MidCap Financial Investment Corporation 8.00% Notes due 2028 (MFICL) Q3 2017 Earnings Report, Transcript and Summary

Good morning and welcome to Apollo Investment Corporation's Earnings Conference Call for the period ended December 31, 2016. At this time, all participants have been placed in a listen-only mode. The call will be open 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 Jim Zelter, Chief Executive Officer; Howard Widra, President; Tanner Powell, Chief Investment Officer; and Greg Hunt, Chief Financial Officer. I'd like to advise everyone that today’s call and webcast are being recorded. Please note that they are the property of Apollo Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release. I'd also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. Today’s conference call and webcast may include forward-looking statements. Forward-looking statements involve risks and uncertainties, including, but not limited to, statements as to our future results, our business prospects and the prospects of our portfolio companies. You should refer to our registration statement and shareholder reports for risks that apply to our business and that may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our SEC filings please visit our Web site at www.apolloic.com. I'd also like to remind everyone that we posted a supplemental financial information package on our webpage 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 reported results for the quarter ended December 31st 2016 and filed our Form 10-Q. I'll begin today's call with some comments about marketing conditions, I will then highlight the progress we have made executing on our strategy followed by a brief overview of our results. I will then turn the call over to Howard who will discuss in greater detail the progress we have made revisiting the portfolio, Tanner will than cover our investment activities to the period and provide an update on credit quality. And finally, Greg will review our financial results in more detail. We will then open the call to questions. The market environment continued to be competitive during the period due to limited supply and strong demand for floating rate assets. Loan funds saw strong inflows and CLO origination rose ahead of the risk retention deadline, issuer friendly conditions resulted in strong new issue activity despite strong new issue volumes yields generally tightened. Moving to a strategic update, we believe that we are seeing significant benefits from Apollo's unified direct origination team and broad credit offering as well as from co-investment exemptive order during the quarter. Combined these factors are increasing our relevance to borrowers and sponsors. In addition we believe that the scale of the Apollo platform makes us one of the few market participants positioned to take on larger commitments which in turn benefit our shareholders. We are pleased with the progress we have made positioning the portfolio, consistent with the strategy we outlined last year. First, we continue to meaningfully reduce our exposure to structured credit and renewable. Second, we restructured a non-income producing asset into a partially income producing asset during the quarter. And third, we funded three transactions entered into our -- pursuant to our co-investment exemptive order during the quarter. Since receiving the order we have entered into eight transactions including several in the March quarter. Moving to our results, for the quarter we reported net investment income of $0.17 per share. Net asset value declined $0.09 or 1.3% to $6.86 per share during the quarter due to a net loss on the portfolio primarily driven by our oil and gas and renewable energy investments, partially offset by gains in structured credit and corporate lending as well as the accretive stock buy backs. Moving to our stock buybacks. During the quarter we continued to execute on our share repurchase program. Since the inception of our share repurchase program through the end of December 2016 stock buy backs have added approximately $0.13 to NAV per share. Moving to the distribution the board approved a $0.15 distribution to shareholders as of record as of March 21, 2017. With that I will turn the call over to Howard.

Thanks Jim. Let me begin by reminding everyone about the strategy that we laid out last year. Going forward we intend to focus on senior secured corporate loans sourced by Apollo's direct origination team with a focus on floating rate assets while adding additional exposure in first lien loans in life sciences, asset-based lending, and lender finance. Areas with significant barriers to entry and in which MidCap Financial has expertises. As Jim mentioned, we believe we have already make good progress reducing our exposure to renewables and structured credit, areas which we believe need to be reduced. It is our intention to further reduce our exposure to these areas. As we continue to reposition the portfolio we expect the overall portfolio yield to decline commensurate with the reduction in risk. Given the illiquid nature of many of our investments, repositioning will take time although we may seek to accelerate the disposition of certain assets which are not core to our strategy. We expect that our target portfolio will be approximately 50% to 60% in traditional corporate loans, approximately 20% to 25% across life sciences, asset based lending and lender finance and approximately 15% in aircraft leasing, with the balance in existing verticals and other legacy positions. As you may know MidCap originates a wide variety of assets across the senior debts spectrum. Many of which do not meet AINVs yield requirement. However occasional opportunities within life sciences asset base lending and lender finance will be suitable for both AINV and MidCap. Next I will discuss the progress we've made executing on our strategy in greater detail. First, we continue to work through our oil and gas exposure. At the end of December oil and gas represented 9.4% of the portfolio at fair value. This compares to 11.9% at the beginning of the current fiscal year. During the quarter we took advantage of the rally in oil to hedge our exposure and mitigate potential losses. Specifically, AINV purchased put options and sold call options. The options were structured so the premium paid for the put options offset the premium received from selling call options producing a costless collar. As oil prices declined the gain on our hedge should mitigate losses on our underlying investments. During the quarter, we recognized an unrealized loss on the contracts. If oil prices rise the loss on our hedge should be offset by an improvement in our underlying investments. In addition we have visibility into further de-risking of our oil and gas exposure over the coming quarter. We've also make progress repositioning non-income producing assets. During the quarter our investments in Spotted Hawk which is on non-accrual was restructured. A portion of our investment is now on accrual status. Second, we continue to make progress reducing exposure to structured credit. Structured credit exposure declined to 6.7% of the portfolio as of the end of the quarter, down from 7.8% as of September 30th 2016 measured at fair-value. During the quarter we exited our equity investment in MCF CLO 1, a middle market CLO, generating and IRR of 21.9%. Subsequent to quarter-end, we exit our equity and debt investments in MCF CLO 3 generating an IRR of 21.1%. Since the beginning of calendar year 2016 and including its most recent exit, we have exited nearly a 140 million of structured credit assets. Our remaining structured credit portfolio consists of two middle market CLO equity position and three regulatory capital released trade and represents approximately 4.9% of the total portfolio at fair value. Third, during the quarter we used the strength in the market to reduce our exposure and renewable via two securitizations. Renewable represented 8.1% of the portfolio at the end of December compared to a 11.3% at the end of September at fair value. During the quarter we completed our third and fourth Golden Bear securitizations, on what we believe to be excellent economic terms which reduced our exposure by approximately $57 million. In addition, Solarplicity repaid £7 million during the period. Subsequent to quarter-end Solarplicity added some additional leverage, which we used to repay a portion of our investment. Pro forma for this pay down renewable represents approximately 7.3% of the portfolio at fair-value. Finally, we continue to actively pursue co-investment opportunities. During the quarter we funded three transactions ended in pursuance with the co-exemptive relief order. One life sciences transaction with MidCap, one asset based transaction with MidCap and one corporate loan with certain other Apollo managed funds. In total we invested $55 million across these three transactions during the period. We look forward to reporting our continued progress executing on our strategy over the coming quarters. With that I’ll now turn over the call to Tanner, who will discuss our investment activity and credit quality.

