MidCap Financial Investment Corporation 8.00% Notes due 2028 (MFICL) Q2 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to Apollo Investment Corporation's Earnings Conference Call Fourth Quarter ended September 30, 2012. [Operator Instructions] I will now turn the call over to Elizabeth Besen, Investor Relations Manager for Apollo Investment Corporation.

Thank you, operator, and thank you, everyone, for joining us today. With me today are Jim Zelter, Chief Executive Officer; Ted Goldthorpe, President and Chief Investment Officer; and Greg Hunt, Chief Financial Officer. I'd like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release. I'd 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 prospectus and shareholder reports for risks that apply to our business and may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our SEC filings, please visit our website at www.apolloic.com. I'd also like to remind everyone that we posted a supplemental financial information package on our website, which contains information about the portfolio as well as the company's financial performance. At this time, I'd like to turn the call over to Jim Zelter.

Thank you, Elizabeth. This morning, we issued our earnings press release and filed our quarterly 10-Q. I'll begin my remarks with some financial highlights for the quarter, followed by a discussion about our investment strategy and some other recent business highlights. Following my remarks, Ted will provide an overview of the market environment and then we'll review our investment portfolio activity for the quarter. And finally, Greg will discuss our financial results in detail. And then we will open the call to general questions. Starting with financial highlights. Today, we reported solid second quarter results as we continue to reposition and optimize our portfolio. For the September quarter, we reported net investment income per share of $0.22. Net asset value was $8.46 per share at September 30 compared to $8.30 at the end of June, a 1.9% increase. The increase was driven primarily by unrealized appreciation from our liquid securities. Regarding our investment strategy, we continue to broaden our investment footprint to provide a more diverse array of private market debt solutions. We believe that a broader investment footprint enables us to shift our investment activity into asset classes with attractive risk-adjusted returns as markets change and evolve. That said, we continue to expand on our core strategy of providing debt solutions to middle market companies by increasing our exposure to senior secured loans. With the unprecedented flow of funds into the high-yield mutual funds, the market has been extremely favorable for issuers, and we have seen a return of covenant light and PIK securities. We believe this could be evidence that the market may be chasing for yield at the expense of credit. That being said, in today's robust market, we are focusing our investment activity on secured loans rather than unsecured debt, and we are taking liquidity and complexity risk instead of credit risk. We also see attractive risk-adjusted returns in less liquid senior secured loans, energy lending and aircraft leasing, a new origination specialty for us that Ted will discuss in detail. The spread between liquid and less liquid investments allowed us to continue to improve our security position with little impact to our overall yield or net investment income. During the quarter, investments totaled $395 million and we received $143 million of proceeds from selected sales and $200 million from repayments. Accordingly, our net investment activity before repayments was a positive $252 million. Net investment activity, including the impact of repayments, was a positive $52 million. The fair value of our investment portfolio was approximately $2.68 billion at September 30, up from $2.58 billion at the end of June. We believe that we are well positioned to take advantage of future market opportunities. Completing the growth on the asset side of the business, we also took advantage of the strong demand for fixed income products with the issuance of 150 million of retail notes in early October. We believe it is important for us to actively manage both the asset and liability side of our balance sheet, and we are currently focused on diversifying our funding sources. Greg will discuss our retail note issuance and our funding strategy in more detail when he comes up. Turning our attention to our dividend. The Board of Directors approved a $0.20 dividend for shareholders of record as of December 18, 2012, and based on our closing price yesterday and annualizing the dividend, our stock currently offers a dividend yield of approximately 10%. With that, I will call it -- turn the call over to Ted to discuss the current market environment and our investment portfolio.

