MidCap Financial Investment Corporation 8.00% Notes due 2028 (MFICL) Q2 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to Apollo Investment Corporation's Second Quarter 2012 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Jim Zelter, Chief Executive Officer of Apollo Investment Corporation. Mr. Zelter, you may begin your conference.

Thank you, and good morning, everyone. I'm joined today by Patrick Dalton, Apollo Investment Corporation's President and Chief Operating Officer; Richard Peteka, our Chief Financial Officer; and Elizabeth Besen, our new Investor Relations Manager. Elizabeth, before we begin, would you start off by disclosing some general conference call information and include the comments about forward-looking statements?

Thanks, Jim. 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 and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these statements and projections. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.apolloic.com or call us at (212) 515-3450. At this time, I'd like to turn the call back to our Chief Executive Officer, Jim Zelter.

Thank you, Elizabeth. As you've seen, yesterday evening, we issued our second quarter earnings press release and filed our quarterly form 10-Q with the Securities and Exchange Commission. I will begin my remarks with a brief review of the market environment during the quarter. I'll then provide some portfolio highlights for the quarter and discuss our capital position. Next, Rich will discuss our quarterly results, followed by Patrick who will discuss changes to our portfolio during the quarter in greater detail. We will then open the call to questions. During the quarter that ended September 30, 2011, we believe investors became increasingly risk-averse given the escalating sovereign debt crisis in Europe and the persistent worries about the U.S. economy. S&P's downgrade of the U.S. also weighed on the capital markets. For the period, major U.S. equity indexes fell between 12% and 14%, volatility rose sharply as the VIX more than doubled. With increased risk-aversion, debt spreads widened particularly for high yield. Given this uncertainty and volatility, investors appear to become increasingly defensive and sought less risky assets, as was evidenced by rising gold prices and falling treasury yields. In addition, there was a notable behaviorable change by some banks as they've began to derisk in advance of the implementation of Basel III and Dodd-Frank, putting additional pressure on certain asset classes. As a reminder, our portfolio of investments consists in part of larger companies, some of which are high yield. As a result, we believe our portfolio is relatively more exposed to market volatility than the other BDCs that invest primarily in the mezzanine market or in smaller companies. With an uncertain backdrop and increased risk aversion during the quarter, high-yield bond issuance fell sharply to $23 billion, a decline of 71% from the prior quarter. This was the lowest quarterly issuance level since the quarter ending March 31, 2009, and the quarter also saw continued weak demand with outflows from high-yield funds $443 million during the period. The BofA Merrill Lynch CCC index rose 472 basis points from June 30 to September 30, highlighting the bearish tone in the market, and the unlevered price return for the index was negative 15.8% for the quarter. Accordingly, these technical macroeconomic factors contributed significantly to a 17% decrease in the NAV per share of Apollo Investment Corporation for the quarter. As we stand here today, we believe that the vast majority of this decline is recoverable over time. Since the end of the quarter, the credit market has shown signs of improvement. From the end of September and through yesterday, the yield of the CCC index has declined 177 basis points and has an unlevered price return of 7.8%. In addition, high-yield fund flows have turned positive with October posting inflows of almost $6.7 billion. Given the significant market volatility, we believe that the recent rebound in the credit markets has had a positive impact to our NAV. We also remain cautiously optimistic that our overall portfolio will continue to perform well in the near term. Given the decline in our NAV, I'd like to talk -- take a minute to talk about what causes changes to NAV. First, it is important to distinguish NAV changes that result from market volatility and interest rate changes versus NAV changes caused by expected or actual credit impairment. As a reminder, a component of our core strategy is to invest in larger companies. While this allows us to maintain a liquid portfolio, it can also result in higher relative value in our portfolio. As we have since our IPO and in accordance with our Investment Company Act Of 1940 obligations, when market quotes are readily available and are deemed to represent fair value, we use them. Our balance sheet reflects our valuations, which are derived to what we believe is to be a rigorous process. As of September 30, slightly more than half of our investments on a cost basis were valued using broker quotes. We recognize the impact to our net asset value from the volatility associated with this strategy, but we believe that the long-term benefits of this strategy outweigh such volatility. We also believe that our strategy will provide long-term value to our shareholders. At this time, I'd like to go over some portfolio highlights for the quarter. We were very active investors during the September quarter. In total, we invested $403 million in 6 new and 8 existing portfolio companies through a combination of primary and secondary market purchases. We also sold select assets totaling $313 million during the quarter and received prepayments totaling $74 million. At September 30, our portfolio of investors' investments closed the quarter, totaling $2.83 billion measured at fair value -- fair market value. Patrick will discuss the changes to our investment portfolio during the quarter in greater detail. To complement our core strategy, we will continue to explore investment opportunities in other areas of lending that may be less volatile, and which, therefore, could reduce the volatility of our net asset value. We believe that the relatively long duration of our capital, especially in light of the backdrop of changes in the lending industry since the death of the crisis, is a competitive advantage that allows us to invest in a broader range of assets across cycles. In addition, as part of our portfolio optimization strategy, we have been focusing on investing in cash-based securities, increasing risk-adjusted returns when possible and reducing the overall amount -- average amount of PIK income. Before I turn the call over to Rich, I'd like to highlight in September, we issued an additional $45 million of senior secured notes in a private placement to new and existing lenders. As we've previously noted, we are focused on adding new long-term debt capital as we believe we will continue to have significant investment opportunities. The additional notes were divided into $29 million of new 5-year notes with a fixed interest rate of 5 7/8, and $16 million of new 7-year notes with a fixed interest rate of 6 1/4. We were pleased to raise this additional long-term capital as it further diversified our lender base and extended the duration of our liabilities. We were also pleased in September, Fitch affirmed our BBB long-term issuer default rating and our stable outlook. With that, Rich, why don't you review some of our financial highlights for the quarter?

