Q3 2020 Earnings Call
[laughter].
Good afternoon, and welcome to Apollo Investment Corporation earnings Conference call for the period ended December 31, 2019 at this time all participants have been placed in listen only mode.
Oh, well the open for question and answer session. Following the speakers prepared remarks, if he would like to ask a question at that time simply press star one on your telephone keypad. If he would like it looked all your question press the pound key I will now turn call over to Elizabeth Besson Investor Relations manager for portfolio Investment Corporation.
Thank you operator, and thank you everyone for joining us today speaking on today's call or Howard Widra, Chief Executive Officer, 10, or power, President and Chief investment Officer, and Greg <unk>, Chief Financial Officer, I'd like to advise everyone on today's call and webcast are being recorded. Please note that they're the property of Apollo Investment Corporation, and then 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 with past May include forward looking statement forward looking statements involve risks and uncertainties, including but not limited to statements that your future results.
Our business prospects in the prospects in our portfolio companies.
You should refer to a registration statement shareholder reports for risks that apply to our business and that may adversely affect any forward looking statements. We make we do not undertake to update our forward looking statements or projections unless required by law to obtain copies of our SEC filings. Please visit our website at www Dot Carlo I see dotcom.
I'd also like to remind everyone that was supposed to be 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 turn the call over to Howard Widra.
Thank you.
I'll begin today's call with a review of the progress we've made over the past few years, followed by an overview of the results for the quarter. Following my remarks, Tanner will discuss our investment activity for the quarter Walt will provide an update on credit quality. Greg will then review our financial results in greater detail well then open up the color questions.
Over the last several years, we've made significant progress de risking the portfolio and building a well diversified portfolio, a first lien floating rate corporate loans, our progress as evidenced by improving our credit metrics. For example, 82% of our corporate lending portfolio is first lien loans compared to 29% in June 2016 over this period.
Our weighted average attachment has declined from 2.7 times to 0.9 times our portfolio is much more granular as evidenced by the decline in our average borrowings exposure in our corporate lending portfolio from 23.7 million in June 2016 to 16.4 million today.
We have also significantly reduced our exposure to noncore and legacy assets, which are higher on the risk spectrum and have more volatile returns at the end of June 2016, noncore and legacy assets totaled $1.065 billion at the end of December 2019, non corn legacy assets totaled $358 million 60.
The 6% decline.
Net proceeds from the sale of repayment and non corn legacy assets totaled approximately $600 million over this period, we continue to seek to monetize a restructure our remaining noncore assets, what the ultimate color maximizing value for our shareholders.
Additionally over the last few years I think they've been able to take advantage of two important regulatory release Exemptive relief to co invest and a reduction our asset coverage requirements.
Pollo direct origination platform originates a significant amount of senior floating rate loans, which are available pay I envy given exemptive relief and are within our target spread range, given our ability to use more leverage given our ability to co invest with a broader Apollo platform, we've been able to participate in large commitments, while maintaining relatively small hold sizes on AI NVS.
Balance sheet. In addition, and I'd be was fortunate to be the unique position to already have all the origination necessary to implement a prudent lower risk portfolio growth strategy when it adopted to reduce asset coverage requirements.
Both of these regulatory release has allowed us to build a diversified granular portfolio a first lien floating rate loans. In this regard since April 2018, when we began to invest and lower risk assets. Following the passage of the small business credit availability.
We have made approximately $2.4 billion of new corporate lending commitments 1.9 billion of those commitments are currently outstanding of which approximately 1.5 billion are funded all of those are performing.
Lastly, we've implemented a number of shareholder friendly actions, which demonstrate our commitment to creating value for our shareholders. In may 2018, we announced changes to our fee structure, including adding a total return requirement to our incentive fee calculation. We also permanently lowered our management fee to 1.5% and further reduced the management fee to 1% on assets on an.
Thats in excess of one times debt to equity.
Second R&D has been actively repurchasing stock we believe that stock buybacks are the most accretive use of shareholder capital when the stock is trading at a meaningful discount to NAV. Our board has authorized $550 million plans for total authorization of $250 million today, we have repurchased over $208 million of stock below NAV.
Which has accreted 68 cents to NAV per share.
We believe the combination of AI NVS fee structure changes and active stock repurchase program demonstrate our commitment to creating value for our shareholders.
