Q2 2020 Earnings Call
So in listen only mode. The coal will open for question answer session. Following the speakers prepared remarks, if you like to ask your question at that time simply press star one under telephone keypad, if you'd like to withdraw your question first about <unk> I'll now turn the call over to lose money, that's an investor relations manager for Apollo Investment Corporation.
Thank you operator, and thank you everyone for joining us today speaking on today's call. Our Howard will drive Chief Executive Officer, Dan or Pal, President and Chief Investment Officer, and Greg <unk>, Chief Financial Officer, I'd like to advise everyone on today's call in webcast are being recorded. Please note that the property of Apollo investment Corporation.
Any unauthorized rebroadcast any form is strictly prohibited.
Remained about the audio replay 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 webcast may include forward looking statements forward looking statements involve risks and uncertainties, including but not limited to statement that your future results.
Our biggest prospects in the prospects of a portfolio companies you should refer to a registration statement shareholder for tourists that apply or business and that may adversely affect any forward looking statements we may make.
We do not undertake to update our forward looking statements or projections unless required by law to gain copies of our NTT filings. Please visit our website at www Dot Apollo I see dotcom I'd also like to remind everyone that we've posted a supplemental financial information package on our website, which contains information about the portfolio as well as the Companys financial performance.
At this time I'd like to kind of call over to Howard will drive.
[noise] Thanks Elizabeth.
I'll begin today's call by providing a brief overview of our investment activity and financial results for the quarter. Following my remarks, kinda will discuss the market environment, our investment activity for the quarter and will also provide an update on credit quality. Greg will then review our financial results in greater detail well then open the call for questions.
During the quarter, we continue to successfully implement our plan to bring me grad portfolio given the reduction in our asset coverage requirements. We had a strong origination quarter I grew up portfolio by 7% by increasing our exposure to first lien floating rate corporate long sourced by the Apollo direct origination platform given our strong net investment activity, our net leverage ratio increased to one.
0.24 times at the end of the corner or corporate lending portfolio increased to 72% of the total portfolio up from 68% last quarter first lien assets increased 77% of the corporate lending portfolio up from 71% last quarter. The weighted average attachment point improved to 1.3 times down from 1.7 times last call.
Her investments made pursuant to our Coinvestment winter increased to 74% of a corporate lending portfolio at the end of September up from 67% last quarter. Our current pipeline is healthy and we're confident with the pace of our new business right [laughter] consistent with our plan. We also successfully reduced our exposure to shipping asset 10 aircraft leasing during the.
Quarter, we sold two shifts in our M.C. investment at a price of Bobby internal allocated value, reducing our shipping exposure to 5% of the portfolio down from 5.8% last quarter. In addition, Merck sold several after aircraft during the quarter, which a lot of merck's to repay capital pay I, envy, which reduced our investment to 12.9%.
The portfolio down from 14.5% last quarter.
Moving to our financial results net investment income for the quarter was 53 cents per share, reflecting the strong that portfolio growth as well the impact from a total return feature in our incentive fee structure, which resulted in a partial incentive fee for the corner.
Asset value per share was 18 69 at the end of September down 1.6% quarter over quarter.
31 cents net reduction in NAV per share was due in part to a 22 cents decline in the value of oil and gas investments due to that caused the decline in a price of oil, which negatively impacted evaluation of our investments as well, it's a six cents loss today due to the extinguishment of our 2043 baby bonds.
The net loss was partially offset by net investment income in excess of a distribution and the accretive impact from stock buybacks.
I'd like to also provide a brief update on merck's as previously discussed our strategy includes reducing our balance sheet exposure to aircraft leasing while growing marks's earnings from servicing income Merck's continues to source transactions for other Apollo funds, which generate servicing fee income for merck's during the quarter Apollo global how its initial close for fun focused on aircraft.
Craft leasing as previously disclosed merck's will be the exclusive servicer for aircraft purchase privates fun.
