MidCap Financial Investment Corporation (MFIC) Q4 2019 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Apollo Investment Corporation's Earnings Conference Call for the period ended March 31, 2019. 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 also 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 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 financial results for the quarter, followed by an update on the execution of our investment strategy. I will then discuss a couple of business highlights. Following my remarks, Tanner will discuss the market environment on fourth quarter investment activity and will provide an update on credit quality. Greg will then review our financial results in greater detail. We will then open the call to questions. Let me begin with an overview of our financial results for the March quarter. Net investment income for the quarter was $0.47 per share. Net investment income benefited from strong net origination activity and the impact of the change in our incentive fee structure, which now incorporates realized and unrealized losses encouraged since April 1, 2018, we believe the change in our fee structure enhances the alignment of interests of the manager with the interest of the shareholders. Greg will discuss the incentive fee calculation in greater detail later during the call. Net asset value per share was $19.06 at the end of the period, a $0.03 increase quarter-over-quarter. The increase in NAV per share was driven by earnings in excess of a dividend as well as the accretive impact of stock buybacks partially offset by a slice appreciation the portfolio. As a reminder, a year ago in April 2018, the Company’s Board of Directors approved the reduction in our asset coverage requirement pursuing to the small business credit availability act. Accordingly, effective April 4, 2019, our minimum asset coverage ratio was reduced from 200% to 150%, which substantially allows us to increase our leverage above one-time equity. As discussed in the past, we’re targeting during periods of normal market conditions a debt to equity range of 1.25 times to 1.4 times. We believe the ability to increase our leverage provide the unique opportunity to AINV given the robust volume of senior first lien floating rate loans originated by Apollo Direct Origination Platform. We intend to generally use the incremental investment capacity to invest in first lien floating rate loans with leverage of 4 to 5.5 times and with spreads of 500 to 700 basis points. Because of reduction in our minimum asset coverage ratio became effective last month we’ve accelerated the origination of new loans with this target profile. On that note, I’d like to take a moment to briefly highlight some of the progress we’ve made over the past year which we believe shows the improvement in the risk profile and portfolio. On the origination front, investment activity has focused on first lien floating rate loans sourced by the Apollo Direct Origination Platform. At the end of March, first lien loans represented 65% of the corporate lending portfolio up from 41% a year ago. The weighted average assets spread in the corporate lending portfolio decreased to 713 basis points down from 814 basis points a year ago. The floating rate portion of the portfolio increased to a 100% compared to 92% a year ago. We also continue to take advantage of our ability to co-invest with other funds and entities managed by Apollo which allows us to participate in larger deals which are typically less competitive which allows us to maintain relatively small hold sizes on our balance sheet. Our ability to co-invest with other Apollo entities continues to be in advantage allowing us to compete with other major market participants. Investments may pursuant to our co-investment order increased to 63% on the corporate lending portfolio at the end of March up from 38% a year ago. We continue to deploy capital on life sciences' assets to asset-based lending in lender finance, areas with significant barriers to entry in which midcap financial has expertise. These three initiatives represent 13.5% of the portfolio at the end of March up from 7.7% a year ago. We also continue to proactively manage position sides and concentration risk. The average corporate borrower exposure has decreased to $15.5 million down from $18.5 million a year ago. Regarding Merx, as we outlined on previous calls, our plan includes reducing our exposure to Merx to 10% to 15% of the total portfolio. During the quarter, Merx priced its second aircraft securitization allowing us to repay AINV approximately $31 million on a net basis reducing AINV’s investment in Merx from $456 million to $425 million, bringing it from 19.7% of the portfolio down to 17.7% of the portfolio. Additionally, we continue to make progress reducing our exposure to non-core assets including exiting all of our structured credit exposure. We remain focused on prudently exiting or remaining non-core position. Non-core and legacy assets represent 19% of the portfolio at the end of March, down from 23% a year ago. In short, we believe the portfolio today is much better positioned than it was a year ago. Moving on the equity market present us with what we believe as an attractive opportunity to repurchase our stocks. We consider stock buybacks below NAV to be component of our plan to deliver value to our shareholders. We typically repurchase shares during both open window periods and we generally allocate a portion of our authorization to a 10b5-1 plan, which allows us to repurchase stock during blackout periods. Since the inception of our share repurchase program and through the end of March, we have repurchased $170.9 million or 12.7% of initial shares outstanding, which has added approximately $0.57 to NAV per share. Since the end of the quarter, we had continued to repurchase stock. The Company currently has approximately $78.4 million available for stock repurchases under the current organization. We intend to continue to repurchase our stocks should it continue to trade at a meaningful discount to NAV. Turning to our distribution, the board has approved a $0.45 per share distribution to shareholders of record as of June 28, 2019. With that, I’ll turn the call over to Tanner to discuss the market environment and our investment activities for the course.