Moving to the December quarter, we continue to sex successfully implement our plan to prudently grow our portfolio, we had a strong origination quarter and grew our portfolio by approximately 6% by increasing our exposure first lien floating floating rate corporate loans sourced by the Apollo direct origination platform.
During the quarter, we also reduced our exposure to second lien loans and to the our noncore and legacy assets second lien sales and repayments totaled $62 million and noncore and legacy asset repayments totaled $46 million given our strong net investment activity. Our net leverage ratio increased to 1.43 times at the end of the corner I stated on our price.
The conference calls this leverage level is consistent with our expectation that we will operate between 1.4 and 1.6 times.
In addition, this quarter was an important inflection point in the makeup of our non core portfolio. The noncore portfolio decreased by approximately $67 million through the combination of repayments in unrealized losses, reducing noncore assets to 12% of the portfolio. In addition, the risk attributable to our remaining noncore portfolio has decreased due to.
It is successful restructuring of our investment in carbon free chemicals during the period. The combination of this restructuring and the and creative impact to the reinvestment of the proceeds received from our non core and legacy repayments. How a lot have allowed us to have a smaller and better collateralized noncore portfolio, while improving the overall earnings profile of Apollo investment.
Moving to our financial results net investment income for the quarter was 54 cents per share, reflecting the net portfolio growth and there were total return feature in our incentive fee structure, which resulted in a nominal incentive fee for the quarter. It is important to note that average leverage for the quarter was 1.27 times, implying that the larger portfolio will continue to drive earnings growth.
In the current quarter.
Net asset value per share was 18 to 27 at the end of December down 2.3% quarter over quarter. The 42 cents net reduction in NAV per share was due to a 54 cents net loss on the portfolio, partially offset by net.
Net investment income in excess of the distribution of nine cents and a two cents accretive impact from share repurchases non corn legacy assets accounted for 51 cents or 95% of the net loss oil and gas accounted for 19 cents or the loss legacy assets for 18 cents renewable 13 cents and shipping one cents.
Turning to our distribution. The board has improved to 45 cents per share distribution to shareholders of record as of March Twentyth 2020, with that I'll turn the call over to Tanner sort for investment activity for the quarter. Thank you Howard the environment for middle market lenders remains highly competitive given the significant amount of capital raise for us middle market lending as Howard mentioned during the course.
After our investment activity focused on first lien floating rate corporate loans sourced by the Apollo direct origination platform new investment commitments in fundings were 491 million and 399 million respectively. New debt commitments were all first lien floating rate loans. These new commitments were across 28 companies for an average commitments.
Size of 17.6 million the weighted average spread over LIBOR of these new commitments with 612 basis points within our target range of 500 to 700 basis points for incremental assets. The weighted average net leverage for new commitments was 5.3 times within our range of four to 5.5 times lastly, 85% of these new coming.
Yes, we are made pursuant to our co investment order.
Sales totaled 15 million and repayments totaled 212 million for total exits of 227 million, resulting in net funded investment activity of 172 million, excluding merck's and revolver activity during the quarter, we reduced our exposure to second lien loans and noncore and legacy assets second lien.
Sales and repayments totaled 62 million, including PS I, just sir and PT intermediate.
Noncore legacy asset repayments totaled 46 million, including 34 million from asset Repackaging legacy asset 5 million from Glacier, one of our oil and gas investments and 6 million from two of our renewable assets.
In addition, net fundings on revolvers were 1 million. We also received a net repayment of 2 million from Merck's net fundings totaled 171 million, including Merck's and revolver activity.
Now, let me spend a few minutes discussing overall credit quality no investments were placed on or removed from nonaccrual status at the end of December investments on nonaccrual status represented represented 0.7% of the portfolio at fair value down from 1% last quarter and 2% at costs down from 2.1% last call.
After.
Moving onto our credit metrics, the weighted average asset spread on the corporate lending portfolio decreased 16 basis points to 651 down from 667 last quarter and compared to 612 basis points for new commitments. The lower average spread is due to the decrease in second lien exposure and the increase in first.
Only exposure the weighted average net leverage of our investments decreased from 5.5 times to 5.27 times and compared to 5.3 times for new commitments and the weighted average attachment point of the portfolio declined from 1.3 times to your 0.9 times.
The average.
The average interest rate interest coverage improved remained at 2.5 times as we've said in the past we view this trade off of the yield for credit quality as a positive at this point in the credit cycle with that I will now 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 68.5 million for the December quarter down 1.8 million or 2.6% from the prior quarter. The decrease was attributed to attributable to lower recurring interest income and fee income partially offset by higher.