He will also receive a fee offset against fees due to its advisor associated with capital deployed by this new fund.
Moving on the equity market did present us with what we believe as an attractive opportunity repurchase our stock we consider stock buybacks below NAV to be component of our plan to deliver value to our shareholders. Since the ended the quarter. We've continued to repurchase stock. The company currently has approximately $41.9 million available for stock repurchase under the current authorization we.
Tend to continue repurchasing our stock should it continue to trade at a many at a meaningful discount to NAV.
Turning to our distribution. The board has improved to 45 cents per share distribution to shareholders of record as of December 22019.
We know that many of you were focused on the impact of lower interest rates on our ability to cover our distribution. We expect that our earnings power will continue to grow in excess of the impact of declining interest rates as we continue to grow our portfolio incremental assets are now benefiting from the lower 1% management fee given that our debt to equity ratio was above one times and we all.
So we remain focused on reducing noncore assets, which are generally non yielding or lower yielding with that I'll turn the call over to Tanner to discuss the market environment and our investment activity for the quarter.
You our overall middle market loan volumes during the quarter declined as lenders have become more selective in are pushing back on aggressive deals in terms middle market loan yields remain flattish as the decline in LIBOR was offset by higher spreads so I'd in fees.
Environment for middle market lenders remains highly competitive given the significant amount of capital that has been raised for U.S. middle market lending.
As Howard mentioned during the quarter, our investment activity focused on first lien floating rate corporate loans sourced by the Apollo direct origination platform.
Our investment commitments and fundings were 377 million and 358 million respectively. All new commitments were first lien floating rate loans. These commitments were across 22 companies for an average commitment size of 17.1 million the weighted average spread over LIBOR or these new commitments was 604 base.
It is points within our target range of 500 to 700 basis points for incremental assets. The weighted average net leverage for new commitments was 5.4 times within our target range of four to 5.5 times lastly, 94% of these new commitments were made pursuant to our co invest in order.
Sales totaled 20 million and repayments totaled 136 million for total exits of 156 million, resulting in net funded investment activity of 201 million, excluding merck's and revolver activity. We sold two shifts in our MC investment during the quarter at a price above the internal allocated.
Value generating 12.5 million of net proceeds to Jay I in the and reducing our shipping exposure to 5% of the total portfolio down from 5.8% last quarter. In addition, net fundings on revolvers total totaled 24 million.
We also received a net repayment of 17.9 million from Merck's from the sale of several aircraft and its portfolio net fundings totaled 207 million, including Merck's and revolver activity now let me spend a few minutes to Scott disgusting overall credit quality no investments were placed on or remove from non accrual.
Status at the end of September investments on nonaccrual status represented 1% of the portfolio at fair value down from 1.7% last quarter and 2.1% at cost down from 2.5% last quarter.
The decline was primarily due to the write downs on both spotted Hawk and Kalo holdings. The decline in spotted Hawk was primarily due to the decline in the price of oil regarding kalo. Our investment was placed on nonaccrual status last quarter due to the underperformance from lower customer demand consolidation challenges in higher costs the company's liquid.
The position has continued to weaken.
The company expects to complete a comprehensive restructuring in the coming months.
Moving onto our credit metrics, the weighted average asking spread.
On the corporate lending portfolio decreased 19 basis points to 667 down from 686 last quarter and compared to six so for.
For new commitments, the lower average spread is due to the decrease in second lien exposure and the increase in first lien exposure.
The weighted average net leverage for investments increased from 5.43 times, the 5.5 times and compared to 5.4 times for new commitments.
And the weighted average attachment point of the portfolio declined from 1.7 times to 1.3 times.
The average interest coverage improved slightly increasing from 2.4 times to 2.5 times, we view this trade off of yield for credit quality as a positive at this point in the credit cycle.
With that I will turn the call over to Greg who will discuss the financial performance for the quarter.
Thank you Tanner beginning with the income statement total investment income was 70.3 million for the September quarter up from 66.5 million for the June quarter increase of 3.8 million or 5.7% increase was attributable to higher interest income.