Thanks Howard. Given the competitive market environment, we remain highly selective and disciplined as we seek to reposition of portfolio. In today's market, we are finding the capital deployment is less attractive, and many of these investment opportunity do not make it past our credit filter. During the period we invested 201 million in 13 new portfolio companies and eight existing companies. We exited 195 million of investments and accordingly net investment activity with 6 million for the period. The weighted average yield on investments made during the quarter was 10.1%, and the yield on sales and repayments was 10.5%. Let me highlight a few of the transactions for the period. First, we invested 24.1 million in the second lean debt of BioClinica to support an acquisition. BioClinica is a leading provider of technology enabled services supporting clinical research trials for global pharma and CRO customers. As Howard mentioned during the quarter, we funded approximately 55 million across three new investments entered into pursuance to our co-investment exemptive order. First, we committed to 50 million of Wright Medical of which 9.5 million was funded during the quarter and we invested 9.7 million in Oxford Immunotec. We also invested 36.2 million in the second lien debt of power products, our investment in power products is a good example of how exemptive relief combined with the scale of the platform allowed Apollo to commit to the entire tranche. We have already closed an additional three transactions made pursuant to the exemptive order in the March quarter. Repayments for the quarter totaled 178 million which included the repaying of our investments in MCF CLO 1, Crowley, Deltek, Kronos, and proceeds from two Golden Bear securitizations. Sales for the quarter, totaled 70 million which included the sale of our investments in Dark Castle Anatomy. Aviation continues to be one of our larger industry exposures and we continue to be pleased with our investments in Merx Aviation as the underlying portfolio continues to perform well. We believe our aircraft portfolio is well diversified by aircraft types, less fee and country. We continue to see attractive opportunity to deploy capital as well as monetize select assets in the portfolio. Let me now give a brief update on our energy exposure. As we have said previously, we continue to seek to reduce our oil and gas exposure when possible. At the end of December, oil and gas represented 9.4% of our portfolio at fair-value or 237 million across five companies. During the quarter Spotted Hawk completed its out of court restructuring, our pre-restructuring first lien term loan is bifurcated into a Tranche A and Tranche B. The Tranche A is on accrual and Tranche B is on non-accrual. In addition, we invested approximately 7 million into the Tranche C first lien term loan to fund high return non-op drilling activity. The company continues to focus on resumption of growth and returns on invested capital in the current market environment. I would also like to briefly mention our investment in Venoco, the value of our investment was negatively impacted during the period due to a deteriorating outlook for certain processes that we have mentioned in the past including the restore of a third-party pipeline. We continue to monitor situation very closely and we will reevaluate in the coming quarters. Let me spend a few minutes discussing the credit quality and the overall portfolio. At the end of December we had eight investments on non-accrual status across six portfolio companies. Investments on non-accrual status represented 2.6% of the fair-value of the portfolio and 8.2% on the cost basis, compared to 3.9% and 11.1% respectively at the end of September. The current weighted average net leverage across our investments increased to 5.7 times, up from 5.5 times at the end of last quarter and the current weighted average interest coverage decreased to 2.5 times, down from 2.6 times. The increase in net leverage quarter-over-quarter is due to several factors including one, the repayment of some lower levered investments, two, the deployment into slightly higher levered investments and three the addition of debt by several of our portfolio companies to support acquisitions which drives up leverage ratios in the short term. With that I'll now turn the call over to Greg, who'll discuss financial performance for the quarter.