Our prepayment in dividend income despite positive net investment activity recurring interest income declined due to the LIBOR due to the decline in LIBOR and lower spread on new investments compared to investment sold are repaid.
And the cadence of activity during the quarter.
The income was 1.2 million down from 2.2 million last quarter prepayment income was 2.8 million up from 2.1 million last quarter and dividend income was 3.2 million up slightly from $2.8 million last quarter expenses for the quarter were 32.3 million.
Down 2.3 million or 6.7% quarter over quarter, primarily due to a C.
A significant lower incentive fee and lower.
Interest expense recall the incentive fee was revised to include a total return requirement with a rolling 12 quarter look back beginning from April one 2018 and was put into effect on January Onest 2019 interest expense declined slightly due to.
To a decline in the weighted average funding cost given the redemption of the baby bonds in the prior quarter and the increased utilization of the credit facility, which benefited from the decline in LIBOR, partially offset by higher average debt balance given the portfolios.
Growth.
The quarterly weighted average interest costs declined 39 basis points from 4.59% to 4.2%.
The average quarterly debt outstanding balance increased by approximately $90 million from 1.5 billion to 1.58 billion.
Net investment income was 54 cents per share for the quarter compared to 53 cents per share for the September quarter net leverage at the end of December was 1.43 times compared to 1.24 times at the end of September average leverage during the quarter.
It was 1.27 times.
From an average of 1.13 times during the September quarter.
Net loss in the portfolio for the quarter totaled 35.9 million or 54 cents per share approximately $34 million or 59% of the net loss was attributable to our noncore and legacy assets, including our investments in carbon free Glacier solarplicity.
And spotted hawk.
Net asset value per share was 18027 cents at the end of December compared to $18.69 at the end of September.
Turning to is the portfolios composition, our total assets had a fair value of 3 billion at the end of December and consisted of 151 companies across 27 industries. We ended the quarter, we core assets, representing 88% of the portfolio up from 85%.
The into September and compared to 80% a year ago noncore assets decreased to 12% of the portfolio.
Down from 15% at the end of September and 20% a year ago.
First lien assets increased to 82% of the corporate lending portfolio up from 77% last quarter and up from 62% a year ago.
The weighted average attachment point improved 2.9 times down from 1.3 times last quarter investment made pursuant to our cone that's been order increased to 76% of the corporate lending portfolio at the ended the quarter up from 74% last quarter and 50.
9% a year ago.
The average corporate lending portfolio yield for the quarter was 9% down 40 basis points quarter over quarter. The decline was due to the combination of a decrease in LIBOR and a reduction in the weighted average spread to the portfolio, which decreased 16 basis points from 6676.
One.
On primarily due to our increased exposure to firstly and our reduced exposure to second lien investments on the liability side of our balance sheet. We had 1.79 billion of debt outstanding at the ended the quarter. We continue to evaluate alternative sources of capital in particular with particular emphasis.
This and diversifying our funding sources.
As you may have seen last week, Fitch lowered and disease credit rating from Triple B minus two.
Double B plus stable, while we are disappointed by Fitch. His actions. We believe that we have built a high quality senior loan portfolio, which more than offsets our increase.
Most of leverage middle market close with loans identical credit quality often are rated higher we believe the improved risk profile of our portfolio will result result in earnings stability, which is in the best interest of our stakeholders lastly regarding stock.
Hi backs during the quarter, we repurchased 502000 shares at an average price of $15.65 for total cost of 7.8 million.
Dollars given the recent rally in this stock no shares have been purchased since early November. This concludes our prepared remarks and operator. Please open the call two questions.
As a reminder to ask your question. Please press star one on your telephone to withdraw your question pressed upon.
We'll take our first question from the line of Kenneth Lee with RBC capital markets.
Hi, Thanks for taking my questions.
Just one on the asset sales looks as if you got some sales within the legacy noncore side of the portfolio wondering what your expectations are right now for any further sales within that portfolio in the near term.
Yes, so so its sales and repayments right. So there was one meaningful sale and then of around 30 million in the remainder was repayments on.
Some of the existing assets and so we would could we expect to continue to have sort of repayments on our because we were focused on sort of liquidity and all on all of these and getting a return of capital.
So.
Obviously wholesale access of any any any of those any of these assets are sort of binary but if you look at glacier for example, we receive $5 million during the quarter.