Thank you, Jim. During the September quarter, the credit markets were strong as actions by the Federal Reserve and the ECB eased global economic concerns. In turn, there was good demand for both bank debt and bonds. Spreads tightened and investors put money into riskier assets. Investors put money into the high-yield market, creating strong demand for both primary and secondary bonds. As a result, dealers brought opportunistic transactions to lock in attractive rates and several LBOs priced and traded well. Secondly, bank debt remained active and there was a handful of mezzanine deals completed during the quarter. In addition, traditional on the run, primary high-yield transactions were very well bid. Leverage loan and high-yield bond origination volume was also very strong. Although the underlying fundamentals were strong, we believe the rallying high-yield markets have been driven by abundance of liquidity and has resulted in mispriced risk at certain parts of the credit markets. We continue to see a wide spread between liquid and less liquid opportunities. Moving to our investment portfolio, as previously discussed, we are working to broaden our investment portfolio to provide a wider array of proprietary debt solutions and increase our exposure to the middle-market senior lending. We believe that our portfolio reposition is well on track. Given the environment that I just described, during the September quarter, we continue to transition the portfolio into more secured investments, there are significant repayments during the quarter, which impacted the overall portfolio yield slightly but also generated strong fee income during the period. Although we are cautious about the current environment, we did find opportunities to deploy capital during the quarter. As previously discussed, one of our priorities is to expand our specialist sourcing capabilities by having a greater focus on select industries that we've identified as providing the opportunity to generate attractive risk-adjusted returns. Along these lines, we recently established an operating subsidiary called Merx Aviation Finance to participate in the multibillion-dollar aircraft leasing industry. The positive outlook for aircraft leasing is well publicized and driven by increasing demand for air travel and emerging markets, a strong need for fleet replacement in the more developed markets such as North America and the attractiveness of leasing versus owning of aircraft by capital constraint carriers. Specifically, Merx's investment strategy will tend to focus on older, current generation aircrafts. This is a space where the large banks and finance companies have scaled back due to regulatory and liquidity constraints. We believe that this opportunity can generate attractive double digit returns, with downside protection provided by the underlying asset value of aircraft. To run this effort, we've assembled an experienced aircraft team with a demonstrated track record in this space. With that said, during the quarter ended September 30, we invested $395 million in 12 new and 11 existing portfolio companies. We also received $142 million of proceeds from selected sales and $201 million from repayments. As I mentioned earlier, the level of repayments experienced in the September quarter was high. Our overall yields were slightly impacted by the higher yield on some of our redemptions. The yield at cost on new debt investments was 12.4% and the yield on cost on debt dispositions was 10.3%, while the cost on -- while the yield at cost on debt repayments was 14.7%. Accordingly, there was a slight decrease in the overall yield of the portfolio, debt portfolio, to 11.9% compared to 12.1% at June 30. We continue to rotate out of some of our unsecured investments and into senior secured investments which we believe offer more attractive risk-adjusted returns. Senior secured investments were 37% of the portfolio at the end of September, up from 30% at the end of June. We estimate our current portfolio has approximately $1 billion investments that can be readily sold at or near current market and today's market. I will now discuss some of the specific portfolio activity for the quarter. During the quarter, we invested $31 million in the first lien debt of Evergreen Tanks Solutions, Evergreen Tanks is one of the premier providers of integrated liquid and solid containment solutions in the U.S. and primarily operates in the Gulf South region where it is the #1 market share. Evergreen is backed by a premier sponsor and is consistent with our strategy of increasing our exposure to secured middle-market bank debt. We also exchanged our unsecured investment in Cengage Learning into $107 million of secured notes with a higher coupon and a longer maturity. Notable sales during the quarter included some of our position in Nara Cable Funding Limited, and we exited our investment in Catalina Marketing and New Omaha Holdings. Notable investments that were repaid during the period included our investment in Hub International and the Servicemaster company. Regarding our investment at Chesapeake Energy, the company's announced a variety of asset sales to pay down its debt and a new financing. As a result, we expect our investment to be called during the December quarter and expect that this investment will generate a realized mid teens return. Lastly, consistent with our objective of increasing our exposure to smaller proprietary originated middle-market senior secured loans, subsequent to quarter end, we made an investment in late October in a second vehicle managed by Madison Capital Funding. The second fund, called Kirkwood Fund II, is similar in size and structure to Kirkwood Fund I in which we have also made an equity investment. I'd now like to review some general portfolio statistics at September 30. We continue to be diversified by issuer and industry with 69 portfolio companies invested in 32 different industries. The company's total investment portfolio had fair market value of $2.68 billion, with 37% senior secured loans, 52% in subordinated debt and 11% in common equity. Preferred equity and warrants measured at fair value. As I previously mentioned, the weighted average yield on our overall debt portfolio at current cost at September 30 declined to 11.9% compared to 12.1% at June 30. The weighted average yield on our subordinated debt portfolio declined to 12.4% compared to 12.9% from the prior quarter. And the weighted average yield of our senior secured loan portfolio rose to 11.2% compared to 10.6% at June 30. At September 30, the weighted average cash interest coverage of the portfolio remained at well over 2x. Regarding our risk rating, the weighted average risk rating of our total portfolio was 2.3 measured at cost and 2.2 measured at fair market value at September 30, 2012, both unchanged from the end of June. With that, I will now turn the call over to Greg, who will discuss our financial performance during the fiscal second quarter.

