase program that is subject to blackout, but can be more price sensitive to the price of the stock.

Yes. And the 10B-1 program can be set each quarter.

Yes so the 10 B-5 expired. So we have a – we put a 10 B-5 enduring blackout periods, right and then that has an expiration date on it and then we have an open market period basically you know obviously after we release today through a blackout date on close to quarter end where we will not be in the marketplace. And then the 10 B-5 will go into place if we decide to put one in.

Okay, but you're going to come out of the blackout period shortly after this release.

Yes, yes we come out within 24 hours of our release.

Right, so for the last month or most of the last month while unfortunately the market for equities it's been extremely weak, your discretionary purchase of the share repurchase program has not been able to operate.

The discretionary is not been operating, yes correct.

Okay, terrific! Thank you very much. I appreciate you taking my questions.

Sure.

Your next question comes from the line of Fin O'Shea with Wells Fargo Securities.

Hi guys, good afternoon. Thanks for taking my questions. A lot have been asked and answered of course. Just to extend on some of the questions for sales and syndication, can you remind us of the mechanics for a mid-cap led deal taking Reddy Ice for example that you solid down post quarter. Is there an affiliate that joint leader ranges this and it gets split up from there or does mid-cap sell to Apollo who would then sell again.

Okay. So I’m going to try not to get overly technical, but effectively the joint leader range on the deal tends to be mid-cap, because it’s the administrative agent. You know and that’s more of a title that has to do with the lender as opposed to somewhat here in the middle market as opposed to someone who’s like arranging a deal and selling all down. What happens is, when a deal is originated it's originated by Apollo, whether it’s at mid-cap or anywhere else. It's then allocated out based on allocation policy. If the deal is only going to mid-cap and AINV, its allocated to the two based on sort of their interest and the allocation policy. If it’s been syndicated to internal Apollo partiers, the story ends there, it’s just other people are added to that list as well. If there is a syndication opportunity beyond that, all the entities that want to take part in that syndication opportunity and are able to – I’ll touch on that in a second, can sign up to go long and then sell to a third party. So a lot of funds can’t, because they can’t originate alone in sale, but AINV can and mid-cap can. So when a syndication opportunity comes up they may split up that syndication opportunity to third parties. A lot of our loans are absorbed by – fully by Apollo Entities. In this particular case in Reddy Ice, AINV was able to take a disproportionate share of the syndication opportunity, because mid-cap you know had its capital tied up in other transactions at the same exact time. So it got a disproportion of opportunity. So it wasn’t like you know there was another 400 million of syndication on that deal. And another deal, it might have been [Audio Gap] but AINV has the option on any deal its part of to be part of – to be one of the entities that syndicate loans to third parties.

Very helpful. So the $100 million sold post quarter of the whole trench, is that going to be – how much of that would be AINV roughly out of the $20 million.

That was all AINV that whole amount is all, but you are only seeing numbers for AINV. So the overall deal was I think something like a $400 million deal, but the overall deal is $400 million. Effectively all of it was done by Apollo related entity except for the amount that was sold down by AINV you know post quarter.

Okay, very helpful, thank you. And then just a question on G&A. That ticked up this quarter I think to legal fees as said in the Q. You know generally your $4 million to $5 million, it seems last few years. As you go to market more senior first lien lower spread, should we anticipate the decline there you know assuming lower deal related expenses and so forth?

Yeah, the reason for the pick-up is more from some past securities that are in a trustee situation where there is litigation. But you would expect one for us when we do our loans to recovery some of the cost from our borrowers and as we are talking these pieces going forward, you would assume that. Our uptick is not related to the assets that we are putting on the books today. Its related to historical situations that we are funding you know to ultimately settle them.

Recognizing this quarter was a touch high, to the more senior asset strategy, what would be your target or expected G&A rate like 50 bips for example?

Yeah, I mean I think, you could say that. I don’t think we kind of factored it.

Yeah I don’t think our deal related costs are expected to change all that much. I mean your right and that the senior loans – we don’t obviously pay legal fees on deals that close, it’s part of what the borrower pays but, when you have enforcement activity or things like that, we would expect to have less enforcement activity but we have more loans. So – and in the grand scheme of things you know that expense line catches lots of things. It’s our exempted relief effort for example. You know like Greg said some litigation from sort of a well long gone deal, and so we always to try to squeeze it down, but I think it’s reasonable to sort of project it the same.

Sure, I’ll do one more if – thank you for that, and I’ll do one more if I may, perhaps a fun one. Do you have any update on AFFE, the progress for that ongoing effort?

I mean there was the exemptive relief filing for the industry and you know it will run its process. There is a waiting for comments etcetera and so it’s in that case scenario of first half of next year issue.

Very well, thanks for taking my questions.

And our final question is a follow-up question from Chris York from JMP Securities.

Hey guys, just a quick follow-up here. What percentage of the $1.1 billion of loans originated after July 1 ‘16 has effective voting control?

A voting control of the company or of the whole – you mean of the debt trench?

Yes, of the debt trench.

Well of the 62%, you know that I presume it’s the co-investment order. It would be all meaning Apollo and its affiliates have effective control, because that by definition we are going to be the only lender or the vast majority of the lender. The other 38%, we have to look at it. If history is any guide prior to that, it would be probably about half and half, where you know half of sort of really bought on the secondary market and that’s some of the stuff that Tanner was talking about, actually on the more liquid means and the second lien and the other half were done second lien loans as part of a club that we have voting control I wouldn’t say, but blocking right. So I don’t if that’s the equivalent control, but…

Yeah, that’s very helpful. So your obviously with the 62%, you guys will have 100% across the platform but the 50/50 is helpful in regards to the other 38%. So that was the number I was kind of looking for, so thank you for that.

And at this time there are no future questions. I would like to turn the floor back over to management.

Thank you. On behalf of our team, we’d like to thank you for your time today and your continued support. Pleased feel free to reach out to any of us if you have any questions. Have a good night.

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