Certainly. Thanks, Jim. I'll start off with some September 30 balance sheet highlights. As we noted earlier, our total investment portfolio had a fair market value of $2.83 billion, down from $3.12 billion at June 30, 2011. Our September 30 net assets totaled $1.59 billion with a net asset value per share of $8.12. This compares to net assets totaling $1.91 billion and a net asset value per share of $9.76 at June 30. The decrease in NAV for the quarter was driven primarily by the net unrealized depreciation on our investment portfolio. From the liability side of our balance sheet, we had $1.22 billion of total debt outstanding at September 30, down slightly from $1.25 billion at June 30. Based on our total net assets at September 30, the company's leverage ratio increased to 0.77:1 debt-to-equity from 0.65:1 at June 30. During the quarter, our investment in ATI, a for-profit education company, was placed on nonaccrual status. Accordingly, our portfolio of 69 companies now has 2 companies on nonaccrual status, the other being Grand Prix Holdings. At September 30, nonaccrual investments represent 0.2% of the fair value of our investment portfolio, which is 0% at June 30. On a cost basis, these investments represent 4.5% of our investment portfolio at September 30 versus 3.0% at June 30. As for our operating results, gross investment income for the September quarter totaled $94.0 million, a slight decrease from $94.6 million for the quarter ended June 30, but up from $91.5 million for the comparable September 2010 quarter. Expenses for the September 2011 quarter totaled $48.4 million. This compares to expenses of $46.9 million for the quarter ended June 30, and $41.3 million for the comparable September 2010 quarter. The sequential increase in expenses is primarily driven by higher interest expenses from a higher average outstanding debt balance during the quarter, together with a higher average cost of debt. Net investment income ultimately totaled $45.5 million or $0.23 per average share. This compares to $47.7 million or $0.24 per average share for the June 2011 quarter and $50.2 million or $0.26 per average share for the comparable September 2010 quarter. Also during the September quarter, we received proceeds from the sale of investments and prepayments totaling $387 million. Net realized losses totaled $20.2 million. These net losses were derived from exits of select investments, including from TL Acquisitions and FSC Holdings, partially offset by gains received from several sales, including DSI Renal and Pro Mach. These quarterly results compare to net realized losses of $45.9 million at the June 2011 quarter and net realized losses of $89.4 million at the September 2010 quarter. The portfolio has changed and net unrealized depreciation totaled $292.6 million for the quarter ended September 30. This compares to net unrealized depreciation of $1.7 million for the June 2011 quarter and net unrealized appreciation of $107.4 million for the comparable September 2010 quarter. Notable contributors to unrealized depreciation for the September 30, 2011 quarter included our investments in ATI Acquisition, AIC Credit Opportunity Fund, TL Acquisitions, Intelstat Bermuda and Ceridian, among others. Unrealized appreciation contributed for the quarter included our investments in PlayPower, Generation Brands, OVI Apparel Corp. [ph], Renal Advantage and Insight Pharmaceuticals, among others. In total, our quarterly operating results decreased net assets by $267.3 million or $1.36 per average share versus an increase of $0.1 million or $0.0 per average share for the June 2011 quarter and an increase of $68.2 million or $0.35 per average share for the comparable 2010 September quarter. Now let me turn the call over to our President and Chief Operating Officer, Patrick Dalton. Patrick?