Thank you, Ted. I'd like to remind everyone that in addition to our 10-Q, we have posted a financial supplement presentation on our website. I will now discuss our financial performance for the fiscal quarter. Our total investment portfolio had a fair market value of $2.68 billion compared to $2.58 billion at the end of June. At September 30, net assets totaled $1.72 billion with a net asset per share of $8.46. This compares to net assets totaling $1.68 billion or $8.30 per share at the end of June. The increase in NAV for the quarter was driven principally by unrealized gains on liquid securities. On the liability side of our balance sheet, we had $935 million of total debt outstanding at September 30, down slightly from June 30, and our leverage ratio remains within our target range. As Jim mentioned, we issued 150 million 30-year senior unsecured notes in early October at a rate of 6 5/8%. We were extremely pleased with the strong investor demand. By adding 30-year unsecured debt, we were able to further diversify our funding sources, extend the duration of our liabilities and add fixed rate debt to our capital base. In the past 2 periods, with the renewal of our senior credit facility and our note offering, we have successfully improved the liability side of our balance sheet. At September 30, the company's debt to equity or net asset ratio was 0.54:1, down from 0.61:1 at the end of June. Our leverage ratio was 0.56:1 at the end of September, up slightly from 0.53 at the end of June. No investments were placed on nonaccrual status in the September quarter and at September 30, nonaccrual investments represented approximately 2.2% on a cost basis of our investment portfolio, unchanged from the end of June. As for operating results, total investment income for the September quarter totaled $83.8 million, an increase from $80.3 million for the June quarter and down from $94 million for the September 2011 quarter. The increase quarter-to-quarter reflected solid investment income, coupled with strong fee and dividend income. Our dividend income fluctuates quarter-to-quarter as a result of certain holdings within our AIC credit opportunity fund, which pay dividends semiannually. In addition, expenses for the September 2012 quarter totaled $39.4 million. This compares to expenses of $40.5 million for the quarter ended June 30 and $48.4 million for the September 2011 quarter. The decline in expenses for the September quarter was due to a multiple of factors, including a smaller portfolio base, reduced management fees and a lower cost of borrowing as the average debt outstanding on a comparable basis was lower. Net investment income totaled $44.5 million or $0.22 per share. This compares to $39.8 million or $0.20 per share and $45.5 million or $0.23 per share for the September 11, 2011 quarter. Also during the September quarter, we received proceeds from the sale of investments and repayments totaling $343 million. There were net losses of $40.6 million for the quarter, which was primarily related to the exit of our equity investment in New Omaha Holdings. The results compared to a net loss of $18.8 million for the June quarter and $20.2 million for the September 2011 quarter. The portfolio has changed and net unrealized appreciation was a positive $69.1 million for the September quarter. This compares to a negative $31.5 million for the June quarter and negative $293 million for the comparable September 2011 quarter. Notable contributors for the quarter to the positive change in the September 2011 quarter included our investments in Cengage Learning, inVentiv Health and our investment in AIC Credit Opportunity Funds, among others. Negative contributors for the quarter included our investments in Gryphon Colleges Corporation, Aventine Renewable Energy and Altegrity Inc., among others. In total, our quarterly operating results increased net assets by $73 million or $0.36 per share versus a decrease of $10 million or $0.05 per share during the June 2012 quarter, a decrease of $267.3 million or $1.36 per share in the September 2011 quarter. With that, I will turn the call back over to Jim.

Thank you, Greg. As you heard from us today, we remain cautious on the environment and selectively deployed capital during the quarter. We continue to make progress repositioning the portfolio and will continue to highlight various benchmarks of success in the future. With that, operator, please open the call to questions.

[Operator Instructions] Your first question comes from Rick Shane of JPMorgan. Richard B. Shane - JP Morgan Chase & Co, Research Division: Could you just provide a little bit more sort of outlook on how you look at the aircraft leasing business? Are you going to be focused on financing new planes, used planes and talk about how big you think that, that business needs to be in order to generate a little bit of operating leverage?