And each of the last 345 quarters I don't know exactly we have received cash capital and will receive capital this quarter as well. So we would Ics we would expect to have two sources of liquidity in that portfolio, which is one continue to receive capital to pay down the exposure and then continue to works for.
Work towards significant restructurings or exits, which can happen sort of effectively anecdotally.
Okay very helpful and just one follow up if I may.
In terms of the the portfolio positioning.
Talked about the first lien as a percentage of portfolio increasing this quarter.
And that's just been consistent with the overall macro outlook you expect this trend to continue over the next few quarters in terms of the positioning just wanted your thoughts on that thanks.
Yes, I mean, that's that's where we're focused spending where we.
At our current our current leverage level.
Yes.
And our end the makeup of our portfolio, we believe we have.
Good earnings power consistent with where we've got we've guided and one of the key legs of the store. If you will have that is is.
Predictable credit quality and so the way we deliver that is by staying high up in the capital structure.
Great. Thank you very much.
Your next question is from Rick Shane with JP Morgan.
Hey, guys. Thanks for taking my questions.
So.
When we look at the non accruals, there's been sort of the steady.
Right down a fair value there over the last three quarters.
Is there continued deterioration or you just taking a more conservative approach what are you seeing.
As we look at that those four investments.
Well, it's almost all spotted hawk and it's almost all driven by commodity prices.
Got it right so.
Not a fundamental company change other than the fight the cost of commodity.
It's not exclusively that because almost all that.
Great. Thanks for the other issue is that look I think there.
Two divergent trends here.
One is that the.
The operating EPS the Eni at this point is steadily covering the dividend dividends you guys and.
A good job.
Moving into right direction, there and taking advantage of the higher leverage at the same online and Avi.
Continues to decline.
How do you reconcile those two trends and how do you ultimately reverse the.
Yes, yes.
So so on the one side you know obviously, we're focused on having the capital that we have.
Valuable to be at work and generating revenue to be sufficient to cover the dividends. So as you noted we're sort of there with a portfolio that we have this noncore portfolio, which has a lot of assets like spotted hawk, where portions non earning or did you know the renewables, which are in equity which are not generating you know a cash.
Cash return right. So on on average that portfolio is producing somewhere in the six or 7% five 5.6, yes. So depending on the dividends are paid off the shifts in a given quarter and so you know our focus is sort of twofold is maximizing the rich.
Turn on those assets in order to ensure that NAV, you know doesn't decline all that much but at the same time, you know focused on getting that capital back as it can be reinvest that sort of double the return so put another way. Our if you look at you know as I mentioned in my comments, we receive $600 million.
Off over the last two and a half years on on on a billion 50 portfolio.
So there has been like $100 million of write down while roughly what was received $600 million of proceeds. If you took that same percentage on the portfolio I'm not at all predicting that.
The hope and expectation is recovered all but if we if we got 85% of our cash back Tomorrow, you would have another reduction in NAV of.
40, $50 million and you'd have a significant increase in earnings.
And so.
So deep because we put that to work at 9% and you know in sort of in normal course and so.
We'd rather not have those two countervailing trends, but we feel like that the you know.
Where the losses in NAV are occurring one they driven been driven a lot by commodity prices and so they can change we'd rather not have that risk. They can change but to date in debt reduction in NAV has been joined by a return of a lot of a capital and then noncore, which then has been put to work, which has been been able to drive and.
Hi.
So.
Obviously is that noncore portfolio goes down.
Hi.
The level of possible write off goes down.
So we're focused on that so everybody can have total clarity, but we feel like at the point, where we're covering our dividend. It's now mostly economic upside to the shareholder even.
Even if net meaning we'll be able to pay the dividend. The dollar 80, a share consistently and cover and even beyond even if we continue to realize the volatile realize more volatility due to the commodity prices in these in these assets.
Yes, Okay and last question I mean look you guys are approaching your leverage targets and.
You know that any continued strong market.
We will prove to be.
Good deployment of capital the flip side is it.
If we were to see dislocation.
Like we saw back in 2012.
Where.
There is some pressure in terms of and Avi in that causes the leverage ratio has got wall.
And you guys aren't able to sort of lean into a more opportunistic market. How do you feel about that trade off given where you are right now in terms of leverage.
You know.
We we feel like first and foremost in order to sort of change the narrative for our business was to have a stable predictable earnings stream, which we feel like we have in these assets and their quality assets sort of set up from a portfolio structure perspective to perform well through the cycle.