Thanks Howard. Beginning with the current market environment, the credit margins have largely recovered from the volatility seen in December. Secondary prices in the broadly syndicated loan markets have recovered despite a continuation of retail loan outflows. The private debt lending market remains highly competitive due to the tremendous amount of capital raised over the last few years as well as the significant decrease in new loan issuance during the quarter. Away from the traditional sponsor-backed corporate lending, our specialty areas life sciences, asset-based lending and lender finance are generally less competitive and accounted for 13.5% of the portfolio at the end of March. During the quarter, investment activity focused on senior first lien floating rate corporate loans sourced by the Apollo Direct Origination Platform. New investment commitments and fundings were $228 million and a $164 million respectively. New commitments were comprised entirely as first lien floating rate loans. These new commitments were across 19 portfolio companies for an average commitment size of $12 million. The weighted average spread over LIBOR of these new commitments was 585 basis points, which is within our target range of 500 to 700 basis points for the incremental assets. The net leverage for the new commitments was 3.9 times just below our target range of 4 to 5.5 times. Lastly 94% of these new commitments were made pursuant to our co-investment order. Solid volatility in the December quarter repayment and access were more modest. Sales totaled $11 million and repayments totaled $34 million for total assets of $45 million resulting in net funded investment activity of a $120 million. Sales included the exit of our remaining investment in craft 2015-2 eliminating our exposure to restructured credit investments one of our non-core strategies. We also received a partial repayment from Crown Automotive during the period, an investment on non-accrual. In addition, net fundings on revolvers totaled $9 million and we received a net repayment of $31 million from Merx. Let me provide a brief update on our first quarter and investment activity. Since the end of the quarter, net portfolio growth has been an excess of a $100 million, increasing our net leverage ratio to over 0.9 times as of today. And with our current pipeline, we expect to be in the mid-90s by the end of the quarter. Now let me spend a few minutes discussing overall credit quality. No investments were placed on non-accrual status during the period. Investments from non-accrual decreased due to the partial repayment from Crown Automotive. At the end of March, investments from non-accrual status represented 2.4% of the portfolio at fair value, down from 2.8% last quarter and 2.9% at cost down, from 3.4% the last quarter. Our continued efforts to reduce the risk profile of our portfolio are borne out by the improvement in our credit metrics. The weighted average net leverage of our investments decreased to 5.4 times down some 5.5 times. But as I mentioned earlier, net leverage on new commitments was 3.9 times during the quarter. The average interest coverage increased from 2.3 times to 2.4 times. The weighted average attachment point decreased to 1.9 times down from 2.1 times. With that, I will now turn the call over to Greg, who will discuss the financial performance for the quarter.