Thank you, Tanner. Total investment income for the quarter was 68.1 million, down 1.4% quarter-over-quarter. The decrease was primarily attributable to lower prepayment income partially offset by higher dividend income. Fee and prepayment income was 1.5 million in the quarter compared to 3.8 million in the September quarter; higher fee income was more than offset by decline in prepayment income. Dividend income for the quarter was 11.4 million, up from 8.5 million last quarter, higher dividend income from Merx and one of our shipping investments offset a decrease in income from our structured product investments, as we have been reducing our exposure to this asset class that's part of our repositioning strategy. Expenses for the December quarter totaled 31.7 million, compared to 29.5 million in the September quarter. Incentive fees were higher quarter-over-quarter due to a lower reversal of previously accrued incentive fees related to pick income in the December quarter compared to the September quarter. As a reminder, our manager is not paid incentive fees on pick income until such income is collected in cash, this provision has been part of the investment advisory agreement since 2012. During the period it was determined that approximately 2.3 million of previously accrued incentive fees from PIK income should be reversed compared to 6 million in the prior quarter; the 2.3 million reversal primarily relates to our investments in Spotted Hawk and Venoco. Given AINV's year-to-date performance and that the performance incentive fee was accrued at a rate of 15% for the quarter. Net investment income was 36.4 million or $0.17 per share for the quarter, this compares to 39.5 million or $0.18 per share for the September quarter. For the quarter the net loss on the portfolio totaled 25 million, compared to a net gain of 1.6 million for the September quarter. Negative contributors to the performance for the quarter included Venoco and Solarplicity. Positive contributors to performance for the quarter included our investments with Spotted Hawk, MCF III and Golden Bear. In total our quarterly operating results increased net assets by 11.3 million or $0.05 per share compared to an increase of 41 million or $0.18 per share for this September quarter. Net asset value per share declined $0.09 or 1.3% to $6.86 per share during the quarter, due to the loss in the portfolio offset by $0.01 per share accretive impact to NAV from stock purchases. Also impacting NAV for the quarter was the impact relating to our hedging strategy on our oil investment. As Howard mentioned we essentially purchased a cost less collar to hedge our oil exposure and as a result during the quarter we recognized approximately 3.3 million or $0.02 per share of unrealized mark-to-market losses associated with the derivative contract. Turning to the portfolio composition, at the end of December our portfolio had a fair value of 2.5 billion and consisted of 85 companies across 25 industries. First lien debt represented 42% of the portfolio, second lien debt represented 27%, unsecured debt represented 10%, structured credit 9% and preferred and common equity represented 12%, The average weighted yields on the debt portfolio at cost was 10.9% down slightly quarter-over-quarter. On the liability side of our balance sheet we have approximately $1 billion of debt outstanding at the end of the quarter. During the quarter we amended our revolving credit facility and extended the maturity to December 2021. We greatly appreciate the support from our lenders. I'd like to pause a moment to review the impact of interest rates on our results. In recent months the market has seen LIBOR climb, our balance sheet is constructed to be asset sensitive. At quarter end approximately 83% of our yielding portfolio was floating rate, measured at fair-value. Typically, subject to interest rate floors. And 37% of our debt was floating rate with three month LIBOR slowing rising throughout the year the remaining below the average floor of our debt, we experienced net interest margin compression. If interest rates increase above LIBOR, the LIBOR floors on our portfolio, we should benefit from improving net interest margins. Moving on the Company's net leverage which includes the impact of cash and unsettled transactions stood at 0.66 times at the end of December compared to 0.63 times at the end of September. Regarding stock buybacks, we continue to see the stock market discount to NAV as an attractive opportunity to accretively repurchase stock. During the quarter we repurchased approximately 2.3 million shares since, the inception of the program we have purchased approximately 17 million shares or 7.2% of initial shares outstanding for a total cost of approximately $100 million. leaving approximately 50 million remaining under the current program authorized by the board. This concludes our remarks Operator and please open the call to questions.

The floor is now open for questions, [Operator Instructions] our first question comes from the line of Jonathan Bock of Wells Fargo.

Howard and Tanner and Jim you know when we look at the new investments that you've made particularly this quarter, we certainly noticed that second lien bias, which is fine, I think you mentioned kind of senior secured. So would you walk us through where you are seeing value in the second lien category such as BioClinica, K&N parent, PAE as well as power products.

Sure, so I'll take it first, without going through the individual credit shift, as an overall concept. As we said the market is getting more competitive, which is a headwind terms of originating credit. On the tailwind side, our significantly increased presence in a sponsor market both on quantitative and qualitative measures, and by that I mean, adding people to our team that are originating sponsor as well as adding capacity in our affiliates, combined with our exemptive relief which allowed us to win a lot more transaction. So when you sort of look at the opportunities that we've had available to us, pretty much all of those deals were proprietary. Some of they may not have been originated by our sponsor team, but they were sort of taken down from the bank on a proprietary basis and that is consistent with the strategy we hope to employ going forward and you'll also note that our hold sizes in each of those deals are smaller than we have historically had before, because our expectations is we will continue to have a much more granular portfolio of corporate loans and that will be supported by the fact that we will originate a lot more. In those cases, those are larger companies, good sized companies buybacks -- I mean buyout by LBO firms with significant size.