Sure, Rick. Let me start with just a couple of brief comments and then I'll toss it to Ted. But we don't suspect that we -- that the aircraft leasing, as you're pointing out, is a very broad space. Certain parts of it are very fluid with capital, although the withdrawal of a lot of European banks has had an impact. But certainly, we're trying to access using our -- the duration of our capital for existing aircraft and longer duration assets within the space, but really not particularly new aircraft per se, which is a much more competitive well-defined space. But with that, I'll toss it over to Ted.

Yes. This just follows our strategy of kind of building out specialist origination and finding opportunities to kind of better match our capital. And we probably spent a year researching the space and spent a lot of time back testing -- back testing the space and doing lots of administrative research and meeting everybody in the industry. And I think our view is that the initial opportunities we've seen, we're not shooting for private equity returns and we're also not going to compete against the large AAA-rated financial institutions. But we feel like there's a nice space in between where we can kind of generate low to mid teens returns, with very, very, very -- we feel very good about the downside protection. Richard B. Shane - JP Morgan Chase & Co, Research Division: Got it. And will it be mostly -- will you mostly be targeting next-gen equipment for passenger or will you be targeting legacy stuff for freight?

No, I think the main focus for us is on passenger. I mean, the global aircraft demand and global passenger traffic -- obviously, it's a very well known that, that's a very fast increasing space. And I don't think you're going to see us spent a lot of time on cargo.

Your next question comes from Troy Ward of Stifel. Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division: Just following up on Rick there for a second. One of the question I think he had that I didn't hear was how big do you think this can get? I mean, what's the magnitude of this type of investment?

Sure. I think, Troy, we're just finding -- to quickly answer your question, when we think about our overall portfolio, could this be 10% to 15% of our portfolio if the returns are there? Very much so. We're going to go -- just like we're doing in energy right now, which we really found a nice niche, we're just finding, as you dig deeper, in the specialized lending area, there is just a preponderance of opportunities you can be quite selective. But I think if we are thinking about our portfolio the next 24 months, we'd like to methodically grow to 10% of our portfolio in a measured basis. Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then looking -- you mentioned in your prepared comments about how the assets, the shift has moved toward -- more toward senior and we can obviously see that. Can you just remind us kind of the degree and kind of the timeframe of the shift and what that will eventually mean for the portfolio yield? Where do you think -- you just talked about kind of 24 months down the road, where do you think your portfolio yields will be with regard to senior versus mezzanine?

Well, let's talk about timing and then amounts, and then we could talk about amount actual rates which is the hardest to do. But we started about 9 months ago and we were very, very heavily weighted to subordinated credit to the exclusion of senior and some other types of equities. Right now, I think you're seeing, as of last quarter, the breadth of our secured bucket. We're trying to get our secured bucket somewhere in the context of plus or minus 50% and our subordinated bucket would be the residual of that and that's a broad definition of subordinated because it would include some of our equity securities. But we're just finding right now, the delta between secured and unsecured, the rate give up, if one would, in exchange for complexity and liquidity, we're just finding that to be a very opportunistic transition for us. I think that what you should expect is the latter. We talked about 18 to 24 months when we initiate this thing in the beginning of the really, the February -- March of '12 and I suspect by the middle to late next year, you'd see us well on our way to achieving those goals. We're having a -- there's a nice active quarter for us this quarter, where the same pace of activity is taking place and we're transitioning as well. So I think expectations of late '13 to getting to where we want to get to, I think we collectively feel comfortable with that. I think repayments are going to decrease in '13 just because of the volume of refinancings in the market this year. I think that's a statement you could say for a lot of the industry actually. On the actual yields, that's a harder one to say. I think that we collectively think that we're going to be in a low-rate environment for some time. And I'll let Ted talk about, but the second lien space, which is a secured asset class, is now very interesting and those returns are north of 10% these days.