Dividend income and fee income, partially offset by lower prepayment income when excluding prepayment income in the 3.3 million dollar catch up interest we received last quarter from our investment in sprint.
Interest rose, 7.1% in line with the growth in the portfolio.
Prepayment income was 2.1 million as compared to 2.9 million last quarter fee income was 2.2 million.
As compared to 900000 last quarter.
Dividend income increased quarter over quarter as we receive dividends from both merck's NMC expenses for the quarter were 36 point.
34.6 million up from 32 million in the prior quarter due to higher interest expense management fees given the growth in the portfolio. As a reminder of the management fee was reduced from 1.5% to 1% for assets in excess of one times debt to equity.
For the September quarter, 1% management fee was applied to approximately $180 million worth the gross assets. In addition, $1.9 million of incentive fees were accrued during the quarter impacted by the total return provision in our fee structure.
Net investment income was 53 cents per share for the quarter compared to 50 cents per share for the June quarter net leverage at the end of September with 1.24 times compared to 1.03 times at the end of June during the September quarter, we funded 105 million in two.
And as a group and then subsequently in October so down approximately 65 million of our position.
To treat to achieve.
Our desired hold size adjusting for the impact of NFV net leverage would've been approximately 1.19 times average leverage during the quarter was 1.13 times.
Up from 9.93 times during the June quarter, the net loss on the portfolio for the quarter was 24.3 million or 36 cents per share. The net loss was primarily attributed to our investments in spotted hawk, one of our oil and gas investments and Ks low, which was which was placed on nonaccrual status.
In the quarter as Howard mentioned in mid August , we redeemed $150 million.
Our on 6.78 unsecured notes due in 2043.
As a result, we recognized a realized loss of approximately $4.4 million or six cents per share on the extinct on the extinguishment of the notes on during the quarter.
Net asset value per share was $18.69 at the end of September compared to $19 at the end of June 31 cent decrease as previously mentioned by Howard was primarily in our noncore oil investment kalo and the loss from the extinguishment.
Our debt the average corporate lending portfolio yield for the quarter was 9.4% down 50 basis points quarter over quarter. This decline was due to a combination of a decrease in library and a reduction in the weighted average spread.
The portfolio, which decreased 19 basis points from 6.6 from 686 to 667.
Bips, primarily due to asset deployment into first liens and a reduction in our exposure to secondly.
On the liability side of our balance sheet, we had 1.58 billion dollars' worth of debt outstanding at the ended the quarter as we mentioned last quarter and given the current rate environment. We continue to evaluate alternative sources of capital with a particular emphasis on diversifying our funding sources, our weighted average interest rate.
Right.
On our average debt for the quarter was 4.6% down from 5.2% last quarter. If you exclude the 2043 notes, which were repaid during the quarter.
The weighted average annualized interest cost would've been approximately 4.5% for the quarter.
Lastly regarding stock buybacks during the quarter, we repurchased 880000 shares an average prices $16.15 for for cost of 14 $14.2 million and since quarter end and through yesterday, we have repurchased an additional 502000 shares.
At an average price of $15.65 per share for total cost of 7.8 million.
This concludes our prepared remarks, operator, please open the call to questions.
As a reminder to ask a question you will need to press Star then number one on your telephone to withdraw your question press. The pound key our first question is right of Rick Shane from JP Morgan Greg.
Hey, guys. Thanks for taking my questions. This afternoon.
Look I think you touched upon this during your prepared remarks, but just love to explore this little bit more when we look at the for non accruals from last quarter.
In general we saw further deterioration in the fair value marks.
Curious it.
That is a function of.
What we're seeing in the market which is that.
I think Rick we lost you.
Operator can you hear US yes, indeed weekend, Rick I believe you may have actually put your line on mute are you still there.
Sure.
Hi, I believe.
Okay.
When we go to share.