Thank you, Rich. As Jim noted earlier, September 2011's quarter was active for us. We invested in 6 new and 8 existing portfolio companies. On a gross basis, these investments totaled $403 million. We also received $313 million of proceeds from select sales and $74 million from prepayments. During the quarter, we continued to execute on our portfolio optimization strategy as we redeployed proceeds from these investment sales into higher yielding assets. Let me take you through some of our specific portfolio activity. Investments were made in the following 6 new portfolio companies: Capsugel, Level 3 Communications, Field Air Corporation [ph], SRA International, TravelPort and U.S. Security Associates. Of these investments, some of the larger investments included $135 million of the senior unsecured mezzanine notes of U.S. Security Associates to support the acquisition of the company by Goldman Sachs Capital Partners. U.S. Security is a leading provider of high-quality customized security solutions for a diverse range of customers across multiple industries. We also invested $30 million in senior notes of SRA International. SRA is a leading provider of IT services and solutions to clients mainly in the federal government. Another $29 million was invested in the senior unsecured and senior floating rate notes of Travelport. Travelport operates a global distribution system to revise aggregation, search and transaction processing services in travel suppliers in online and traditional travel agents. Investments in existing portfolio companies were made in the following 8 names: Alliance Boots, AIC Credit Opportunity Fund, Avaya, Clearwire Communications, Exova, Insight Pharmaceuticals, Intelsat and TL Acquisitions. Of these names, some of the larger investments included $76 million in the senior notes of TL Acquisitions. Regarding this particular investment, we identified an opportunity to sell a more junior security, a discount, and purchase another more senior security, a similar discount, while moving higher up in the capital structure, which we expect will result in a better expected risk-adjusted return. TL Acquisitions is a leading global print and electronic publisher of textbooks, reference materials and other educational resources for higher education, professional training and library reference markets. Regarding Insight Pharmaceuticals, we invested in the recapitalization of the company as they made a strategic acquisition. Notable exits during the quarter included our investment in DSI Renal in conjunction with the sale of the company, which included an $11 million of subordinated debt and $31 million of equity. As a reminder, we made our original investment in DSI Renal in 2006, which ultimately went to a restructuring in early 2010, and we received both preferred and common equity positions in the reorganization. The closing of the sale of DSI Renal this quarter and the strategic acquire concludes our investment and results in a modestly positive IRR on our original investment in 2006. In addition, received a repayment of $8 million on our subordinated debt investment in Angelica, and a full repayment on our $10 million of subordinated debt with Babson-led CLO. Now let me go over some general portfolio statistics at September 30. We continue to be well-diversified by issuer and industry with 69 portfolio companies invested in 30 different industries. The company's total investment portfolio had a fair market value of $2.83 billion, which was comprised of 30% in senior secured loans, 60% in subordinated debt, 1% in preferred equity and 9% in common equity and warrants measured at fair value. Weighted average yield on our overall debt portfolio at our current cost at September 30, 2011, rose to 11.6% as compared to 11.1% at June 30. The weighted average yields on our subordinated debt and senior loan portfolios also rose to 12.6% and 9.4%, respectively, at September 30, 2011, versus 12.3% and 9.2%, respectively, at June 30, 2011. Since the initial public offering of Apollo Investment Corporation in April 2004 and through September 30, 2011, our invested capital has now totaled over $8.5 billion in 161 portfolio companies and transactions with more than 100 different financial sponsors. At September 30, weighted average EBITDA of our portfolio companies continues to exceed $250 million, and the weighted average cash interest coverage of the portfolio remains over 2x. The weighted average risk rating of our total portfolio was 2.4 at September 30, up slightly from 2.3 at June 30 measured at cost. This rated 2.0 measured at fair market value at September 30, 2011, which is unchanged from June 30, 2011. While our September 2011 quarter was an active one, we believe our investment pace will likely remain highly variable and market dependent. Given the continuing uncertainty surrounding the global economies, particularly in Europe, and to a lesser extent, here in the U.S., we believe that the frequency and the depth of market volatility will likely continue for at least the near-term. These types of market conditions could create substantial investment opportunities for Apollo Investment Corporation. We do recognize that our strategy of investing in larger companies comes at a cost of higher NAV volatility in the short run. But it also provides us with what we believe to be enhanced liquidity on our portfolio. We believe that over the long term, in a post Basel III and Dodd-Frank world, there'll be many new types of attractive investment opportunities, while turn of lending institutions like Apollo Investment Corporation expect -- we expect that there will be increasing demand for long-term capital to fill the void of the more traditional sources of capital, which will be forced exit. In closing, we again like to thank all our investors for your continued and long-term support and confidence in us. With that, operator, please open up the call to questions.