You know.
If the market changes then there is more opportunities to deploy capital we feel like the combination of normal course repayments and our ability to sort of effectively cherry pick those opportunities off the platform, which is going to because because the capital there on the Apollo platform and so given given our ability to.
Sort of just have some capital be generating as well as sort of sell some assets to have that still remain liquid on our balance sheet that we'll have the ability to sort of you know on the margins take advantage of that opportunity.
But of course, not as much as of 2.5 to one but but enough enough that we will we will we will be able to benefit from.
Great.
Thank you very much.
Your next question is from Alexander with Compass point.
Good afternoon.
A couple of questions one in relation to.
The debt side, the liability side of the balance sheet I mean your upwards of.
70, 580 per cent covered by the facility in what.
Vehicles do you think you have available to you, especially in light of the pitch downgrade to diversify the liability side of the balance sheet.
Yes, so Casey we have we still have on investment grade rating from Kroll and.
We feel very comfortable that we can either attack the on.
The debt market and or the convert market on.
At rates that.
Our are acceptable to us as we look at on where our portfolio growth is going to come from.
Okay. Thank you.
I calculate adjusted NII for the quarter I come up with 43 cents a share.
And looking at where LIBOR is going forward, even with the expansion of the balance sheet. It seems to me that that you guys you really need everything to go right to cover the dividend and comfortably covered the dividend and frankly not very many.
Well first lien senior secured loan funds have a dividend on NAV that is in excess of 10%.
Wouldnt offer investors.
Better.
Total return if you were to adjust the dividend to a level, where you were beating the dividend consistently and building any the overtime wouldn't that frankly make more sense.
No I think no I think you know your adjusted numbers, probably a little bit low.
You know.
Based it's I think it's a little bit low but call it in the 43% to 45% range.
Our average leverage for the quarter was was lower than where we're at right now so that drives you know another three or so sense.
To tour and I, you know and and and as our portfolio grows sort of like our recognition of fees also sort of it will tend to expand so there isn't I wouldn't say, we're just creeping over it so I think.
Our our view is that the expectation of the shareholders is to is for us to deliver you know the return that we promised over the past two and a half years and we feel like we can do that we also feel like though fully employed at this left and right now LIBOR is almost hit the worst possible point for us because it goes down much more floors.
Kick in if it goes up we make more money so even despite LIBOR being at that level, we've gotten to a point, where we can cover the dividend.
And when you say everything has to go right I mean, if we keep our leverage levels. There you know we will cover.
You know the and any you know sending the question is how do we grow NAV in some other ways and there are some other ways with some capital gains with Tagalong equity investments, we're doing with the value we are driving it marks.
With with some of those things and so.
I don't think that we think.
If it would be necessary to change the dividend and we think.
All the times, we you know since I started being associated with you with say I envy when the dividends sort of was cut to this level. This is the point, where we've been most secure and covering it.
Okay. Thank you for taking my questions I appreciate it.
Your next question is from Chris York James.
Good afternoon, guys and thanks for taking my question.
So Howard or Greg I know your portfolio companies are now hedging commodity risk, but what effect has the decline.
Year to date for crude had on your portfolio, maybe even specifically spotted hawk today and then secondly, if oil stays at this spot rate are any of your portfolio companies and carry a spot to cover debt service or required equity injection.
So the the.
The spot price doesn't drive the valuation write the longer term curve drives the valuation so the movement into prices don't directly correlate to the valuation as of the snapshot of Fat day that said you know the long term projection of prices today is is it different not not.
Lower in all respects, but lower in motion specs than it was a month ago, and so devaluation and sort of the too.
The two oil.
Deals that are currently on the book would be down some of.
That you know in this in the short term given that they have been generating cash and paying down debt at least in the case inflation spotted hawk has been sort of for the most part.
Stable from a cash flow perspective, and they have some hedges in place we don't expect there to be sort of.
[music].
Meaningful cash needs, obviously could affect their ability to pay down debt.
But in the short term, we don't Theres no question, though if oil sat its 50 now before the sat at 40 for an extended period of time that would be.
That would create some some.
Some issues, but but not where it is today in the medium term.
As I hope hands that answer yes, so I mean, I look at the port curve and yet it's moved down a little bit too with the spot here, yet and so im just trying to think of if this body Ben Yes, Youre correct.