Today is having some problem to this phone will move to the next question. Our next questions line of fin O'shea from Wells Fargo Securities.
Hi, guys. Thank you I just a small question first and then screens to here on the Merx aviation side are you able to give any context on the level of the see rebates are servicing fee will receive and and then I'm sorry, if I missed that well this.
The part of the.
What do we see this on the reimbursements line or somewhere else.
Yeah with regard to marks on the way the our agreements work on with both the manager.
The.
In the aviation fund on when capital is deployed.
We will receive a servicing fee at the merck's level, so that will impact on the cost structure Merck and also the income on and ultimately the valuation on.
Also the.
On manager will rebate to the fund on 20% of any management fees and incentive fees.
Sensitivities, we paid at the end of the term of the fund, which is probably six to seven years.
But the management fee.
It would be current so once the once the equity is deployed on.
We will earn that so I think we'll start reporting as we start receivable you'll see it in the obviously in the income statement from the fee rebates and then we'll also highlight the merck's impact.
Got it thank you for the color.
A follow up.
On the.
Mid cap side, it sounds like you're expanding there there was a purchase of.
Pncs franchise finance.
You guys talked about.
Growing that platforms verticals more can you talk about the impact to Apollo will you.
Should we expect to see a wider funnel or will you focus the BDC still on the core.
Cash flow life science strategies for example.
Yeah, I mean, I think you know as a general sort of strategic matter across Apollo, whether mid cap or Apollo, we're looking to expand sort of our origination reach especially in areas, where we think theres. Some you know guardrails around them. So we can have some sort of proprietary access franchise finance has hit.
Storage had been has been a section on sort of commercial lending, which has historically been.
Relatively economic economically resilient and and has a pretty sort of long term history of steady granular performance. So that business made sense overall for what we're trying to do across about boarded Apollo and mid cap to the extent that those acquisitions like franchise generate assets that that work.
Sure.
Hey, I envy, you would expect I envy to do some so what is work mean it means.
You know effectively be.
To be low loss, given default and have hit our yield hurdle and if the franchise deals do that.
We.
We would expect to do.
Some of them a lot of the loans in that platform or smaller.
But there are some you know that where you know there are there our equity backed groups that own 40, 50 60 franchises that have.
No that look like cash flow loans, and now we sort of have the expertise and relationships with the franchise orders to do them well.
Appreciate that Thats all for me. Thank you.
And our next question its line of Kyle Joseph from Jefferies Kyle.
Hey, good afternoon, guys. Thanks for taking my questions congratulations on good quarter.
I think first question for Tanner you gave us.
We obviously want to your non accruals.
At least had some incremental energy weakness in the quarter, but stepping back from those could you give a sense for.
The broader portfolio performance outside of those industries and outside of the troubled credits.
Yes, sure and this will rhyme with what we've said.
In previous quarters as well as frankly, I think some of the headlines that you see just across.
The Wall Street Journal and the like is there's definitely been a deceleration and if we look at our performance you were still seeing showing positive revenue growth.
But in something that many of our borrowers have had to grapple with it it has become a more difficult margin environment, whether it be.
In terms of wages freight costs and certain commodities pressuring the margins and so for.
One of another quarters in a row, you've seen last earnings growth and you saw revenue growth, but clearly positive clearly still positive but added a decelerating rate we like I would I would argue many of our peers had been very sensitive to more cyclical businesses in light of where we are in the cycle.
But thats clearly an element, where we do have some of that.
Exposure, where you're starting to see some some weakness on the on the manufacturing side and more just than than typical idiosyncratic type situations.
Got it Thats helpful. Thanks, and then Greg just just talking about margins here obviously.
Yes, it had a nice debt pay down to reduce your cost of funds in or balancing that with a lower rate environment and ongoing movement higher up the capital spectrum, but as you think about your your yields going forward with some offsets on the cost of funds side, where do you see that trending both in the near term and longer term.
Well I think if you look at our spreads for the quarter compared to last quarter last quarter, we were about.