Thank you, Tanner. Before we discuss our financial performance, I'd like to mention that we provide our quarterly financial supplements to provide you with more detail about the corporate lending portfolio, which we think will help you better evaluate the performance and execution of our plan to reduce risk within our portfolio. I'd also like to remind you that Merx's financial statements are included as an exhibit to our 10-K. You will note that Merx financial statements include the consolidation of the assets from two securitizations that were previously held with investments on the balance sheet. Moving on our core portfolio grew by approximately $100 million, or 6% quarter-over-quarter and by approximately 216 million or 12% year-over-year, as we continue to execute on our portfolio repositioning strategy, with the passage of the small credit availability actually. Our core portfolio, which includes corporate lending positions and Merx represented 81% of the total portfolio at the end of March, 63% in corporate lending, and 18% in Merx, 65% of the corporate lending portfolio is first lien, up from 41% a year ago. 100% of the corporate lending book is floating rate. Weighted average yields on the corporate lending portfolio is 10.3, down slightly quarter-over-quarter. Our net investment income was $0.47 per share for the quarter compared to $0.45 per share for the December quarter. The increase was reflective of our investing cadence during the quarter. Net leverage at the end of March was 0.83 times compared 0.74 times at the end of December. Our average leverage or the quarter was 0.78 times, up from 0.71 times during the December quarter. NAV for the quarter rose to 19.06 versus 19.03 at the end of December, as we added $0.47 of net investment income against a dividend of $0.45 per share, plus a $0.01 per share increase from the impact of our share repurchase activity offset slightly by portfolio depreciation. Turning to the income statement, total investment income was 61.4 million compared to 64 million for the December quarter, as prepayment and fee income were down quarter-over-quarter. Fee income which includes bridge fees declined by 2.6 million and prepayment income declined by 2 million. Net expenses were 28.9 million, down from 32.6 million in the prior quarter due primarily to lower incentive fees offset partially by an increase in interest expense as a result of the growth from the portfolios to over 2.4 billion at the end of March. As a reminder, a year ago, we announced that the calculations the incentive fees -- our incentives had been revised to include a total return requirement with a rolling 12 quarter look back beginning April 1, 2018. The incentive fee calculation with the total return provision became effective on January 1, 2019. For the period between April 1, 2018, through December 31, 2018, the incentive fee was a flat 16% and did not include the total return feature. As a result of net losses both realized and unrealized incurred since April 1, 2018, no incentive fees were paid during the March quarter. Our weighted average interest rate on the average debt was 5.4% flat quarter-over-quarter. Going forward as we grow our portfolio, we expect the weighted average percentage decrease given the higher utilization of our lower cost revolving credit facility. Regarding our liquidity and liability structure, we added an additional $50 million to our revolving credit facility during the quarter which now gives one of the industry’s largest $1.6 trillion up $450 million with our existing manager group extended their commitment to our facility while at the same time we’ve added five new banks to the bank's group. With the additional funding commitments, we now have enough capital to operate the higher end of our leverage range. The additional leverage capacity is reflected of the benefit AINV received from being part of the Apollo platform. Lastly regarding stock buybacks, during the quarter, we repurchased 311,000 shares at an average price of $15.38 for a total cost of $4.8 million. And since quarter end and through yesterday, we have repurchased an additional 45,000 shares at an average price of $15.23 for a total cost of $700,000. Since the exception of the share purchase program which we gained in 2015, we have purchased $10 million or 12.8% of our shares outstanding for a total cost of a $172 million. The Company now has approximately $78 million available for stock repurchases. This concludes our prepared remarks, operator, and please open the call for questions.

[Operator Instructions] Our first question is from the line of Kyle Joseph from Jeffries.

Hey good afternoon and thanks for taking my question. Just wanted to talk about sort of quarter to-date. It sounds like the investment activity has remained strong and you guys have a solid pipeline. Can you give us an update on sort of repayment activity for the quarter end? Is that sort of normalized after the volatility I guess at the end of last year?

What we -- I mean, we have -- we ended the quarter around 0.8 to 0.83 times and we’re around 0.9 right now and expect to be about in the mid 90s by the end of the quarter, so that’s net. Our origination levels are good probably a little bit higher than this quarter. And so, the repayments are still probably lower than they will be on average to whole cycle, but more than this past quarter. So, it's still probably little bit muted.

And I think since you've last spoke, people's expectations for interest rates have changed a bit. Could you give us a sense in terms of how you’re thinking about that both from an asset and liability perspective any changes to strategy?

No, I mean at this point our loans are floating rate. All our incremental debt is going to be floating rate. And so, we’re going to -- we do have fixed rate debt and overtime obviously it changes the calculus each time interest rate may go down with regard to any of our fixed rates and that maybe callable. So that’s sort of the only place, but it won’t change our strategy and we’re trying to sort of eliminate the interest rate risk. Obviously, when interest rates go down, the return on equity goes down a little bit. But as we lever up more, that gets muted as well.

Yes, and I’d add one thing there Kyle where possible, we try to add back LIBOR floors to our loans, which would help to mitigate some of that decline, a feature that had started to leave the market as LIBOR had rallied or they increased, but something we're trying to add back to help as mitigate to the potential interest rate declines.

Sure, thanks. That's helpful. Then last one for me, just in terms of credit. Obviously, you guys. NPAs were stable in the quarter of a teen give us an update on sort of revenue and EBITDA trends you're seeing from your portfolio companies? And any changes you've seen this year?