So then just to make sure I'm -- and this will be, maybe the follow up to Tanner or Jim so the APO platform effectively purchased a majority of, so for example those four deals, one was offered by Jefferies, Goldman, BMO, RBC. You are telling me that APO was a global platform purchased more than half of that second lien debt tranche and that it's somewhere else in an institutionally oriented loan portfolio that you manage?

Yes, I'll hit that real quick and again I'll allude to how -- don’t want to get into too many specifics on individual names so we, so we did call out power products and as an instance wherein the global Apollo platform was able to speak with the entire tranche under the exemptive order and gave it some ability to deliver a full solution to the sponsor. The other names, some of which were proprietary, some of which came through the banks, our position, our total hold size was in excess of what was otherwise in the GDP and gave us leverage in the context of getting them allocation and the like. And so as the benefits were born out in that respect.

Got it, and then just to -- hate to be a stickler, but it's always important because majority of folks loves to look at your control of a full tranche as a means to your potential protection in the event of encountering a bump, particularly when the credit markets are over heated. So if you are looking at the BioClinica, the Goldman deal which was -- came in apparent where the Bammal deal which was PAE. Are you saying Tanner that Apollo owns more than 50% of that tranche in order to ensure concerns in the event of a credit blip in either of those credit?

No, the hold is higher than what is otherwise in the GDP, but would not represent 50%, more than 50%. Those names that you called out there, Jonathan, happen to be names that are in bigger companies and I think when we laid out our strategy, we endeavor to get originated transactions, but selectively opportunity will present themselves in bigger companies where owing again to what we want to do in terms of granularity in our portfolio, do not enable us to be as big of a particular tranche, but are still what we believe to be attractive risk reward for the shareholders.

Got it. Then maybe dropping down to another area of opportunity, you mentioned through the MidCap platform so the sourcing of Wright Medical, which I believe was a 50 million commitment, I know you funded about 10 million of it already. Walk us through the all-in yield on that investment, because I'd imagine there were fees et cetera. And is this -- it's just 5.8, but I'd imagine the all-in net yield to you is going to be something larger? Is Wright Medical a representative transaction in terms of first lien yields that will be coming out of the MidCap platform to AINV? Right, I mean I imagine it's probably 8, 8.5 or is it much higher?

No -- sort of yield in a quarter for this deal was over 10. I don’t -- so the contractual yield of 5.8 is the yield on sort of the fully funded commitment, if it got to fully funded, which would not be the expectation over the life of this loan because it's a revolver without a collateral, but a company with a lot of liquidity. The expectation for yield on the AVL business that will be shared with MidCap is in the 9% range on average, that could take the form of yield like Wright Medical, where there are a lot between the unused line fee and commitment fee on the whole commitment as well as sort of other ancillary fees drive the yields away above the contractual rate. And there can also be deals which is more fully funded like a bid loan for example, that is like collaterally and structurally exceptionally strong, but has a face yield much higher in that 9% to 10% range. So in either phase though, to hit the bogey we want it to be at certain size for AINV, and we also want the expected yield to hit at a certain level. In a Wright's case, early on its above where we expected to be for the first quarter, but it should still be well above the contractual rate.

Got it. And then turning to the renewable energy, obviously you mentioned that the reduction of exposure is important, we appreciate that, however looking at its Solarplicity with -- when you think about the margin environment you sold down, but can you give us a sense as to a forward outlook for such an investment when we think about just the all-in solar segment that you have exposure to, I mean you are reducing exposure clearly, I would imagine because there are some risks in the segment, I we're trying to understand how we should position investors thoughts related to whether there are forthcoming losses, because the new isn’t that great and I know the position size is relatively large and they will reduce?

Well, so just we are reducing the exposure overall because this like CLO equity and some of our other positions are just sort of levered positions that are effectively more volatile. And it's a highly-concentrated position which we want to -- in terms of one industry which we want to reduce in the vehicle. The particular -- the forward-looking profile for the industry is actually somewhat dependent basically on what jurisdiction you are in. So the Golden Bear transaction has been really lucrative than we would expect them to be going forward, and we still have an important relationship with our company renew and Solarplicity in and of itself is a very large investment and we have written down, it is a -- this past quarter they have gone 20 year power curve and inflation expectation. Our exposure there is on a cash basis over what we expect under the next 20 years is pretty much set. It's just the question of how that compares to sort of alternative investment. So what that means is that, we pretty much know what we're going to return on a cash basis, the problem is the value is derived by external sources and so the volatility in that value is too high; it's like buying a treasury bond where you know you're going to get your money back at maturity, but your actual value could change a lot. So as a result it would be out preference to exit that, so you wouldn't have to ask that question, I wouldn't have to give this confusing answer. So, the answer is we think our mark right now was -- it consisted with exactly where the curves and inputs are today. We would hope that we could exit that higher because someone will underwrite higher now and there is a chance we could exit it a little lower, we wouldn't exit it a lot lower because we don't have to, and we can just take the cash yield we expect. Does that make sense?

That makes complete sense. And then, look on the go-forward basis, clearly it's becoming a much tighter mark and you're stretching in areas where you can easily add value through the APO platform, MidCap, et cetera, made complete sense, but I'm curious in light of the competition, in light of the potential changes that we're seeing from Washington et cetera, should we expect just a general slowing of overall portfolio originations, just because right now we've heard from everyone, it is an extremely tough time to invest.