550, Bips and this quarter were six so for I think Weve I think when we're looking at new originations I think we flattened out a bit.
And I think so we'll be in that range on the six which is in our target range in our modeling.
Five to 700 Bips.
So I think that that is good and I think we'll continue to use.
The credit facility on also to balance on rate reductions I also would say that when we looked at our.
LIBOR loans most of the impact of the recent drop in.
By the fed had already been kind of somewhat partially impacted this quarter already because if you look at where LIBOR was trading in the ended June and July it pretty much.
On baked in the most recent an adjustment. So I think that will also so I think consistently you will see kind of where we are earnings power.
Continue to grow as we add assets on but I think we're in a good place at this point I'll. Just comment quickly is there has been a modest widening in spreads that is offsetting some of the pressure in LIBOR as we mentioned in our in our prepared remarks keep in mind and many of the deals that were doing often times, there's a long lead time.
Between when we are indicating on those deals and they actually get executed so the effects of that.
Of that change in market pricing, sometimes operates with a lag is it often does in the in the middle market.
I appreciate that very helpful. Thanks for answering my questions.
And our next question is mine of Casey Alexander from Compass point Casey.
Yes, good afternoon.
First of all.
Maybe just this is nothing.
But.
The 111 million dollar draw on the revolver. So just sounds like a lot to have happened in one quarter was there anything idiosyncratic about that level of draws that went out to revolvers and did any of those revolvers go to companies that are on non accrual.
No nothing on nonaccrual, that's normal course for ABL revolvers.
Right.
As revolver does that's not like cash flow revolvers that are just drawing up because they are challenged for liquidity there might be little pieces of that but and the vast majority of that is effectively.
Ill draws which are also netted out by ABL pay downs. So when we report the net activity as well, which is something in the $15 million. So let me try to sort of clarify and then report reporting and actually if it's not clear would love your feedback to how to make that clear.
Okay, great. Thank you I.
Normal course.
That is helpful.
Thanks, you talked about the 12 and a half million dollars proceeds from sales to ships as being.
Bob your internal allocated value is that internal allocated value different than what those ships were on the balance sheet for or is that are you calling that the same number.
It's the same number the reason why we use that terminology is because it's a.
Those two ships sat in a company with.
Eight or nine ships and so those two came out and the value of the company is we value. The company. The company is a buildup of each of those ships. If we sold each of the ships at their internal allocated value or above we would recover above the value of the whole thing, but we we don't valuate by putting an exact number on each ship from.
From the outside valuation firms perspective, if that makes sense. So yes, yes.
So you know you it's a good catch because we per week perfectly use that but but it is effectively.
Slightly above what we guided the shipset. The these two ships.
Great.
No thats very helpful. Thank you.
That's all I have right now if I have anything more I'll jump back yet.
Great.
As a reminder, again if you'd like to ask a question. Please press star one on your telephone keypad. Our next question is mine of Robert Dodd from Raymond James Robert.
Hi, guys just a clarification first on on the merger.
The management fee rebate that'll be a contra expense item rather than.
Topline item.
Yes, yes, yes got it got it. Thank you and then on very helpful color on a kind of the broad mark in terms of revenue growth EBITDA as I said everything when I look at on page I guess Sixsix <unk> presentation. The weighted average net leverage if I look at the second lien for the last couple of quarters that.
Come from 589 to 626, but at the same time, you haven't actually deployed any new.
Second lien so that's kind of I mean, you probably exited some so.
Is it a comp consequence of exits or is it an indicator the depression deterioration in EBITDA at in the second lien book that may be outpaces, the broader deterioration in the broader EBITDA trends you ceiling in the portfolio.
So very much to the former with the caveat also not surprisingly that the best candidates for refinancing are those that have de levered. The most and so you naturally expect that.
To occur aware and there's an adverse selection right, where you Delaware levered seconds or coming out we have not deployed I think save for a handful of million into the second lien in terms of that performance versus.