And then I'd say is -- and you guys have heard me say this quite a bit, is so far and history is not a precursor to the future, but so far because -- basically, what we've been doing is trading liquidity for security, I'd say. So we've not seen -- you can see our numbers for the last 3 quarters, we have not had a material diminution in our yields, as we move up the capital structure. And I think we've continued to see that this quarter. But I think, as a broad statement, I'd say that we are willing, in certain instances, to make the trade for slightly less yield for more security. So we have not -- the Cengage swap we did this quarter is emblematic of that on a yield basis. Where we moved up in the capital structure, we feel like we're in a much, much, much better position. So we feel like we're in a much better position. I think number two, and this is just a broad comment is, you've also seen us kind of reduce -- the private mezz markets, we're seeing a lot of deals in the private mezz market. We're actually passing on the vast preponderance of them. I think there's certain asset classes that we're finding that probably just not priced the way we would like it to be priced. And so we're trying to be very disciplined in certain markets. Europe is probably the other place where we get a lot of questions about -- our activities in Europe have been de minimis. We have just not found a lot of good risk reward opportunities in Europe just given some of the macro challenges over there. Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division: Okay, great. And then one last one on the Kirkwood fund. If I recall the original Kirkwood Fund I was originated by Madison over the last 1, 1.5 years as a $250 million pool. How do you feel about -- well, first of all, I think you said it's going to be the same relative size, $250 million, how do you feel about the current vintage of assets, and what is the timeframe do you think Madison -- I'm sorry, Kirkwood II would go out and deploy that full $250 million?

So Kirkwood II, when we buy the equity in these Kirkwood II funds, the assets have already been deployed, so we know what's in the portfolio before we make the investment. In terms of what the credit quality and what the yields look like on Kirkwood II and Kirkwood I, we tell you that we haven't seen a material change between those 2. And what I'd say on a go-forward basis, we do see large changes in future middle market spreads. We are not locked in, in any way, to do future Kirkwood transactions. Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division: So does the Kirkwood II -- the $250 million of assets were originated between -- you bought Kirkwood I in April, so I'm assuming between April and late October when you made the equity investment?

That's correct. So the underlying loans and the rate at which they're coming at, the attachment point and the size of those companies is extremely similar between Kirkwood I and Kirkwood II. And as Ted said, we did actually were able to take a look at that portfolio to make sure that, that pricing had not materially changed in that market for the relative risks you were taking. The one thing I will say though is it's interesting on the liability side, the manner in which you can finance assets like that, that has actually has gotten better. So with the competition amongst lenders to lend against the pool of assets at continually better rates and better covenants and better flexibility, the ownership of where we stand in the structure, we're the recipient of some of that competitive lending. But the actual underlying loans themselves, attachment points and spreads virtually incomparable. Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division: And we'd expect the same -- basically the same level of interest and dividend income from a quarterly basis from II as we do from I.

That's correct.

Your next question comes from John Stilmar of JMP Securities.

To go back to the theme of the morning of aircraft leasing. Did this fit in kind of the 30% bucket that I think you guys have talked about optimizing? And then secondly, should we think about this as being like an aircraft leasing business or is it really going in and being a part of the debt capital structure of existing aircraft leasing portfolios? Just curious as to how this business -- are we taking operational risk at redeploying the aircraft? And just a little bit more color about the structure or about the -- I'm just kind of a little confused exactly whether it's a direct investment or whether it's actually a management company.

Yes, so I'll take the second part on strategy, which is -- this really is a -- the vast majority of what you'll see us do, not everything, will be metal. So actually owning the aircraft and leasing it out versus -- I want to be very clear that we're not making bets on the airline industry because, as you know, we'd much rather be in the actual asset than the actual industry. In terms of 70-30, it depends a little bit on the assets, but a lot of these will actually be 70% assets but it depends on a transaction-by-transaction basis. So a lot of what we'll be doing will actually not hit our 30% bucket, but they're -- in certain instances, we will do 30% transactions if the risk reward merits our 30% bucket.

So aircraft -- just a standard aircraft leasing business still fits within 70%? I think about public comps like AerCap and those which some of us cover. I was just curious as to how to look at your strategy relative to the other public companies that might be out there.

Well, I think, you just mentioned one company. We don't presume to compete with somebody like AerCap who's been around for a long time and has a great business model and again, has been there or has tremendous scale. What we are finding is that a variety of those players who are out there today, some of their -- the manner in which they had financed their business has changed. And as Ted said, we don’t want to take equity risk. We don't want to take directional equity risk on the airline business, but it's been proven out, long duration leases to quality counterparties and getting in the middle of that can be very, very advantageous if you have long duration of capital, which we do. So I think Ted said it well, we're really trying to reposition ourselves between AAA-rated providers who are well over collateralized but doing things on a very, very aggressive single digit yield. And those folks that are looking for equity returns, the goalpost we don't want to touch, we're trying to operate in the middle zone where, again, we're just finding because of the reverberations of the crisis from 3 or 4 years ago. The ability to make $50 million, $75 million commitments to pools of assets for 8 to 10 years, which fits very well within our corporate construct. There's not as many players that are providing that as there had in the past. So we're very cognizant of the dialogue we've had with some of the great established players. We're not trying to nose those folks out of business that they do very well in, but we can complement their capital based on the returns and risks that we're trying to do.