I don't want to give you exact number I mean, we have a number you know based on last week, but you know I'd like last Friday. When we asked the same question you just asked and you know the thing is Brent is relevant for one company W.T.I.s relevant for another one those curves look differently prices.
Prices on the Carver actually hop in 2023, and 24, which impacts some of sort of our expected stuff coming out of the ground in our valuation.
All of which is to say you know the the quarterly valuation of these comps based on those long term curves are little bit frustrating because they don't necessarily speak to what the value will ultimately be when we get to that period of time that said if oil sitting at 60, it's better for the company is that it's sitting at 50, and so you tend to see the geography.
Move in that direction, and and so given the sort of the drastic moving oil over the past month, you would expect more that this quarter if it didnt if it didnt change, but just like when it goes up it doesnt drastically go up it wouldn't be you know as drastically down as well like it's what's from 60 to 15% to 18% decline, it's not something like that.
In terms of value.
Got it okay. That's helpful. Im just trying to understand the pain points there.
At a price level potentially spotted hawk, maybe you talked about the short term so if it was.
55, $50 over the next 12 18 months, what what pinpoint.
I'll just move on to secondly, I mean, Tcf this little bit I just it was on your capital structure, obviously, 80% of your debt capital is tied to your bank revolving credit facility.
And then you did mentioned the downgrade.
Below Gee, you do accrual at investment grade, but how should investors think about the sustainability of just that one screen.
And then the potential to diversify you talk about on balance sheet securitization, which would be a good form of debt capital, but what do you think is the the sustainable cost of your debt capital at full leverage.
Well I mean, I think as we said we were 4.2.
With that May if we did a bond offering or convert.
That would go up slightly you know on.
Given the size of an offering that we may do.
But I don't think it'll be a meaningfully maybe you're you're closer to.
4.44, 0.5, I may still a very favorable cost of capital.
In the marketplace.
Got it and then I would have to review the covenants, but is there any pricing adjustments in your bank credit facility and on the downgrade there.
No no because it's really just for sub it's really for sub debt is the rating so.
Okay.
And then Howard last one here talk a little bit your prepared remarks about exemptive relief benefiting the IP.
That's true the reason why bring it up or is that Pollo does have involvement with the coalition for business development. So prompt me just revisit your potential update on the likelihood for.
Empted relief for Bdcs in the application of if Thats. The this year.
Right, so that it's been actually withdrawn.
Okay that that approach.
At this point.
And we.
Go on you know more toward.
A legislative approach.
And working with the fund of funds.
You know.
Application that sort of the fund to fund rules that are being you know looked at by the FCC and change. So we're looking at that is a better approach.
I think the good thing is that we hear the FCC became very familiar with this topic and.
On the withdrawal of our application, which is really a function of the direction that they were going in with the fund to fund rules.
Got it Greg the withdrawal that application change your potential identification of a probability of the removal of if that fee. This year can be.
On no I don't if were able to get it in the fund to fund rules. It actually has a better chance of getting done than it did on as a stand alone.
Exemption that we were asking for.
Got it that's it for me thanks, guys.
Your next question is from talented with Jefferies.
Hey, good afternoon, guys. Most of my question Dan.
That answered just just a few modeling one in terms of dividend income when any.
One timers in the quarter and let's say good run rate so far going forward.
No I think you're you're fine it you know to eight to 3 million.
It's really coming out of our shipping invest and merck's on.
Got it that help and then a it looks like Pik income increased in the quarter you know what specifically drove that.
Yes, so what drove it was on bumble bee on which.
Had their restructuring.
Approved this weekend on we've.
Restructured our position in been paid down on.
Partially partially subsequent to on.
At quarter end.
So is recognized and then.
Oh, sorry.
No go ahead.
Hi, just stepping back.
Broadly appreciate candidates color on me.
Portfolio metrics, but button simplified in terms in terms of gross.
The revenue and EBITDA can you tell us why we are versus three months ago and personal even a year ago.
Yes, sure it's very much paying a continuation of the trends that we've seen wherein growth on an organic basis is still positive from a revenue standpoint, but EBITDA or earnings growth is underperforming the magnitude of revenue growth as our companies are grappling with a number of cost pressure.
As be it and depending on the industry, obviously things are more pronounced.
But but freight costs have gone up wage and in certain places notwithstanding the most recent downdraft in commodity prices commodity price pressures and so you've seen that in a trend that frankly has been something we've seen for the last couple of quarters.
And and continued through through Q4.