Yes, sure. So we try to take a sample size and I think as we've discussed in the past, we do our best to try to get at an organic number. But realistically with the level of acquisition activity and the underlying rewards, sometimes, it's tough to disaggregate. I think that the holistic comment is that on an absolute basis, revenue and EBITDA growth were high-single-digits. If we disaggregate to what's or another kind of immediate adjusted basis, if we try to disaggregate to what is organic, that certainly less than that number, but still firmly positive. I think one takeaway and it might have to do with the fact that maybe we're lacking some of these cost issues, from a year-on-year basis, as we saw less margin pressure than we had and more recent quarters. Probably speaking still so tough, whether it be wages, commodity costs, but the level of pressure at certain of those of our underlying investments, some moderation there, which I think has to do with, if I'm to speculate, some lacking of the more difficult comp.

And our next question is line of Chris York from JMP Securities.

Good afternoon, guys, and thanks for taking my questions. So I just want to begin with couple of questions on life sciences lending. So Howard, it does seem to that mid-cap has been quite active in the origination of life sciences loans year-to-date. And that the opportunity set, as you said in prepared remarks, appears healthy and attractive because of their barriers. So the question I have is about portfolio management and maybe the max size today you would want life sciences loans to represent as a percentage of the total portfolio?

Well, I mean, our view with sort of life science space is that, the key to keeping the credit performance pristine in that asset category, which it has been for us over time, and for some people we would describe as our most sort of direct competitors. It is to be circumspect about going too aggressively into the capital structure, which means that the markets only so big, right. So, the opportunity to add loans in this space is probably not even as large as the percentage of the portfolio that we would be comfortable with it being. In addition to the fact that obviously, whatever loan we do make a portion, if they're even bigger loans parts of Apollo could potentially be part of them as well. So, what that all leads to is the, what we have sort of said before is for the BDC, for AINV, we like the asset base products and the life sciences products to be 25% to 33% of our portfolio. If we broke that down, we would think life sciences would be 10 to probably 12% to 15%. We'd be very happy if we got there, we're moving towards a $3 billion portfolio. So that would be a $300 million life sciences portfolio. That, it would be -- I'd be hard-pressed to see the market getting big enough for us to be able to get much more than that anyway, does that all put together?

So I knew you had to 20 to 25 on asset based kind of portfolio percentage basis. So the 10 to 12 is very helpful as and then the 300 million is very helpful as well. And then I mean, I just kind of following up on that from the competitive environment for life sciences. They're having your entrants and I am "newer in that area." Has that affected your business or maybe your opportunity set because this partner with one of those vendors recently?

Well, first of all, I'm not even sure what to do where interests are because our competition for these deals is not always just the people we're directly competing with on debt. We're, sometimes competing with additional equity round, they were certainly competing with like on a very aggressive debt lenders in lieu of equity. So someone comes to us, and they're either going to do debt or they're going to do a preferred, and so as part of a broader capital raise. So there are more new entrants in terms of providing capital, these type of companies and just ones that are doing venture debt as we described it. That said, if you look at the market today versus the market 3 or 4 years ago, there are more people in the market. And so there is some more competition. The combination I think I'm having been in the market for a long time. So having established have a really good set of relationships so we see our share flow combined with the fact that we have a couple hours and equivalent, which other people don't have, which is one. We can do large commitments, because of the combined balance sheets of call available. And two probably more importantly, we can provide revolvers to company which has some revenue even if they're not profitable, which allows us to sort of grow with these companies as a revenue base growth, there's a lot of people can do provides us with a little bit of protection versus that competition. But for sure, I need people in the market and if they're good and if they're good, it's actually not as bad as if they're not good. Because what they're not good early, they often do things that don't make sense and moves the market. But there is more competition there but it hasn't, I wouldn't say it's changed things in 90-day.

Great color. Just to be clear from my side, I was speaking of Blackstone and then SVP newer entrants?

SVP has been there forever, right? I mean, we do a lot of business with them.

And now organ genesis was once so, okay. And then last one a little bit different. It's on fundraising. So, are you guys currently fundraising or considering fundraising in any complimentary direct lending strategies either SMA or private funds today as a manager that could help benefit AINV via co-investment?