Listen I'll start from the count down, there's no doubt that the activity in DC has created a lot of questions and the demand for products exceeds the supply of products. So I can -- that being said, we also see an environment with a backdrop of the overall economic conditions are favorable to credit with lower defaults continuing for some time. So I mean, Jonathan, I think what you're hearing the management, what you're hearing Tanner and Howard say here is, we articulated this strategy six to eight months ago. Smaller hold size really lessening -- decreasing our exposure to structured credit, to renewable, to energy, smaller bright sight, but also having a broader front end having greater selectivity and with the questions you've asked here today you see all that -- the genesis of that in our portfolio. So, you're right, it feels like it's a very competitive time right now, I would suspect that the net underwriting benefits to a variety of folks in our sector might be lower this quarter than last quarter as a generic industry statement, but as 2016 showed us one quarter does not make a year so, I don't want to be in the position to have a macro view. But we're just trying to get our portfolio nice and tight and clean and well diversified. And again to Howard's point, we don't want it to be purely dependent on the crop origination, we don't want to be purely dependent on the street, but being able to have selected that front end when you have 20 or 30 transactions which you can pick your two to four from, that's where we want to get to and that's what we're doing.

That makes total sense, and then Jim, just as a departing question, interest deductibility and how you kind of play its potential whether or not it gets approved or not, I'd imagine Apollo has done some form of scenario analysis, how do you look at, at least that specific tax change coming through Washington and how it affects your business? That's all my questions, thank you.

I think it's a real question mark whether it’s going to come into play or not, I mean, some crude work we've done out of the box will tell us that higher multiple buyouts are going to be -- have a greater impact, if that were to take place in lower value buyouts, I know if the product cut-off point is you know 7, 8, 9 times, but it's certainly is something we're watching, we're watching a lot of legislative action that may come out of DC. But our view is when we can find good companies we want to lend to, especially in the United States, we're eager to do so in a variety of environments.

Yes Greg, thank you so much.

Our next question comes from the line of Terry Ma of Barclays.

Just wanted to touch on Merx, since it’s almost 20% of the portfolio. Can you just talk a little more in detail about just the outlook for that business and the trends you're seeing? there is a publicly traded air lessor that made some comments about how competitive the market is for used aircraft and there's likely not that much upside in the lease rates, maybe no, a little bit downside. If you can just add some color there.

Yes sure. So as we talked about on our prepared remarks, about 19% of the portfolio, as we've talked about in the past, has a lot to do with continued to have performance in Merx and the relative under, you did the shrinking of the rest of the portfolio. Over time as we've guided we like to see that exposure as mid-teens. In terms of the current environment it has become more competitive as you've seen there are a lot of risk assets, we've used that market selectively to monetize a number of our names, credit risk manage around lessees, we have less faith in. And going forward, we still selectively see interesting deployment opportunities, cognizant of the broader backdrop that is pretty competitive on the heels of what we think could be a very differentiated team with differentiated access to the market. So we echo those comments you make in terms of, it has become more competitive, we have used the opportunity to de-risk in certain places, but on the margin are still seeing interesting things from time to time that make sense from a risk-reward standpoint.

Alright, that's helpful and that's my only question, thanks.

Our next question comes from the line of Kyle Joseph of Jefferies.

Just wanted to go a little bit further into your outlook per yields and your NIM going forward. I know we talked about some headwinds from sort of the portfolio reallocation, I know and you touched base on higher interest rates as well, but can you balance those two and tell us your outlook for yields and then at the same time dive into your NIM expectation.

You know we had a certain set of expectations for yield as we reposition our portfolio which was basically bringing the overall yield of this portfolio and from the high tens to low tens, which is what you saw in the origination this quarter, we don't expect -- that is not changing based on where the market is, given the amount of new business that we have to originate at AINV versus the size of sort of our funnel, which is very large across the whole platform, we believe that the market is still allowing us to sort of generate those yield that sort of the risk profile we want. And so, we would expect over time for the yield and a portfolio that doesn't include fee income but the asset yields to be in the very low tens for new originations and then ultimately the portfolio gravitating to them. Do you want to, Greg, jump in and show how the NIM, on how that ties in with this cost?

I think that we've looked at we look at our kind of the right side of our balance sheet pretty well management specially with extending our credit facility, we have opportunities as our certain of our fixed rate securities are coming out of their non-core position. So I think overall the way we've forecasted and relative to our looking at investment yields we feel very good about going forward and producing pretty consistent NIM results.

Alright, and then just one little modeling question, it looks like the fixed income in the quarter declined pretty substantially sequentially is that like a good run rate going forward or was that down from -- where there any onetime of items in that?

There weren’t any significant onetime, I think that it will, but continue to go time overtime as we reduce our exposure, especially in Solar. So you'll see that coming down.

Alright, great. Thanks for answering my questions.

Our next question comes from the line of Rick Shane of JPMorgan.

Couple of things, Greg can you do me favor, I must have misheard, can you repeat the percentage that's floating rate asset? I thought it was 57%, is that correct?