Got it that's it for me thanks, very much answering my question.
Your next question is from Ryan Lynch with KBW.
Hey, guys. Thanks for taking my questions.
First one I wanted to talk about your leverage range.
When you guys had initially on past two to one leverage you guys had a leverage range of 1.25 to 1.4 times.
That target leverage range has increased over time to the current 1.4 to 1.6 times I'm just wondering it seems to be in an environment that we are today, which has a lot of competitiveness Robbie ssli.
Over 10 years removed from the last credit cycle I'm. Just wondering how you guys are getting comfortable increasing your target leverage range, you would seem to be that.
You would want to increase that range and environments, where you're seeing robust activity.
And there is very good deal flow and very good risk rewards, which I don't think is how most participate market participants would characterize this market. So can you just talk about in this environment. How are you getting comfortable and what does the thought process of increasing this this target leverage range.
Well.
So the first thing I'd say is you know we are seeing very good deal flow.
And that's because of what we've sort of focused on for the last few years is that the amount of of deal flow that he has to take off to the overall origination platform is such a small part that even if deal flow across the platform is more constrained because of the market dynamics you talked about there's a lot of deal flow available to.
Sort of get you know just sort of pick off the stuff that builds our portfolio. The right way. So you know we had said 1.25 to 1.4.
Over sort of it really the amount of time to get too about the end of this year. That's what we said about 18 months ago, which is what we've gotten too and we continue to sort of have these opportunities. It's sort of you know what you're asking similar to the two one of the previous questions is.
You want your dry powder for other things.
The answer so the first answer is we want to you know, we believe and we believe that as it is corroborated by sort of the significant amount of capital that we raised from institutional investors for the same assets across our platform versus a lot of our competitors that we have you know.
We have a very good engine producing proprietary asset.
At a I envy you know.
The leverage that its employing you know obviously is high versus historical levels for bdcs, but low actually versus you know a lot of of.
Commercial finance or or or or specific.
Investors leveraged these assets and that's because when you build a portfolio. When you have a wide funnel and you build a portfolio that is granular and broad based you know the ranges of outcomes, even in sort of the district, you're part of the cycles is now are quite a bit. So you know we so so are the overall.
Answer it we are being circumspect across our whole platform you know our origination takes into account.
The the the challenges of the markets, we reject a huge amount of deals and we like a few of our competitors.
Take areas and called for example, because of the size of our platforms and the size of our origination teams still have the ability to sort of differentiate ourselves because of like our side and the depth sizing our depth of our relationships to have enough assets for AI envy to grow and just sort of Ryan like the last point I'll say is the leverage loan portfolio.
Mid cap has not grown over the past year, even though theres been a lot of origination and that's because it is a larger more stable. It's already had as much runoff has it generates new business and it spreads those assets awful lot of balance sheets. So we know we view the market what you view the market. We just few we just have a very big.
Funnel of deals coming through.
Okay. That's helpful color just one more for me and I'm not sure. If you mentioned this but.
If you kind of hold.
The portfolio realized and unrealized gains and losses neutral next quarter under that assumption.
What percentage of your incentive fee would you guys expect to earn would you had spectrum has zero full what I'm just kind of trying to get a gauge of where that incentive fee is looking to shake out holding that portfolio depreciation rate appreciation constant.
If there were no if there were no losses next quarter, we pay the full incentive fee.
Okay.
Okay. Those are my only question. Thank you guys.
Your next question is from Robert Dodd with Raymond James.
Hi, guys.
Probably a couple of effect on the downgrade or the you've addressed it a couple of times, if I look at and obviously, if you shift the mix from the facility to more note. So other things the blended cost would go up but when I look at the 2025 notes half that trading they look to me to.
He trading above par before the downgrade and still above par now. So do you think the the Fitch downgrade is going to have any meaningful impact on you'll kind of like for like borrowing costs, rather than you know I mean, you mentioned about go up to four four if the mix of types that.
Shifts, but do you think that downgrades actually going to affect your like for like kind of.
All in cost on that note side.
No I don't think so no and.
I just quickly did the math it actually only goes up to four three if you do a 200 million dollar offering.
And you'll be inside of the cost of funds on the on the.
Our bonds that outstanding so.
Got it and then one more if I can which is.
Having some trouble.
Selling something on the Pik income on the piano well in the queue in the notes 2.6 million was recognized but in the cash flow will elsewhere in the queue like there was almost 13 million capitalized that's the biggest.