Not only or we have been. I mean and we haven't sort of done in very aggressive about sort of publicizing sort of the size of our direct origination platform across the board. But and we actually probably will release coming soon. But we raised billions of dollars of SMAs that invest in the same type of assets that are in -- that are type of investments is that AINV is co-invest again. So it enables and continued to sort of take whatever seismic sensitivity in $20 million-$25 million of something that we are speaking for as a team for $250 million a cubic diversified across the board. So we have raised over the past 18 months significant SMAs and intend to continue to be able to increase our serve ability that’s in margin transactions.

Got it very helpful and the most of my question I heard some SMAs were being raised and I just hadn’t seen any cross releases like some other direct lender sales so…

Yes we talked about it because we seem to much especially because we have and we just figure we’ve been business in a mid cap space right so mid cap has $11 billion of commitment under management itself so people know we have this watch present. But we had entered through – public transaction we will improve that in the near future.

And our next question is coming from Rick Shane from JP Morgan.

Hey guys thanks for taking my question this afternoon. Just wanted to talk about non-accruals a little bit, they were down quarter-over-quarter on a fair value and cost basis. Curious what moved there? And how do you feel about the migration of the non-accruals over the next three to six months?

Yes, so that movement down, obviously, the denominator is changing a little. Bit but in terms of absolute levels we're just the partial repayment that we received on sound automotive. As it relates to continuing movement, top to speculate still a pretty like we talked about, a pretty benign economic environment but difficult to speculate there. Obviously, it will go without saying that these are the names that we’re most focused on and trying to bring to a resolution such that we can reinvest in yielding assets.

And our next question is from line of Robert Dodd from Raymond James.

Hi guys, if I can ask a question kind of about competition. When we look at the incremental spreads on first lien and then, we see 585 this quarter I mean its 529 last and 639 in the one before that. Can you give us any color on how much does that sound trend is competition versus maybe incremental de-risking? Obviously, I mean your cash flow point and to look forward next quarter which is lower than your average and certainly the last couple of quarters of incremental assets at on given on the first lien insight. So, I mean, how much of that spread movement is deliberately de-risking versus market competition?

So, it’s probably not either. This is basically the dynamic it’s until April 4th of this year, we were not able to go over one to one lever so the screen with which we have a long term view of certain level of that that we need to do between 500 and 700. As we got closer to April and knew that we were not going to sort of run up against the limit, we basically increased the origination funnel to include all the things in that range as opposed to just sort of the higher end of the range if you will. So, already it is just more of the origination with slightly lower end of the range, which is to say that you would expect over the next quarters for that to level off in this area in this level. So wasn't really the result, the market really hasn't changed with regard to what we're doing what we're choosing to do at the BDC is a little different, but it's actually not different than what the platform is doing overall. That's why you're seeing, that's why you saw good growth this quarter. That's why we're telling you that that already in this current quarter, we're seeing the growth and we expect to continue to see it because now we're not as worried about the ceiling.

Got it. When, I'm just kind of high on that, I mean, with the attachment point, then if that that was when you towards of the lower end, will you open up to more or lower ends in that 500 to 700 range, would it be fair to say that obviously is opening up potentially low attachment points as well. We see on average and there's a lot of other dynamics, I realize, the attachment may be lower and obviously that implies incremental de-risking your portfolio as well?

Sure, that's what you should see, you should see that obviously, the average hold size you have already seen, that's de-risking the portfolio, because that's granularity, but also the credit metrics. Putting interest rates aside in terms of interest average, the average, leverage, the percent of first lien all of those should get incrementally better.

And our next question is line of Christopher Testa from National Securities.

HI, good evening, guys. Thanks for taking my questions. Last quarter, I know that the floated prices and volatility in the liquid markets had led now to decline and NAV was up just very modestly, although you're non-accrual increase. So, where there are some companies that have some idiosyncratic issues that you marked down in a significant way during the quarter?

No, last quarter. Most of our down last quarter was not from the liquid markets. It was not.

Okay.