And would it be a fair summary to say that as other publications have put out there that the aircraft financing market for aircraft older than 12 or 13 years has basically dried up and it's very much centric on younger, new modern generation aircraft? Is that then really the vacancy of capital that's driving a lot of your decision to go and exploit? Is that the kind of the basic thesis here?

Yes, I think that's a fair assessment. And I think, to Jim's point, really the people that -- the void of capital has been -- the people who filled this space before wasn't AerCap and Aircastle, it was European banks and large investment banks. And because of capital constraints, a lot of these guys have exited the market.

Okay, great. And then is there any -- with some of the energy investments that were made this quarter, is there anything in there? You had talked about potentially doing some restructurings, first in, last out, was there any evidence better than energy portfolio, other types of investments of where you all were able to use your balance sheet and create kind of a first out type structure to bridge the liquid and illiquid credit markets?

What we did -- so the answer is no, we didn't do a first out -- second out structure. But what we did do is we did do a couple of oil and gas transactions, which -- again, took advantage of the type of capital we had. So we did a -- and you'll see it get published. We did a bridge financing for a company called Ivanhoe, which is a public company, where we thought the loan was a, call it, very, very, very well-protected loan, very well-protected loan and it kind of bridged them to get an asset and sell proceeds and generate mid teens returns. So that is right down the middle for some of the stuff we want to do in this business. It's first lien, it's very, very well-covered by asset value but we did not do a whole bunch of what I'd call back-end structuring of energy investments.

Your next question comes from Jasper Burch of Macquarie.

I'd like to stick on the topic of the aircraft leasing. For a little bit, I might just be misunderstanding it. But Ted, it sound like you said that you guys are going to be directly owning aircraft and investing in the metal. I mean is there any -- I mean, one, is that correct? Two, is there sort of any infrastructure build that's necessary to vet the leasers, to run the logistics of moving the planes around, or are you just investing sort of pari passu with people who are already leasing out aircraft?

Yes, I mean, I'd say it depends on the transaction, but we've hired a team to do this, and we set up a subsidiary to do this. And obviously, there's some infrastructure involved in the investments we've made. What I would say is, a lot of this is done by third parties and consultants who help you out with some of these transactions. But yes, we obviously -- to do this business, you need to have the right people involved and we've hired a team to do that.

Okay. Have you purchased aircrafts already in the subsidiary?

No. So this past quarter and up till today, really the focus has been on establishing the infrastructure and really, really being selective about how we purchase this space. So what I would say is today, we have not made an investment in the space.

Other than setting up and funding our subsidiary, Merx Aviation, we've not made an investment in the actual investment themselves. We just -- we've created the infrastructure.

Okay, great. I definitely want to go more into your strategy there offline, but just so I can get to it, you talked about trading off liquidity for security and you have the October capital raise. And I was wondering if that trade off, I mean, does that change your appetite for taking on additional leverage since you won't have the same sort of book value volatility going forward?

No, I don't think so. I think that we really approach it really first from a what one has to -- usually, it's a give in yield going from subordinated to senior or a subordinated to secured. And we're finding that, that gap is narrow if you can make a longer duration investment or if you can take on a degree of complexity or lack of liquidity, which we don't mind doing. Right now, I think we're generally very comfortable in the bounds of what we laid out in our leverage goals. Might there be times in market deteriorating times when we don't mind picking up our leverage and buying assets. Like we've talked about, instead of reacting negatively, we're reacting positively and proactively. But nothing here would led us -- lead us to believe that we want to lever up and change the long-term goals we put forth. Now that being said, we really like the idea of 6 5/8%, 30-year liabilities. We think that's a really smart move for us. Many of our peers have done it as well, and we think over time that will be looked at as a very shrewd financing in terms of cost of capital.

[Operator Instructions] Your next question comes from Kannan Venkateshwar of Barclays.

I have just one question which is, on most of the energy and power loans that you made out this quarter, it looks like the focus is more on project finance loans. Is that a right interpretation and is that going to be one of the focus areas for you going forward given the context of complexity? I mean, trading off liquidity for complexity that you're talking about?

