Q4 2020 Earnings Call
[music].
Good morning, and welcome to the Apollo Investment Corporation earnings Conference call for the period ending March 31st 2020.
At this time all participants are in a listen only mode.
The goal will be open for questions and answers session. Following the speakers prepared remarks.
If you would like to ask a question at that time simply press Star then the number one on your telephone keypad. If he would like to withdraw your question press the pound cake I will now turn the call over to Elizabeth Besson 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 we address Chief Executive Officer, Tanner, Pal, President and Chief Investment Officer, and Greg <unk> Chief Financial Officer.
I'd like to advise everyone that today's call on webcast are being recorded. Please note that near the property of Apollo investment Corporation that any unauthorized broadcast in any form is strictly prohibited.
For me 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 statement.
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 company.
You should from first where most recent filings with the FTC for risks that apply more 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 Apollo I see dotcom.
I'd also like to remind everyone that we posted a supplemental financial information package on our website, which contains information about the portfolio as well as the Companys financial performance at this time I'd like to turn call over to our Chief Executive Officer Howard Winter.
Thanks was that's.
Good morning, and thank you everyone for joining us today first and foremost would like to express or deep gratitude to all the health current SMS professionals in the central business workers, who continue to work tirelessly to seems to serve our communities. We extend our deepest sympathies to all those directly affected by the pandemic all view on the call today, we hope in each of you in your families are healthy and save during these difficult times.
I'll begin today's call with the discussion about hey, how many ideas position. During these unprecedented times I'm also provide an overview I doubt results for the quarter.
We my remarks, Kinda will review our investment activity for the quarter I will discuss the impact of the cobot 19 pandemic, an economic shot down on our portfolio.
Greg will then review our financial results in greater detail and discuss our liquidity position. We'll then open the call for questions. During today's call. We were we won't be referring to some of the slides in our investor presentation, which is posted on our website.
Since the onset of the Koby 19 pandemic Apollo it seamlessly transition to a remote work environment, while ensuring full business continuity our priority, it's been a health and safety of our employees, while maintaining normal business operations as a farm were well equipped to work for movie from the most senior levels on down we've been in regular dialogue with our portfolio companies on their respective owners.
To evaluate the impact of a pandemic on their businesses and liquidity in order to identify and addressing issues as early as possible. We have long standing relationships with most of the sponsors that on the companies in our portfolio and we're working closely with them to support. These companies. We have found these conversations to be thoughts on constructive as we collected we manage the economic impacts independently.
Today, we have generally been pleased with how management teams and sponsors and handle these conditions in the coming months, we expect to see an increase in discussions with borrowers in their sponsors regarding the need for covenant amendments and request for additional support and our investment Committee is meeting frequently discussed portfolio company development and how do we address each situation.
Clearly there are many unknowns regarding the full impact on a pandemic an economic shutdown in each one of our companies, but we'd like to provide you with some general observations as we all know covert 19 pandemic has been an unprecedented shock to the global economy.
Hey, I envy entered this volatile period with a well diversified senior corporate lending portfolio and less sick cyclical industries with granular positions a portfolio, which we believe is generally well position to withstand economic volatility.
88% of our corporate lending portfolio sponsor backed and as I mentioned earlier, we're having constructive dialogues with these sponsors to find solutions for our company's has needed.
We believe our portfolio repositioning over the past several years has allows us to enter this period and stronger position.
That said outside of our corporate lending portfolio, we do have exposures to industries that are experiencing direct impact from the economic shutdown, including aircraft leasing and oil and gas, which can or will discuss in his remarks, we have already been reducing our exposure to some of these more impacted areas prior to the pandemic precisely because of their concentration and inherits a symptom.
Really need to volatility.
It is during this type of challenging environment, where I'd be can most benefit from its affiliation with the broader Apollo global platform.
Power has successfully navigated many market cycles disruptions in periods of heightened volatility, we're able to a valor sounds would be expertise of more than 450 investment professionals globally, you gain insight into the broader economy and on specific industries.
Regarding our liquidity, we believe we have adequate liquidity to meet our commitments many of our borrowers did drawn there revolvers. During the period Midcap is the agent for nearly all our revolver and delayed draw term loan commitments and is actively monitoring every commitment a significant portion of our unfunded commitments are not available tomorrow's most of our revolver committed.
It's are subject to borrowing base and many of the companies do not have the requisite collateral delayed draw term loans are typically used to support portfolio company acquisitions and have incurrence covenants and therefore, we do not expect these facilities to have any material utilization in the current environment.
Further we in our affiliates are extremely well situated to support our existing borrowers with new commitments as needed by virtue of mid capping a well capitalized co lender on much of the portfolio and given the FC Fccs recent co investment relief, which allow certain of our other affiliated funds to also provide capital to our existing borrowers subject to satisfaction.
Certain can distance conditions contained in the Exemptive order.
Greg will discuss our liquidity and unfunded commitment exposure in greater detail during the call.
Moving to our financial results net investment income for the quarter was 59 cents per share driven by portfolio growth ended December quarter, and good fee income, including the syndication of a number of loans and the total return feature in our incentive fee structure, which resulted in no incentive fee results were negatively impacted by the codes at 19 pandemic, which has caused severe disruptions in the.