Right, we probably have a book of in second lien, primarily second lien, okay. Say that 300 million of our book that basically was impacted by the drop on in the syndicated market, syndicated market was probably about 550 bps. We were off less than 200 bps in our kind of a closed market, per se, that rebounded somewhat this quarter, but not to the extent that you would say, and that's really because of those second lien. And there was one on investing in there that was marked down from let say 94 to 91 during the quarter that impacted the quarter-over-quarter comp. And then if you go back, you have to remember that the September quarter was also very strong in valuations. So and we have not recovered to that extent.

Got it. Okay. Now, that's helpful. And given that you guys, obviously have the ability to go towards your target, close to almost 1.5 times, if you look at the portfolio today, is the current composition where you'd be comfortable at that level? Or should we assume that sort of the 500 to 700 paper comprises at least, I don't know, call it 75% of the portfolio before you get towards the top end of the leverage range?

No, right, okay. So, the simple thing is to say, to go from, 90 to 140 would be all in similar assets to what you're seeing new this quarter. So that takes us from whatever it is 2.6 today to something like 3.1 or 3.2, 600 million incremental assets, all in those number. In addition, though, we would hope is as we're climbing that ladder, we're getting another sort of -- we're getting our core assets to shrink on an absolute basis, and Merx to modestly shrink on an absolute basis. And so then there's also that, so then when the picture came through, at the end of the day. You'd have 10% to 15% Merx, you'd have markedly less core assets. And then you'd have this corporate portfolio look like it looks today in terms of metrics and things like that. But it's obviously much bigger percentage of the data.

And the interest little bit on Merx. You guys have done a great job with diversifying the portfolio more and in response to Chris York's question earlier, you said you're raising more money in SME, you're increasing your co-invisibility. But then you have Merx, you have a single name, that's, you're targeting 10% to 15% of the portfolio. And I understand it's a good company and its done great. But I mean, just optical do you think that that's something that could potentially weigh on valuation, and it's something that you might revisit to maybe have as a smaller portion of the portfolio going forward?

Well, so as we talked about at last call, right. We just, we made a couple of changes in order to sort of be able to take advantage of the value that's been created there, but also address your question, because there's no question that that once we moved off our non-core assets. That's the next question. Okay. You have this one concentrated position, how do I assess that risk? And, so we're aware of that, it was a 20%, we targeted 10 to 15. But ultimately, it could be less, but we don't want to throw the baby out with the bathwater. So for us, what we focused on is using the power of that platform to raise third party money, build the servicing capabilities that Merx, which hopefully will retain a reasonable portion of the income, but shrink the capital there. So I think the answer is yes, like we're not so focused on valuation we're focused on some sort of the quality and we'll see we'll have the luxury of worrying about sort of what Mark says our valuation when we improve some of the other things. But ultimately in the long-term we have our eye on and our hope is to monetize the value of Merx raising third-party money in combination with Apollo getting feed off that creating a stronger servicing platform getting feed off that. And then having the asset level there be small enough so nobody asked that question again.

And last one, if I may, just I know you had mentioned that going forward, you guys are looking for really only the floating rate data just basically not taking interest rate risk and credit risk. Aside from the obvious on the revolver, it is doing middle market certification, something you guys are evaluating given the largely personal first lien focus and obviously the branding of a platform has?

Yes. I mean, we're certainly aware. I mean, we are one of sort of the larger issue is a CLO that may tap into these exact assets that are going there. So we definitely have exactly the benchmark for what would work in terms of what the alternatives are. So, it's definitely something we're aware of, I wouldn't necessarily expect in a short time only because we have on drawn that capacity which is not vastly different in cost. And certainly we would have on us line costs related to what it is nominally cheaper to do the CLO a little higher leverage there's something thrive all that much earning power if any, because of our unused commitments we have. So, we are -- it's sort of something we have, we do issues CLOs at often the platform, which is sort of people can look at and see what they can expect us execute, added execute. Basically if they had the best execution of middle market CLOs so we feel like we have that available first.

[Operator Instructions] Our next question comes from the line of Casey Alexander from Compass Point.

Yes, hi good afternoon. Based upon you’re know to prior losses it’s just looking straight forward how long would the total return requirement eliminate incentive fees going forward from this quarter?