Yes, the way you have to look at it, 70% of the portfolio is made up of both fixed and floating rate. So you have to take out your Merx investment, your Solarplicity investments and then when you take a look at that, 83% of that 70% is floating rate. So that gives you your 57% or 58%. But I think it's more appropriate to look at the portfolio comparatively to corporate originator or corporate syndicated versus some of our verticals that have fixed rate incorporate within their structure.

Okay, got it I didn’t mishear, than that was the distinction I was looking for. By the way. I appreciate the flow work chart on Page 12, I think that's really helpful, it's good disclosure. Now with that said I hear your thesis on that, but from a practical perspective when we look at the asset sensitivity it's not the 70% or 80%, it's the 57% that's floating rate and when I think about the value drivers in the BDC sector over the last two years, it is concentration in energy, it is leverage and it is asset sensitivity and when we look at the strategy, when we look at it's a knob that you have turned, you clearly reduce leverage, you clearly reduce energy exposure. But on your overall basis your asset sensitivity is lower than your peers. Ultimately, a data strategy that you will pursue as well, do you see that is a value driver?

Yes, I mean again, Greg's answered the question, because he's answering what we can control at this minute, right. So if you look at our long-term portfolio and we have effectively aircraft paying about 15% of the portfolio, putting aside whatever detail there might be left the remainder is 85% of either corporate or MidCap loans and the expectation is over the cycle those will all be floating rate unless there is some real unique exception and opportunity. So everything we're originating going forward is floating rate, and so that is a real value driver. We are -- and so -- I mean Greg is just pointing out the fact that we're sort of much closer to there than it may look was with the 57%. Certainly, you are right in terms of the levers, if the rates move we only lever the thing better, better with this floating rate. So yes, when we see our portfolio and how it looks at our end day of all it's when we are just sort of doing everything else boxed up to our strategy, we would expect everything but loans to be floating rate.

Got it. I really thought that perhaps you would answer my question with yes, and then move on, which would of have been great. Thank you, guys.

Our next question comes from line of Chris York of JMP Securities.

So you wrote down your investment in Solarplicity and then on the call here you stated that the input drivers were related to inflation expectations, so what specifically are those inflation expectation inherent in the mark today, and then what changes in CPI would cause this mark to be written down further?

Yes, so we don’t want to get too granular on this particular name, but as Howard alluded to, the mark on that particular investment is influenced by longer term power prices as well as given that the underlying assets have an inflation adjuster, one has to make an assumption on where inflation goes from here. So don’t want to get too specific, but do want to also harp on the same point that Howard made. As we look forward in transitioning the portfolio given the profile of the investment and what can openly influence a mark, this is the type of thing you want to be doing less of and wanted to capture that point as well. So it is linked to those two things and don’t want to spend too much time getting too granular on those.

Okay. And then you did comment that subsequent to quarter end that some of your investment that was repaid, how much, I guess I could run the map, you gave a percentage, but how much was repaid?

Yes, £70 million.

Okay. And then kind of just staying on your -- this one is for Greg, just curious given the size of Solarplicity then the income contribution historically. Why did the company not need to meet a condition of significant subsidiary which were required the discloser somewhat to like Merx?

Well, because we don’t own more than 25% of the equity of the Company. That’s really the threshold this year equity ownership on that.

Then how much I consider with the next -- the Q, is it -- how much equity ownership do you have?

We are just slightly under 25.

Okay, okay. And then you wrote down Venoco, $26 million in this quarter, the company has been bankruptcy for a couple quarters, so what happened specifically? I know you mentioned little bit in your prepared remarks, but in the company's performance or outlook to cause the mark now and then can you talk about the outlook for this investment, and why we should feel comfortable with the remaining fair value risk and the income to continue to improve?

Yes, so if we go back to our prepared remarks and we talked about this name for last couple of quarters, it actually did emerge from bankruptcy, but our outlook for the investment and what generated the write down in this particular quarter was our -- what we were able to surmise about various processes affecting the company, including restart of the third-party pipeline, which actually affected other operators in California. Also as will not come as any surprise, the political environment in California has also weighed on how we think about investments. As it relates to outlook, I would tell you that it is something that we monitor very-very closely, we're spending a lot of time with, but past that we can't really comment too much further.

And then maybe here for Greg, can you breakout the drivers of the controlled and affiliated dividend income from your portfolio companies?

Well the drivers, if you think about it, from a controlled basis there are investment in aviation, also investment in shipping. And the way we look at it, we're either going to invest back into those entity and [indiscernible] opportunities or we pull capital out when we feel we can deploy it more effectively at AINV. And so that's first of the drivers. So I think we've been pretty consistent that that was shipping and aviation can drive somewhere in the neighborhood of $4 million to $5 million worth of dividend income a quarter, that can fluctuate depending upon -- especially in aviation. As Tanner mentioned, where we monetize certain of our assets as we're repositioning and there are gains on those sales, and we may have the opportunity to have more dividend income, but that's a function what we want to do with the capital, either leaving it in Merx or bringing it up to AINV.

And then so how should we think about recurring dividends here from both affiliated and controlled?

So I think when you think of coming out of our two controlled investments or basically three when we look at our shipping, it's 4 million to 5 million, and then you have the run rate on, the only other structured products we've are the Reg track credit trades and also a couple of CLOs.

And how much is that?