[Operator Instructions] Our first question comes from the line of Rick Shane of J.P. Morgan. Richard B. Shane - JP Morgan Chase & Co, Research Division: Really 2 things. One is that leverage has obviously crept up. And I would describe that I think liquidity is probably a little bit tighter than it's been, which presumably slows investment activity or at least net growth. Can you talk about in your -- in the current environment, your willingness to exit certain investments at losses in order to reduce your exposure to any future volatility in terms of high-yield pricing?

Rick, it's Patrick. Regarding our leverage, as you saw at the end of 2000 -- end of September, as Rich mentioned, we were 0.77x levered. Clearly, that was higher than it was in the previous quarter. Since then, and given some of the comments that Jim made about the recovery in the credit markets, our leverage is reduced from that level. So we are more capable and confident to deploy capital should those debt opportunities exist. We will be prudent about that. Our liquidity is available to us. However, even if liquidity does become somewhat constrained as you saw last quarter, we are active in our portfolio optimization strategy. There are really a few main goals with that strategy. Number one is to provide better credit and risk-adjusted returns, and going from one investment to another. If we can do that, as well as find higher yields, that's a great strategy for us. To talk of the dislocation, different asset classes have different levels of volatility. For example, the higher market was much more volatile than the second lien secured bank market. We were able to exit some of our second lien positions, which were lower yielding at higher dollar prices, and reinvest in some subordinated debt at lower dollar prices with higher returns for companies that we expect to be as well performing as each other. So we're going to -- as a relative value investor, in the quarter, for example, for the sales and exits we made -- of the purchases and exits we made in the quarter, still, the purchase assets at about 12.8% yield were selling assets at a 9.9% yield. So therefore, you see that the 11.1% to 11.6% weighted average yield increases. So that's good if we can do that. And we're going to be very market dependent. It's going to be about credit first. We don't like to take losses, but if we can take losses but expect that we're going to recover those in a swap of a different security, then that's a prudent decision that we will make. But we are taking all those variables into consideration as we continue our portfolio optimization strategy. Richard B. Shane - JP Morgan Chase & Co, Research Division: Patrick, one follow-up, too. Obviously, given the narrowing of spreads during the first part of the year as the portfolio recycled a little bit as there was a lot of refinance activity, the gap between NII and dividends started to widen out. The way we look at it, your portfolio growth is going to be pretty constrained over the next couple of quarters. How do you look at dividend in light of that wider gap right now?

This is Jim, let me answer it. For a general matter, we really don't give guidance on dividends, and we really look at dividends are part of a long-term strategy between the management and the board. Since the IPO, we've taken a much longer-term view, well over one year of -- or quarter-to-quarter on our dividends. And really any change in that policy will be communicated as appropriate. So we understand where we are and we feel comfortable in our current position.

And, Rick, just a comment on liquidity and constraints. We have debt capacity. We're fortunate where we've expanding our debt sources. So our NAV and our NAV process measurement, which we use third parties, there's a little bit of volatility so we're putting in there some cushion. But as we've mentioned, we are more available today or more willing today to invest, given sort of the recovery we've seen in the credit market. So now don't let the mark-to-market, the technical factors, presume that, that constrained liquidity permanently.

The next question comes from the line of John Stilmar of SunTrust.

Really quickly, just wanted to point out or ask a question, Patrick, TravelPort specifically, just looking at the mark, do you expect that to come to actually pay off at par? Because it looks like to me, you bought that at $0.60 on $1, and are those kind of the reflective of the opportunities that came to you during the quarter? And I look at that vis-a-vis stock repurchase. Obviously, you have a program in place, but if you're able to invest the capital at $0.60 on $1 for something that's yielding between 6% and 8%, that's a meaningfully accretive portfolio purchase. And I'm just wondering is that sort of an outside purchase or is that sort of more representative of some of the types of things that moved across in the public markets on a flow basis or how that kind of trade or other types of trades like it came to fruition?

John, I'll put some specifics around that. With the dislocation in the high yield market, we saw names of our portfolio, for example, First Data, which was trading at around par, go down as low as the mid-60s, now it's recovered to the mid-90s. There is significant swings. We can be opportunistic, hopefully, when it's down towards the lower part of that range and unlock some value if it goes up, or if we don't make a purchase of companies we don't believe we're going to be at par repayment at maturity. There are times that we're going to be more opportunistic. The yields, when you're buying a security in the 60s that might have a bit of 10% coupon, you're going to get significantly higher mid-teens if not high-teens level returns over time as those snap back. But the technical factors put a lot of weight on a lot of credits. Some are higher dated than others, some are lagging, some are leading, but the recovery across the high yield index you see is showing a lot of companies went significantly down because of the risk off trade, and many have recovered. And we want to be available and opportunistic on the downside of the cycle, and then capture the return and the benefits of a recovery. We're only making purchases in companies that we believe, over the long run, will pay us back at par.