The first lien book I couldn't point any material difference in terms of the operating environment for either either company I will say however, our second lien deals happen you typically skew to bigger companies, but with that nothing nothing else to say about the relative performance of our first lien credits.
Versus our second lien credits and then just to that point, if I can wait one more on the on the the bigger companies I mean as a company gets larger obviously, probably gets more overseas customers et cetera versus domestic.
And domestic environment seems a bit better than the global environment right. Now. So you are seeing any any delta between performance between who's got exposure more focus domestic versus increasing international exposure.
Yes, I don't think it necessarily breaks down first lien second lien by and large given our mandate for us domestic businesses, we are less.
Fortunately less.
Less weighted towards.
International jurisdictions, and but that said there are certain.
Idiosyncratic instances across the portfolio, whether it be the effect of the tariffs or as you alluded to the relatively poor economic environment internationally again, not expected to be widespread in our portfolio given our mandate for 70% use.
Domestic.
Ending to U.S. businesses.
I appreciate it thank you.
And our next question is one of Paul Johnson from KBW Paul.
Hey, guys. Thanks for taking my question.
My question is around.
I look at your dividend today.
About a 9.6% yield or so on your book value.
From the presentation here that portfolio yields about 9.6.
Thank you can potentially get that slightly higher things like a 9.8% yield on your core portfolio, but even as the rotate your assets into your sort of ideal core.
Are you still see enough opportunity under your strategy and also specialty verticals.
Hands.
Income and earnings.
To maintain the dividend, especially as.
Kick back in.
Yeah, yes.
I think we sort of we're been somewhat consistent about this in terms of sort of just the math which is that.
As our portfolio grows you know two or the target leverage which we have said.
1.25 to one for maybe we sorted would say that one five or something now.
That earnings power, especially given the 1% management fee you know effectively covers the.
The decreasing yield.
Now I'd like you know coverage decreasing yield but also covers the decreasing LIBOR.
That's so so let me sort of put that another way because obviously.
When we 18 months ago, we sort of had projected that at one in a quarter times levered to leverages at we're at today at the yields we expected to be at which was a little bit of a higher LIBOR around 10%, we could make 46 or 47 cents, obviously, because LIBOR is now lower and are in yogurt compressing at that one.
0.25, we don't get there that's why I'm, saying, one for one four and a half, but we still have room within our strategy to be able to cover that.
There are a couple variables.
That.
Impact each quarter, which is our fee income.
Which has been.
Actually averaged a pretty steady amount over the last.
Over the last three years bucket, but could change quarter over quarter odd.
So we feel pretty good about where that needs to be in order to sort of covered the dividend. So so hopefully that sort of clear. So we considered we I mean, we build up on this model if we have spread if we have.
Yield compression spread compression as Greg said, I think thats sort of leveled off and.
And we have LIBOR going down obviously, our cost of debt goes down as well.
We do not need to have that much more leverage than we have today in order to sort of consistently covering the dividend.
Okay, guys that this great.
Great color.
No. It's been a couple of questions on on leverage portfolio companies.
One thing I wanted to ask about.
Little bit is the.
Leverage on first lien new commitments I believe that increased a little bit.
Past quarter, three nine times back in March.
5.4 times this quarter is that just a function of the market.
Investment funding that any.
Specific to your strategy.
I think it was actually a little bit of a mathematical anomaly, we were longer deal and I say, which we said we sold down over the quarter in that.
It had 6.2.
Times.
Our leverage at closing and was 100 million. So in our first liens for the quarter. Your originations were 264 million and 100 million of that was NFL today, and we sold it down to 30. So skewing, it's really skewing that number. So we should we should have corrected we sure it but we haven't corrected for previously.
When we are long thing. So we just kept that in the numbers, but created with you took that noise out it would be very close to what it was.
Last quarter Okay.
Okay and last.
Last question.
The simple I remember a number of quarters ago that you had some oil and gas hedges in your portfolio.
Outside of oil.