Yes, four to five a quarter, and that may end up being two a quarter, so we're probably at a run rate more 7-7.5, right now.

Yes, so seven, 7.5, so we've got 11 here, so about 3.5 to four and one-time from recaps in the quarter?

Yes, recap you have MCF, right here MCF I, and MCF III coming out as we mentioned.

So, basically that -- right the pool of asset generating that income is increasing, it's strong.

And then prepayment fees it appears if I back into it, about 600k, is that correct for the quarter?

Yes, approximately yes.

And you'll notice, if you've looked at the activity for the quarter, the activity was in our structured products and not in our loan portfolio, and that's why you're not seeing the prepayments, the difference in prepayment income quarter-over-quarter.

I know, I had used that from the presentation or the supplement, so that's good disclosure. That's it for me thank you very much for answering my questions.

Our next question comes from Robert Dodd of Raymond James.

Just to go back temporarily to Solarplicity and I think some clarity can be nailed down here, if it's just mark-to-market and volatility to do with forward curve projections et cetera, et cetera, that does not indicate any deterioration or change in the underlying credit and its ability to repay et cetera, right. So the question is, if it's no deterioration credit or weakness of the company was the repayment post quarter then 16.5 million, call it or $20 million round number, was that made at par or at the mark of 78? Obviously if it was par, cash flow is fine, but was there a discount applied on that repayment or was it repaid at par?

That's leverage on the investment, right. So that's effectively a -- that's a repatriation, if you will, of some of our cash, but it's not par or -- that's apples and oranges. That's basically expected leverage on the investment in order to generate an expected return over time. We now have with all the work complete on the whole portfolio, we now have an exact expected amount of cash flow on the whole portfolio over time because there's no more work to be done and no more expenses to sort of being employed. So now we know that, that has been finished basically over the last six months or so and now with its leverage on it, we now know exactly the cash flow that's going out, with the typical leverage. And so, we know the cash flows that we expect over the next 20 to 25 years and so the only thing that changes is what I said it's like a bond, that part's now set. Now the only thing that changes are these exogenous inputs, and so you know I don't think it would be -- I don't think you can back into your answer, which is, it's all equipped to be worked back at its cost of what it's marked at today, with those questions. I mean the answer is, by the end of the 20 years all our money will be returned, plus the rate of return. Right, it's just a question of what that's worth versus an alternative investment over an extended period of time. Which is why again we'd like to exit it so we don’t have to ask that question.

Okay, got it. Secondly, on the ABL side you gave target yields I think 9%, two-quarters ago on the call and the comments during the Q&A you said 10 to 10.5. Obviously there's a range, is this new number, is it lower than you said before. Is that a function of mix, competition, are you going to do -- obviously the range was 7 to 12 or higher, is the expectation that you're going to do some of the lower risk it will move further on the lower risk ABLs or the lower coupon ABLs or can you give us some color about what's changed.

Nothing changed. The 10% was for the MidCap transaction generally which includes the Life Sciences ABL under finance, life sciences tend to be on the higher end of that range, ABL on the lower which is why we set the target as around that. And really we try to use 9 as a threshold, not to say we couldn’t do ABL a little bit lower, but it's pretty much the threshold. So nothings changed. So 9 is sort of the threshold and ABL is on the lower end of that MidCap related products.

Okay, got it. Thank you. And one last one if I can, an asset that's been a non-accrual for long time, obviously Gryphon, major changes there. Except the new administration, obviously has made some noises about regulation on the collage front as well. No kind of granular detail, but on Gryphon, what would it take, was it feasible at all for that asset to, say comeback on non-accrual or to improved or do you have any ideas on the regulatory front that could shift that would be materially beneficial for the asset or is that just not going to have?

You are right to point out that there and it's might be back with some of the questions around tax, there have been rumblings about potential regulatory change with respect to for-profit that would enhance the prospects for those particular companies for that industry. I think as reflected and where we have written down Gryphon, even accounting for the possibility of beneficial regulatory change. There is a very limited window in which we would see significant moves such that that investment would come back on to accrual. I would cautioned that the changes proposed, I think to your question it would have to be up substantially higher than is anticipated in any kind of reasonable scenario to really see any enhanced value. So I'd caution accordingly.

Okay, got it. Thank you.

Our next question comes from the line of Ryan Lynch of KPW.

First one, you talked about on the demand side for launch the competition is obviously very strong for new your loans which is just pressuring some pricing and leverage et cetera. But with the new administration coming and new congress suddenly the equity markets are excited about U.S. economy and U.S. growth. So, I just wondered, are you seeing any of that things sentiment and key sponsors or are you seeing any excitement about the outlook for new transactions from the key sponsor side?

I think people will understand the less regulatory repatriation of lower tax benefits and so we all understands and sponsors collectively understand the upside I think because there is no specific rules on the books right now, it's hard to navigate. So the macro is understandable to see equity market is excited by it, but in terms of actual, what deregulation means for the financial services business, what a benefit to a tax regime. Again, we all see the benefits, but I know maybe if we could we are seeing a specific strategy is being taken. Certainly, the animal spirits are elevated. But in terms of what that actually does, in terms of portfolio or as the individual investments is too early to tell.