Okay. And then, the second question with that. You identified in sort of your closing remarks, Patrick, about the structure itself being set up to benefit from what's an obvious trend in banks jettising (sic) [jettisoning] either types of businesses or types of companies for which they provided capital to in the past. And you layer on top of that changes that are coming from the structured market, specifically the CLOs. Can you talk about how you balance setting up AINV as a platform, let's call it in the next 18 to 24 months, to start to capitalize on those opportunities? Or is there really nothing that you can do structurally to change your business? And it's the market is coming to you, and you'll take the market when it comes to you and sort of make the best risk-adjusted decisions that point in time. Just wondering if there's any kind of structural change or how you're managing the business until the point in which those factors become a lot more revealing in the market. And then that's my last question.

Okay, John, that's a very difficult question. Jim and I will both comment on that. From my perspective, I always and we always have been looking at the world for how can we build a better AINV and how can we take advantage of market opportunities. There are many considerations on that. Obviously, we have our shareholders, our lenders, our independent Board of Directors. We have regulators. The regulatory environment, we're in constant dialogue and we have really good relationships there to help us to find the model. We think our model was set up in 1980 to create lending when others were not lending and we would like to continue that. We think that the Dodd-Frank and the Basel III outcomes are still uncertain. We think it will, based on what we believe are going to be the minimum requirements, will accrue our benefits. Having said that, we're not going to stay flat-footed and wait for the markets to come to us. We think they are coming to us. We did see some real structural change throughout last year when we were being called by Wall Street firms to back stop bridge commitments because they're concerned with holding loans if they can't sell them. That's a fairly new phenomenon, that's accrued to the benefit of us and our shareholders and some fee income, as well as getting access to good assets and doing due diligence. We are -- we do think that there will be other markets that have been orphaned. But we have to make sure that we can create an unlevered return and not put a cape to returns on leverage that has been yet to be defined, how it can be viewed by from a GAAP perspective or regulatory strains perspective. So we are in active dialogue, we think there will be opportunities, we're researching many opportunities to benefit the AINV shareholders. We think the alternative lending institutions like a business development company should be able to, and hopefully will be able to, take advantage of a change in the lending world.

And the only thing I would add, I think that's a great question because we, as management and the board, that's exactly what we're confronted with today. And we like and appreciate our model, but the backdrop of the leading environment has changed. As Patrick said, we will always have a major foot in the areas that we have done to date. But it's certainly an opportunity. And what gets us excited is about in a world that is dominated by liquidity and short-duration investor mentality, the duration of our capital is the advantage we've got to match up. It's a really competitive industry, so you can understand why I'm sort of loath to talk about some of those ideas right now. But we're using the breadth and the strength of the overall Apollo franchise to develop some of those, and we're eagerly looking forward to executing them.

The next question comes from the line of Jasper Burch of Macquarie.

I guess just 2 fronts. One, if you guys could just give a little bit more color on sort of, I guess, what your target leverage is. And also, the idea of taking advantage of market opportunities, how does that jive with your appetite, with your ability, with your liquidity, given that the best opportunities will probably come around when your leverage is the highest?

Jasper, our target leverage, we've been saying for years that our comfort level and the history, if you look at our leverage history, is between 0.5 and 0.75 to 0.8. And that's kind of where we've always managed Apollo Investment Corp. But you have to respect that not all of that's controllable, which is why we leave that 20% area of cushion because you could see swings in volatility. We're fortunate to have built a portfolio that includes liquidity that we can optimize and move to different assets where we can get a better yield or better risk-adjusted return or move higher up in the capital structure in a down economy. We also have the benefit of looking at -- seeing many different assets that we can buy or sell. In primary market, we want to make sure we're available to our customers if people look for our long-term capital to provide committed financing. So it's a dynamic approach. We think that knowing that the world is volatile, building a cushion is very prudent. Diversifying your lending sources is very prudent. But we can't, in talks of dislocation, move amongst different types of asset classes. For example, second liens, or high yields, or private mezz or private high yield, and get enhanced returns and improve even the credit quality of the investments. So it's not -- we're not sitting flat-footed in a dislocated market. And as you saw this quarter, we did improve the yields, very pleased with the performance of portfolio by and large. And we continue to look at that. As our leverage ratio is now decreased post quarter end. We have opened up some liquidity.