I think the way to answer that is you have to distinguish between energy and power. And so the only project financed we did this quarter was a power -- were 2 different first lien power deals for a sponsor called Panda. In the oil and gas space, in our energy team, again it's just not part of our strategy to project finance.

And we've also talked -- Ted's talked about them in the past about exploitation versus exploration. When we make a first lien loan in the energy space, it's really to exploit proven assets, but we're not really taking -- we don't want to take development risk with exploration, which is a very different risk reward scenario.

We have time for one more question. Your final question comes from Jonathan Bock of Wells Fargo Securities.

Most of my questions really have been answered, but I did want to start with just a quick philosophical question as it relates to equity issuance. So obviously, there are some improving risk-adjusted return to the senior secured market you mentioned in the -- particularly in the second lien portion. Can you maybe balance that with your need or desire, perhaps, to raise additional equity capital today?

Yes, I'd be glad to answer that. I think that we -- equity is something and you have and we -- I have spent a lot of time in this space, equity issuance is like 1 of the 4, 5, like key criteria for success. Right now, that's not really on our front burner. We've got some of the things we can do with our portfolio, we've got a lot of flexibility repositioning our portfolio. So the need to raise additional equity capital right now is not really -- we don't see that as the primary driver of future value for our shareholders. There's a lot of things we can do right now, repositioning the portfolio, continuing that process. We think that -- while we think there's a real interesting value proposition on all the BDCs as a sector, we want to get our costs of capital down. We want to have our dividend traded or reach our yield, we're certainly not going to sell stock below NAV. We have no intention of doing that. So again, we -- there will be a time in the future to explore that, but that's just not really on our radar screen, on our front burner, any time in the immediate future.

Appreciate the color and completely agree. Now another question, I noticed Apollo Investment management does now sub-advise a privately traded BDC called CION Investment Corp. Does that fee stream coming off of CION benefit Apollo Investment Corporation in any way, shape or form?

Yes, it directly does. That revenue stream is part of Apollo Investment Corporation and will benefit the shareholders as such.

Okay, great. So that means, let's just say for the 2 and 20, does the entirety of the 2 and 20 off that capital pool flow up through AINV and then through your incentive fee, 2 and 20, and then split with the shareholders. Is that how we look at it or is there a little bit lost in the shuffle?

Well, as you know, between us and CION, we split that 50-50, so we don't get all the fees. Our partners split half the fees as well and then there is a fee rebate concept, which we have worked out. But again, the goal is to make this beneficial to the AIC shareholders and in doing so have a fee rebate. But again, and the end of the day, net-net is a valuable -- is a net contributor to AIC earnings. And we're not looking to make money away from this at Apollo, we're really -- we're looking for this as to help and benefit the AIC shareholders.

Yes, so just to be very clear, Jonathan, I think I know what you're asking. Every dollar that we generate from CION, the Apollo Investment Corporation shareholders benefit from that. There's no leakage to Apollo APO.

Excellent. And Ted, just as we look at a few investments, we noticed -- for example, in the power space, there may be a few other BDCs or one in particular that you would have partner with to make a few of those investments. But maybe talk about the club environment and particularly with other BDCs or maybe other strong senior secured lending managers. And do you typically like to come alongside and participate maybe take a dual lead role, maybe just some commentary on the club environment as it relates to second lien senior secured investments?

Sure. I mean, listen, the people who we see on a day-to-day basis spend much broader than just BDCs. And listen, we realize that at times, it's good to have a partner on situations, they'll know stuff that we won't know, we'll know stuff that they won't know and partnering on transactions, we actually look at very favorably. So listen, there's a lot of smart managers out there and a lot of smart BDC managers out there and if we can benefit from sharing information and ideas when we partner on transactions, we're going to want to do that. We're also happy to lead transactions. So for us, we're just trying to put the best risk-reward assets on our books for shareholders and we don't get totally hung up in competition and everything else. We just want to put the best assets on the books.

If there's no further questions, appreciate the participation today, appreciate the time everyone is spending to really understand the intricacies of how we're trying to navigate the portfolio going forward. We think there's a tremendous opportunity in the industry, in the space and there's many paths to success in the BDC space. We're certainly excited about the path that we are taking. But please reach out to the team here in terms of any specific questions you may have going forward, and we look forward to talking to you next quarter. Bye-bye.

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