Okay, and then just wondering, I might have missed this. With your guys, oil calls and puts that you guys layered on the score the asset it was basically a costless collar you put on. I mean is the goal that just to reduce the portion of the volatility in your $250 million oil and gas portfolio or and how much would impact can that have? I mean you guys still have about $250 million portfolio of oil and gas investments, so how much of an impact can that costless collar have and is that a strategy you guys anticipate continually to add to that both the puts and calls actually growth that derivative book.

So -- it is yes, just to sort of use the volatility. And the answer is, we -- the hedging of the portfolio like this -- some of the portfolio which is potentially on the cusp of being refi'd. So when looking at the overall portfolio that we have sort of more deeper into the value of the company, and our hedging at the company level as well that the companies could have taken on to sort of try to lock in their performance, so we are trying to tie into that. So at the end of the day, it's not an exact science, but it's not an art either. So the amount of the sort of we took on, we think potentially you'd split the returns either way 15% or 20% of our overall exposure and that's outside debt, we expect are repaid somewhat soon.

Okay. Those are all the questions from me. Thanks.

Our next question comes from line of Doug Mewhirter of Suntrust.

Most of my questions has been answered. I had a semantics question, you said when the demand for the product is exceeding the supply, I just wanted to confirm, the demand being the institutional investors, seeking yield or looking for credit investments, meaning more money is coming in and the supply being credit equity deals or other leverage credit deals, is that -- am I interrupting that correctly?

Doug, that is correct.

Okay. And second question about your oil hedges and my last question, is there anything that we have to be aware of in your hedges from a regulatory perspective, in other words, is there maybe expect capital charge that maybe not be apparent from how you are holding on the balance sheet or is that an -- at your 30% bucket and any sort of outsized way just because it's not a traditional BDC financial transaction?

Yes. As Howard said, while it is a 30% basket asset, it was just meant to you onetime to dampen the volatility impact as we go through our broad strategy of reducing our exposure. Don’t expect to it again. We feel like again the costless collar was effective. When we looked to the fundamentals of our handful of companies we had a broader equity exposure, but those run offs to December 31, '17. There is no either hidden agenda or hidden reason why we get it.

Okay thanks. That’s all my questions.

And last question will come from the line of Christopher Testa of National Securities.

Just looking at the structured product's portfolio, you had mentioned that MCF III will repay subsequent quarter end. Is that both the residual interest as well as our class E notes? And my second question on that would be, are you seeing, given the rebound unstructured products the ability to sell out of some of the other positions as opposed to waiting for them to repay?

So the answer to your first question is yes, and then on the second, and I think tied us into the broader strategy change. We are evaluating our existing exposure, given, as you rightly alluded to the strength of that market.

Got it. And can you remind us on how much in repurchases are remaining after the quarter end?

Yes, approximately 50 million.

50 million, great. And so, how much AUM is available across the private funds, whether it's MidCap or just the other Apollo funds?

Well we've a broad set of businesses and APO is a public filer, a public company, you could see the breadth, we have a very large credit platform and a variety of variety of activity in the performing and mezzanine space. So I think it would be probably best served for you to look at the documents on the overall APO presentation.

And just touching on that and the ability to invest with exemptive relief, do you think the ability to potentially take down larger slices of investments given the exemptive relief will help somewhat mitigate pricing pressure, as it's obviously much harder for lenders to move up market as opposed to down market?

Yes, I mean that’s our expectation, it's been our experience at least three months, that we've been able to -- as the market has really-really overheated that we've been able to -- the opportunity to be able to close. We feel like at are at a premium to what some other people can do, we don't have quite the appetite that we have across the board. And so we -- that's far.

And do you think that could potentially generate more uni-tranche and such single opportunities for you in Apollo's portfolio?

Well to go back for a second, we -- our combination of products we've between MidCap and AINV and managed accounts and funds across Apollo we think it as broad as almost anybody in the market and so our ability to be relevant to sponsors and deliver very broad things is a positive feedback. So the more we can do that, the more relevant we can become. And so for AINV, as a $2.6 billion fund, being actually a linchpin of that, but not a huge amount of the dollars, gets sort of a disproportionate benefit of that side. And so -- yes, we expect to be able to deliver solutions at all levels of the capital structure amongst our different vehicles and that's sort of the whole intention of sort of having a combined origination and the exemptive relief sort of the important center piece of that.

Not only on pricing and terms, but again, as you can see what we've laid out the whole side that Tanner and Howard were talking about around the 25 million to 30 million we like that. So having a broader front end, it's not only potentially helps you in pricing and returns, but also just gives you a great ability to have a diverse portfolio, so those are two distinct, but equally important attributes.

And just touching on the Venoco again, you had mentioned one of the issues was restarting the third-party pipeline, just wondering if you can disclose any visibility you have into how long that should take them to get that restarted and have that pick up again?

That will be really best not to comment on. There's a whole host of issues that are included in that, so, it's probably best to comment like we have thus far.

Well, first of all, thank you for the broad collective questions today, we appreciate the following and the support of our analysts, with also all of our investors and we appreciate the process going through as we continue the process of our strategic initiatives, thank you very much for your time and question and we look forward to talking with you in the near future.

Thank you ladies and gentlemen, this does conclude today's conference call, you may now disconnect.