I'd also say that Patrick mentioned that we had a full repayment on our subordinated debt investment in the Babson-led CLO tranche. And that the subordinated debt portion in -- those are things we did 24, 36 months ago, that have turned out very -- to be smart investments. And I think you'll see us doing more of those in more buoyant markets when we can expand our footprint such that when markets are much more challenging, we're not forced to sell things.

Okay, that's helpful. And then drilling back into the portfolio rotation, or going forward really, portfolio rotation, I mean how much more juice do you think you really get out of the portfolio without earnings growth, without really expanding the portfolio? I mean you guys expandnded the yield by 50 bps in the quarter, which is obviously respectable. Do you still see similar opportunities in today's market to rotate the portfolio or is it really something we have to sit back and wait till there's dislocation in specific asset classes?

Jasper, we cannot predict what's going to happen tomorrow with perfect vision. However, we do stand ready in looking all the markets. We do think that there has been and there -- in this quarter, you've seen a dramatic snap back in the high yield market. We even can use that in a different way to benefit our company. So we look at optimization as always being available, that we do get repayments back from time to time when trade markets are robust because companies are bought and sold. But we can't give you a specific what's going to happen next quarter. I have to say that we stand ready, it's a dynamic decision. We're constantly looking at our NAV, we're constantly looking at our liquidity. We constantly want to be prudent with our liabilities and managing to a 1:1 leverage ratio in a dynamic market. But if we can find some new asset classes that are less volatile, we'll look at those as well. And we think that the walls are setting up to help us benefit down the road as the official lending sources are moving out of the marketplace.

And I guess today, is there a specific asset class that you're more bullish on or rotating into?

We've seen some benefits in the high yield market and we could sell some assets at some nice gains. And we think that we've seen some interesting primary market opportunities to deploy mezzanine wherein companies are looking to be purchased prior to year-end or close after year-end. So, but no deal is done until it's done. And so that's why we can never give guidance. A lot of work and due diligence and structuring and negotiating has to take place, but we're constantly monitoring on a daily basis our liquidity. And we're -- it's really a dollar allocation question for us. Where is the best dollar to us invest? Is it new dollars? Is it existing dollars or existing assets that we could sell and redeploy? And what are the implications of doing that? So it's a dynamic process, it's multidimensional, we work in a very close environment here with a small team of folks who make decisions on a realtime basis and continue to look for those benefits.

[Operator Instructions] Your next question comes from the line of Greg Mason of Stifel, Nicolaus. Greg Mason - Stifel, Nicolaus & Co., Inc., Research Division: Jim, in your prepared comments, you highlighted that we needed to make sure we took a look at movements and book value that were due to marks versus credit issues. And I wanted to see if you guys could give us a little more color on the $1.64 decline in book. How much of that you view was due to credit deterioration like ATI versus mark-to-market?

Listen, and these are always the hard ones to answer, we're -- our -- for the great thing aboust a BDC, it's a very transparent portfolio, you see it in our Qs and our Ks, I think we feel is the guidance that I gave about the direction. I think we feel very comfortable of our portfolio. We obviously had to talk about ATI, because that went a nonaccrual. But I would say the vast majority of that, as I've said before, is due to market movements. And as you guys had the great luxury of transparency, I'll let you decide name by name.

And Greg, we go through a very rigorous process. We use third parties to value the portfolio. For the ones that quotes are not available, that's a process, the ones acquired by third parties. So we can't suggest what it's going to look like in December. We did feel that in that last quarter, and we tried to recognize in our comments, the vast majority was from technical movements. Greg Mason - Stifel, Nicolaus & Co., Inc., Research Division: Okay, great. And then, Patrick, you gave us some new investments in your portfolio, but there were a couple that I don't see in the schedule of investments like Level 3, and I believe you mentioned Capsar [ph], if I got that correctly.

Capsugel. Greg Mason - Stifel, Nicolaus & Co., Inc., Research Division: Pardon?

Capsugel. Greg Mason - Stifel, Nicolaus & Co., Inc., Research Division: Capsugel. Where -- can you give us some comments on those new investments and if we're just missing them in the schedule of investments or why they are not there?