Delta in that I've ever seen from you guys. I mean was that also related to bumble bee or could you give us any color on reconciling that because it's a pretty big gap.
Yes.
Yeah, we think carbon free it was our restructuring of the carbon free position.
On the recapitalize the pick that was.
Had not been capitalized prior okay. So that was the previous non accrual that you know you you.
No that could pick the capitalize it but you didnt run it through the piano, but.
No. It had been writing it had added run through the PNM Allen in prior quarters sitting on and it was sitting as a interest receivable and that was capitalized in the restructuring of the debt.
Okay got it.
I appreciate it that that's all I had thanks.
And your final question comes on line of finishing with Wells Fargo Securities.
Hi, Thanks for taking my question just a follow on carbon free can you give us.
To the extent you are able any context on the restructuring just seeing this was.
And affiliates investment.
So what it did they sort of trip any performance measure and then a second parts of that.
How is is this de risks beyond your position converting more so into equity or debt at the company level as there is there more reduce debt.
I'm not first of all just let me clarify I have you are saying, it's an affiliate position.
I'm not sure would you.
On your table like your ownership percentage affiliate.
Oh, because now I set out for okay.
Well, let me let me the I don't think Thats you know.
So there's two things that the restructuring did to make us more stable is with basically we you know that the owner the equity owner of of the odd the facility.
Basically what was running.
This project.
Both to produce profit as well as to you know build off and IP value off sort of a carbon free technology.
Our restructure basically.
No change to our deal to sort of align us directly with that equity investors. So we had to be both hats.
Debt on our operating company, if you will and we had ownership in the in the IP that is monetizable in other places, we believe and has raised money.
I had a good valuation and so what we've done in terms of sort of the stability of so one we've diversified our collateral if you will so we basically the position now has both the previous collateral had before which is this plant and it also has this IP which is separately.
Separate value, that's one and two because of that and because of allocating that the allocating a portion of the value to that equity debt that the operating companies force to carry is now much lower so so the cash flow profile of that out of that entity is it's easy for into services debt.
It's still is it still driven by a commodity price. So it can still have some variability on its ability, but it now has less debt.
So it has a much lower burden of debt.
I also know pick one accrue anymore. So it'll be it will have something like $33 million adapt that will pay steadily that it could cover which is far less than how to cover before and then we have to separate pool of value are and so we view it as meaningfully de risked from where it was before.
Obviously, we wrote some down as well so there's less that theres less debt to service and there's more collateral.
Okay appreciate it.
That color.
Just another follow on on mid cap there was a couple questions.
Can you talk about the.
Mid cap funnel and its allocation across the accounts that's been obviously growing since since Apollo acquired and and since you now co invest but seeing you all Apollo is a BDC generally onboarding you know your L. L 600 last couple of.
Quarters is this reflective of the overall funnel or is there a tilt.
It was on one end the BDC.
Say, all 600 stock than that and on the other end you're seeing SMH as you know what's more allocation to the L. for 50 stuff would that would that be.
Is there any directional tilt there or is it even even keel dot allocation.
Well you know it's not we you know we have a lot six or seven separate investors that look to.
To invest in deals and they each have different criteria. Some return based on leverage based some industry base to could be it could be anything and so you know.
By enlarge what AI envy is doing is the vast majority of the origination in our leverage loan a clock. There you know there is not as much being done in the L. for 50 range Hot mostly because that's not where the market is people. That's been people. One you know effectively four and a half to five type.
Instead as opposed to three and a half four times that for the lower cost. So you know.
So just to give you some numbers mid cap did $13 billion of new commitments last year.
About two thirds of that was in leverage lending. So we know the other the other third is in life sciences they'd be out real estate and when those deals makes sense that is part of the origination for I'd invite makes sense. It basically means they're big enough that AI beacon getting enough size that it makes sense for them to do the other two thirds a across our leverage.
Loan book.
That that $6 billion is something like 80, or so loans, you know theres probably.
20 of them that are below the yield profile that and im guessing 15 to 20 of them that it below the yield profile that and you may want to choose to do.
Okay. Thank you for the color that's all for me.
There are no further questions at this time I'll turn the call back over to management for any closing remarks.
Thanks. Thank you everybody for your time today and your continued support please feel free to reach out to many of US. If you have any questions have a good night.
Ladies and gentlemen concludes today's conference call. Thank you for participating you may now disconnect.
[music].