Could you remind me where those those run off or is that no longer part of this strategy.
Are they still in the portfolio no they right they ran off.
And you know the hedging is done at the company level and has been.
It's been a you know I think actually relatively successful over the last year part of Glacier strategy for sure in terms of how they generated cash but theyre all the hedging is done at the company level now.
Okay.
Thanks for taking my questions silica.
And our next question is from line of Rick Shane from JP Morgans.
Hey, guys can you hear me.
Not if you are going to cut off again, if you ask about non accruals again [laughter] yeah. The list the list of people, who would like to be able to me. It means that is not sure it I'm guessing.
Yes.
Anyway, two questions and thanks, and sorry about that.
First what I was really getting out was okay. Nonaccruals showed a little bit of weakness in terms of valuation some of that idiosyncratic.
One in signal of an inflection point, though more generally would be divergence between.
You are better investments injure weaker investments are you starting to see that at all within the portfolio.
No.
No. So so let me just for.
The to the too.
Significant.
Our write downs in the non accrual deals are idiosyncratic one on sort of restructuring credit the other one just on commodity prices.
So no like macro trends for that we have not seen in divergence.
It's Tanner said, probably a little slower growth this quarter than other quarters.
We don't see any sort of overwhelming trends in the portfolio that are notable.
And you know even beyond unity Ivy portfolio, but across the greater platform, where we see something.
That we can say this is a query or at least leading indicator of an inflection point. Obviously you know retail has been slow for a long time unrelated to the economic sector and there's some things that you can point to that feel.
That are noteworthy trends in sub industries, but certainly not in our portfolio like the.
Theres always companies that perform better their investment case, and there is always wanted to perform worse, but no difference in that sort of.
Bell curve than there than there has been historically.
Got it okay great.
And then second question and I like the way Paul for in the question related to dividend in Aro we.
When we heard and spoken with some of your peers. They see higher end leverage more as a defensive opportunity during periods of market dislocation basically historically bdcs have been unable to deploy capital into attractive markets.
Because they traded below NAV and they don't have cushion.
And in some ways. It sounds like you guys are headed to your NAV or your leverage targets.
Basically in order to sustain or are we.
Curious how high you would be willing to take leverage in a market dislocation in order to be able to take advantage of things or do you think that you're sort of using that dry powder now.
Well first I want to sort of at least you know.
Hibbett your premise a little bit because as you know the reason why we are deploying our leverage right. Now is because we believe we have the best senior debt origination platform in the country.
And with our Exemptive order and our ability to leverage that's now available for the BDC investors should take advantage of and we believe that over the last few quarters rebate that pretty clear the diversity of our assets are the granularity of our assets sort of the consistency of those assets. Unfortunately, you know obviously some of that's colored bodies.
Historical invest investments, we have which.
Don't let the numbers come through as much but we think that as a strategy or as an investment option for people getting sort of access to a relatively unique finance company mix of assets.
From the platform that we create it's something that is up more value than you know.
Playing sort of disconnects or the market at appropriate times, so we like our strategy.
That that so so then thats going into next thing like what level are we comfortable getting our leverage to you know on.
I think what I would say is historically you know people would sort of say I'm going to stopping 0.8 times because they want it and so I don't know if that translates into new world at 1.6 times or 1.8 times could you need point to Cushing to 0.4 question, but I think we would say 1.6 times, that's sort of where we think is fully leverage.
If as a result of getting to 1.6 times first on what we believe it's sort of a quality portfolio the market than disconnects and we don't have liquidity I think we're pretty comfortable that we will internally generate enough liquidity to take advantage of those things that's a portfolio roles I mean, even even in a tight market.
You know loans tend to your loans amortize things pay off you created enough liquidity take advantage of those type of situations.
So you know I guess.
And People's narratives change all the time, depending on sort of whats available to them for us the the strongest attribute we have is significantly larger pipeline available.
Then as compared to the size of this vehicle.
Got it okay into your feeling like the bundles big enough.