Well, absolutely. As I mentioned, the structural change in the bank market last year about us being called by Wall Street, investment banks, commercial banks, to backstop high-yield offerings that they are committed to. And the worst case scenario, we get a fee. Best case scenario, we actually get the asset at a rate that we're comfortable backstopping those loans. However, what does happen from time to time is a deal can get done, and it gets done at a rate that we're sort of indifferent on but we'll take it, but then the market actually has a real strong bid and that thing trades up a couple of points. We can capture some value at kind of what is the indifference point on yields. We can recycle that cap for something else to make some additional dollars. But that's just a -- we're not a trading shop, but that's just an opportunity that we'll take advantage of. We can redeploy that capital into more of our core of our business. And so, it didn't get done at the rate that we really wanted to get done because the markets were too robust, there's a lot of demand for that paper, it trades up to security, we can grab that security at a gain plus a fee. That's good business for us.

Your next question comes from the line of Jo Hawk of Wells Fargo.

Patrick, on the ATI deal, last quarter, both the senior and sub were slightly above -- carried above par. And now one quarter later, the sub debt's 95% of par and the senior's 66% written down. What happens within a BDC that you can have something within 90 days go from carrying above par to basically being written down to 0, at least in the case of the sub debt?

Sure. Joe, that was a very unique situation that happened to us, unfortunately. This company is in the for-profit education space. I mean clearly, when you looked at that space, it's in the crosshairs of a lot of regulators, it was in the crosshairs of Congress last year, gainful employment. There's enhanced monitoring of all the for-profit schools. However, last quarter, it was doing fine. And then in August of this year, the company received a negative warning from the Texas Workforce Commission. They wanted to do some investigations on some inaccurate data that they believe was being reported. The company, quite frankly, self-reported the issue. This is public information. It's available, so I'm not disclosing it anything we're not able to. And with the Texas Workforce Commission rendering an unfavorable ruling, that since has been cleared up. But there are another set of regulators that also joined in the investigation of the company. And from our perspective, it's had a negative effect on the company's profitability, new enrollments, working capital, et cetera. And we thought it prudent and our third-party valuation firms thought it prudent given the uncertainty around the situation. We are very much still engaged in the situation, working with a sponsor and the management team. The outcomes are not certain yet, but given sort of the uncertainty at here and the dramatic effect we've seen in short-term on new enrollments, et cetera, and the working capital, the profitability is lower than it once was. Some things can happen. Unfortunately, when you talk about highly regulated industries, there's more regulation now than there was 5, 10 years ago around certain specific industries. Things can happen, it's an unfortunate situation, but we took immediate steps. Our valuation firms took immediate steps to write down those robust process we go through. It's not going to keep things up when it shouldn't be. And that -- hopefully we'll see a change over time there. But it was the right thing to do to recognize the issue. Any sudden things can happen, Joe. I know you've been doing this a long time and things, unfortunately, can happen from time to time. We get good surprises sometimes, sometimes, we get unfortunate surprises, and this one candidate was one. And it happened in August of 2011.

All right. I'll leave that one alone. I guess if I look at -- and this is more of a longer term question, I hear you guys. I mean, I appreciate that you guys are marking the highest percentage of loans to market now that BDCs aren't doing that. I mean, I get that and obviously, this quarter you're getting -- your NAV reflects that. But if I look at the NAV at March of '09, $9.82. So the March of '09, that's the world's coming to an end, that's the worst of all capital markets. And then the high point, this year in high-yield markets, your NAV is only $10.03. So it's only up 2% over the low point 2 years ago. I mean, that seems like that's substantial underperformance relative to an unmanaged high-yield index. You guys are charging 2% and 20%, I mean. So why would investors pay you guys 2% and 20% for that type of performance when you can go on and buy a closed-end fund at 50 basis points with no incentive fee and get the market? I mean, has the board really looked at the business model and decided this is the best way to go?

Well, Joe, I'll say, this is Jim. I think the one missing ingredient of your analysis is the share count. Share count is much broader. And certainly, our board takes their job very seriously as we do, and as you look over time one, we've invested over $8.5 billion. We were all very large BDC before the credit crisis, we weathered the storm and certainly, over a multiyear cycle, we've redistributed a lot of capital back to our investors. Certainly, the credit crisis has been a challenge. A lot of big platforms did not survive. Our platform has survived, and we believe that we have a robust platform to produce long-term investments over time. There's a lot of value added service we provide. We're very comfortable with that. There is a broad BDC universe out there that investors can make choices between a variety of vehicles. But again, I think that, if really to get to the heart of your question, in the beginning of the crisis versus today, our share count went from 135 million shares to approximately 200 million shares today. And so it's the breadth of that business over a different share count. So again, everything you're saying, that's certainly one view on it, but I think that we look at the long-term return, what we provided for investors, the liquidity we provide, the transparency we provide and we have created value. So in our mind, there is a justification for our broad existence, there's a justification for our broad shareholder base and everything goes along with that. So that's our perspective. We take a longer-term approach. And again, from our view, there's a lot to be gained from doing that.