Well, I think it’s a current -- you just take a look at where we are. I mean, you can kind of take a look at this, Casey, looking at from 41 forward. You can look at the accumulated losses from that, I think they’re about $55 million. You can multiply that kind of the incentive rate. You can get a sense of what our run weight is, so our earnings are about $30 million a quarter so that without any losses. So if you kind of take that versus a $55 million number that’s kind of carrying forward, we will kind of in our next quarter have some benefit from that carryover via the incentive fee credit essentially gives a [bit of] losses, but then probably move out of that into the third quarter. So, we have $55 million and 20% of that is $11 million, $6 million or $7 million of that was credited in the first quarter. So there’s still a performance – if nothing else changes this quarter. If there is another four -- I don’t know what it is $4 million to $4.5 million of benefit in the second quarter.

Okay that’s what I was looking for. Thank you. If I'm hearing right, as it relates to the oil, energy and tanker assets, there was no movement in those other than regular mark-to-market. There were no exits of any of those non-core assets.

There is a very small dividend on one of them, that’s correct. We hope to have more meaningful progress in the next few quarters. We’re still very focused on it and feel like -- I mean, we’re hopeful to make real progress over the next couple of quarters.

And our next question is from the line of Fin O'Shea from Wells Fargo.

Hi guys, good afternoon, thanks for taking my questions. Just first one on, now we have more accelerated shift into more senior assets, seemingly pretty straight forward, lower spread, lower leverage. Can you kind of talk about the opposite, the higher spread markets or segment? Are you completely kind of moving on for the time being? Or are you maintaining some form of presence in those higher risk areas?

Yes, look, I mean we’re not out of it forever. We think there’s an investment strategy for AINV that requires this type of execution for an extended period of time. So, investors get a sense of stability. The risk reward proposition in that market is not appealing to us right now because even though yield might even held up there, the credit metrics are just so out of whack. So, we see those deals all the time, definitely on the platform, there are occasionally times when we make choices. And they're even sort of some that we would do, at the BDC, if we decided to win them and do them and do [about] second lien on a really stable company that looks really solid. So, I'd say we would never do it. But, there isn't that much of a need in the sponsor world to sort of be really active in that space, in order to sort of continue to see those opportunities, because in almost every case where someone's contemplating a second lien, they're also contemplating a unit tranche. And so, they're looking at financing options across those deals. So, you should expect to not see very much of it, but -- I wouldn't be shocked, if you saw one at some points or and then as we stabilize and as the market changes, we certainly think, it could potentially fit the opportunity, but first we want to sort of set the table very solidly before we get to that point.

Thank you for the color there and then just one more on the BDC and the platform. So, you have a pretty good array of vehicles under the direct lending platform and, we can all see the world's going or you have many of your peers are going toward permanent capital, so that, is it something to think about as to your hopes or intentions to not bring any private funds vehicles into Apollo into the BDC. Should we kind of think of look to something like that down the line?

You need as part of as like a JV of the BDC.

To merge in to the BDC.

Yes, no, I mean, I don't think so. Obviously anything that may make sense down the road that's opportunistic. We would potentially do but nothing that seems imminent certainly or even sort of medium term. No, I mean, never say never.

And your last question is a follow-up from Robert Dodd from Raymond James.

Hi, just actually literally follow-up on the last one. I mean -- obviously, you mentioned the average bar of exposure is [indiscernible], you have averaged on the corporate debt side. Now it's about a 1% position, it was about a one and a half a year ago. With the SMA capital et cetera, you've got more pockets so you can put that into as well. So potentially bringing down even further and adding more diversity and, as you said, another layer to -- another level to de-risk. So what is your target, if you have one on kind of average position size long term for AINV?

Yes, you alluded to the 1.5 going to the 1, I think the 1% is a good operating assumption. Clearly, as we hopefully continue to post positive net origination and we approach that $3 billion number that Howard alluded to earlier, that naturally will mean slightly bigger hold sizes, but same kind of percentage and I think directionally that's the right idea. The other thing, just to expand on for a second is as you could probably appreciate in this type of market certainty to the counterparty that you're interfacing with is of paramount importance. So we don't look at the incremental capital raise as necessarily cannibalizing the AIC opportunity. We more broadly look to that gives us the opportunity to commit the bigger deals provide, that much more certainty, and they're comfortable, especially because AIC at that 1% level is not a number that would overwhelm the type of availability such that we think of it is as additive.

And I'll now turn the call back over to management for closing remarks.

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

Ladies and gentlemen, this does conclude our conference call for today. We thank you greatly for it. You may now disconnect.