The the counter pointed out I think would be if we think back and I may get my timing wrong, but I want to say it was a fall of 2012.
There was a market dislocation you guys were relatively highly levered there was relatively less liquidity available to use some of your peers had more liquidity.
And there was a divergence in performance over the next six to 12 months.
Theres no question that if the market disconnects and people invest money, especially if the if they invest money, which I'm not so sure. They will do in this cycle as much as they did in the cycle, you're you're referring to in broadly syndicated loans that trade down that can quickly recover.
That's it investment opportunity just like you know buying gold at the right time would be.
And but that's so so there's no question, having capital available valuable for that and timing. It right is an opportunity that people should take advantage jobs, if they have money and it sits right in front of them.
We don't believe that we should be positioning our business to wait for that because we believe we can have a longer term stable economic performance with a broad portfolio.
That's more valuable in the long term, even if we miss that opportunity because what the reason why things diverged is because not so much that people made a lot of money on those trades. It's also that you know the people who weren't capable of taking advantage that lost a lot of money on the portfolio. They carried into that and you know we're building a.
So we don't believe that Thats the position will be in vis-a-vis really almost everybody. We compete with Gotta look it's a fair point people don't pay you too to time to market. They paid make good credit decisions and that's ultimately what what your.
Striving towards and look I have not historically been as clear about this I mean, the our whole strategy is there is a.
A 20 plus year origination history on our mid cap team through these cycles and there's no question.
And economic cycle impacts everybody, but there are some time tested things.
Portfolio diversification being you know.
Focusing on low loss given default asset base.
Asset coverage, even in cash flow loans being in product sets that are that thrive in some challenged.
Economic environments like asset based loans all of those things.
All other things being equal help you and so we are very focused that's why I like the most important number we feel like almost and everything we show is the average borrower exposure.
Two years ago that was 27 million at 16 million now.
And we are much bigger business.
Hey, Greg. Thank you very much for taken all my questions.
And our last question its line of Casey Alexander from Compass point Casey.
Yes, Hi, I'm, sorry, I should have remembered asked this before but there is particularly in the upper middle market. There's been some discussion about some.
Spillage, particularly on the leverage loan market that would be rated single B is build back into not a driving market opportunity, but an incremental market opportunity over and above what you might have normally see have you guys seen any of that or does do you know your group and.
And the mid cap team.
Sort of originate in a unique funnel that wouldn't necessarily participate in that.
We have definitely seen it I mean, you know every every sponsored deal that falls in the range that isn't that could have been broadly syndicated is now looking much more aggressively at doing and smaller lower middle market or or small smaller deals. We broadly syndicated market are all single B credits city all fall in that category.
Our our all looking at private execution at least as an alternative and probably as a favored one at the same time that these assorted platforms and.
The larger platforms have more capacity to do that stuff, including Apollo, it's why even though in the third quarter. We saw lots of metrics about middle market volume being down you saw people like our OCC in areas in the us.
Have origination above their targets because that status do you got is definitely driving market activity.
Do you think that's sustainable for a while because I mean, you know there have been times in the past where like in the fourth quarter 2016, where it was technical and some spilled out and then it corrected itself very quickly but to the ratio of downgrades to upgrades and us leverage loans is running three to one and much higher than where it was.
In the past and so do you think that perhaps this is a sustainable phenomenon for some period of time.
Yes, I mean, I think that our thesis here across the board Apollo is that this is a secular change that there will be even driven by market challenges, but but it will also be driven by the flexibility and the size of the capital available to private market, which will even sort of.
Work in markets that aren't don't have some noise in them. So.
So, yes, I mean, I think thats, our expectation and I think our peers expectation as well.
Okay, great. Thank you very much I appreciate its very helpful.
There are no further questions and I'll now turn the call back over to management for closing remarks.
Alright. Thank you on behalf of the team. Thanks for your time today. Your continued support please feel free to reach out to any of US if you have questions having tonight.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
No.