I appreciate the comments, Jim. And I guess the last thing is I think someone asked about the dividend versus NOI. And walk us through kind of the dynamics. I mean, obviously, spreads are higher, and I don't know how much of that spread widening you guys captured in kind of the August-September timeframe. Is this something where you guys feel comfortable that higher yields are going to move your NOI closer to dividend? Because obviously, dividend above NOI is also -- hurts the book value dynamic as well. And so, if you could talk about that, that would be helpful.

Yes. Listen, you're a veteran of the space, and over many years, the net interest margin I would believe for the industry has been under a bit of pressure. With lower LIBOR and LIBOR floating rate assets, those yields have come down, whether it's revolver or long-term, terming out of debt, which we think is actually a very shrewd thing to do in a low interest rate environment, has certainly squeezed our net investment margin. And I think that could be safe to be said about the industry as a whole. And what our view is, is we try to be very thoughtful and strategic about our dividend and not make quarter-to-quarter adjustments. As you remember, probably 3 years ago, we were one of the first companies in the industry to cut our dividend because we saw the same challenge that you're pointing out right now in an industry led by a lot of the large firms that continually paid out in excess. We didn't think that was sustainable. So we certainly are again, trying to be multiyear strategic about the dividend and not make decisions quarter-to-quarter. Certainly, we've -- I don't want to say we're at the trough of our net interest margin, but we're certainly been compressed. And as I've said and as Patrick said before, is we've taken a bit of a path in the past to really have a not as broad an asset management approach to the business with really things that we're very thoughtful and experts in, which is corporate credit. What you are seeing in the book and what you will see, hopefully, in the book in the future is a broader approach to bring those capital. And the benefits that will bring will have a hopefully long-term impact positively to shareholders.

Next question comes from the line of Casey Alexander of Gilford Securities.

What is your percentage of fixed to float in the portfolio right now?

It's about 1/3 floating and 2/3 fixed. And that roughly matches our floating rate liabilities.

Okay. When I take look at your balance sheet versus your statements, a large percentage of this NAV decline, which has been taking place over years, is recoverable, I see --

That's not what we're saying to you...

I understand. You're saying it for the quarter. I get that, okay. But you have $250 million of unrealized depreciation in your noncontrolled assets, and you have $300 million of unrealized depreciation in your controlled assets. Shouldn't we look at this as though the unrealized depreciation in the controlled investments is far less recoverable than the ones in the noncontrolled assets?

Well, I think that's probably correct. But again, I think what you really -- what we're talking about is looking at the business on a quarter-by-quarter basis regarding this NAV adjustment. Certainly, there are unrealized depreciation on our balance sheet. It will not be recoverable. And what we're talking about, a certain aspect of the unrealized depreciation that we believe is recoverable. I think it'd be clear to say we have never in -- we've never really said, but we obviously believe that the unrealized depreciation in keepers is not recoverable. Whereas, the volatility in some of our names this past quarter, we believe, is recoverable. And that's reflected on our balance sheet based on when we look at our NAV today, as you know, is including the unrealized appreciation and the unrealized depreciation. So I think how the other analysts have approached it is the right way. Certainly, as I've said before, we've been in business quite some time, we've invested $8.5 billion and there are some losses that are on our balance sheet that are maybe unrealized, we will not recover.

And wouldn't it be fair to say that you would likely have a higher degree of recovery from the unrealized depreciation from the noncontrolled assets than you might from the controlled assets?

Outside of Grand Prix Holdings, that may not be ultimately the true statement. Because the equity holdings we do have in other assets, we don't, we cannot, as a co-investor, dictate when those get exited. A lot of those are investments in companies we like. And to the extent that our private equity firms are backing those exits, those are the gain, there could be some gains in there. But as you know, those are where we can't give you the crystal ball [indiscernible] in things to come.

I guess I have one other point. Patrick mentioned that we had a successful outcome of DSI. And if you would look at DSI 36 months ago, that had a greater amount of unrealized depreciation, which through restructuring, we took back debt and equity, has recovered and has a modest IRR since the investment. So as Patrick said, you need to really pull the onion back on the different companies within that bucket to make that final judgment outcome.

Your last question comes from the line of Jasper Burch of Macquarie.

My question was answered.

Well, ladies and gentlemen,thank you very much for your time and your great questions today. We appreciate it and we look forward to talking to you after the next quarter. Take care.

That concludes the question and answer session of today's call. Thank you for participating in today's conference. You may now disconnect.