Global economy, and negatively impacted the fair value our investment portfolio net asset value per share at the end of March was $15 in 70 cents, a 14.1% decline quarter over quarter. The two dollar and 58 cents decrease is attributable to into dollar and 81 cents net loss per share in the portfolio partially offset.
By net investment income and except in excess of the distribution by 14 cents and a 10 cents accretive impact from the stock buybacks below NAV.
Slide 16 in our Investor presentation shows the net loss for the quarter broken out by strategy as you can see our corporate lending portfolio accounted for 97 cents for 35% of a total net loss our investment in Merck's, our aircraft leasing portfolio company accounted for 44 cents or 16% of a net loss and noncore and legacy.
Assets accounted for $1.39 or 50% of the net loss, while only representing 10% of a total portfolio Greg will discuss the drivers of the net loss in greater detail.
Due to the net loss on the portfolio and a small amount of net fundings. The company's net leverage rose to 1.71 times at the end of March It is our intention to reduce the funds net leverage as new commitment activity has slowed and we expect some amount of repayment activity, although although below normal levels.
Turning to our distribution. The board has improved to 45 cents per share distribution to shareholders of record as of June 18th 2020.
We in consultation with our board will continue to evaluate and monitor the appropriate this distribution level in light of the impact of the covert 19 pandemic uneconomic shutdown or portfolio companies, taking in consideration the yield on the portfolio its credit performance and resilience and incentive fees.
With that I will turn the call over to 10 or to discuss our investment activity and our portfolio.
Thanks, Howard first of all that go Howard comments, and I hope, everyone is healthy and doing well.
My remarks today will focus on four topics the current market environment, our investment activity, a review of our portfolio and our outlook for future activity.
Starting with the market environment, the volatility triggered by Kogut 19 cents massive shockwaves through the broadly syndicated leverage led segment.
The pandemic has led to an unprecedented disruption and business activity across a broad swath of industries.
Certainty over the duration of the crisis since led many companies to enact measures that will ensure that they have ample financial resources right off the storm.
To that end companies have been drawing on available capacity on their credit facilities are securing other financing to enhance liquidity activity in the middle market remains slow.
And sponsors and lenders continue to struggle to evaluate how to price risk due to the low visibility surrounding the duration of the pandemic and resulting economic shutdown.
Against this backdrop, new corporate lending commitment for the quarter totaled 153 million across 14 companies, 100% of the new debt commitments were first lien floating rate loans.
All of these new commitments were made prior to the market dislocation that's funding for the quarter were 8 million, including 47 million of net revolver funding as Howard mentioned, we did see an increase in revolver draw requests during the period, but that is sense leveled off.
I wanted to take a few minutes to review, our oil and gas in aviation investments, which were significant contributors to the net loss during the period.
Our oil and gas exposure decreased from 117 million or 4% of the portfolio at fair value at the end of December.
84 million or 2.3% at the end of March the decline was due to a 52 million net loss recorded during the quarter, primarily due to the decline in the price of oil and a $1 million repayment.
The oil market is experiencing a significant oversupplied due to a combination of a demand shot from that pandemic NSX supplies producers were slow to adjust production, our largest oil and gas exposure spotted hawk, which had a total fair value of 47.2 million at the end of March representing 1.7% of the total portfolio.
Or 73% of our oil and gas exposure.
Spotted hawk is an excellent exploration and production company operating in the Bakken basin with significantly hedged production through the middle of this year.
The company has reduced expenses and capital expenditures to necessary maintenance items and temporarily curtailed production to adjust the lower commodity price environment.
One of our positions and spotted Hawk was placed on nonaccrual status during the quarter.
Our second largest oil and gas position these.
Glacier oil and gas, which had a total fair value of 14.7 million at the end of March representing 0.5% of the total portfolio or 23% of our total oil and gas exposure.
Glacier isn't an exploration and production company with Alaska base reserves Glacier production is hedged through the end of 2020 during the quarter. The company repaid its remaining $1 million first lien debt to hey, I envy and we placed our second lien debt position on nonaccrual status.
Before discussing aviation, let me briefly make comment about our shipping exposure, which had total fair value of 138.2 million and represented 5% of the total portfolio at the end of March as I mentioned, the oil market is experiencing significant oversupplied. The oversupply is being put into various types of storage, which is driving up prices for.
That storage as a result, theres significant increase in demand for tankers to simply store oil, which is driving up tanker rates and we have seen a modest increase in charter rates for our.
Product tankers consequently.
Moving to aviation as you're aware the Corona viruses had a significant adverse impact on the global economy with direct implications for the aviation sector aviation is considered to be part of the critical infrastructure of the global economy. Our aircraft leasing portfolio company Merx aviation continues to closely match.
Under the situation then proactively maintain dialogue with its airline clients globally across Merck and PK Air Finance, which was the recently acquired which was recently acquired by Apollo Global Apollo's Aviation platform has 45 professional dedicated solely to aviation located throughout North America Europe.
In Asia, providing expert in house support to the platforms various aviation strategies.
Ladies and team has the experience if you will see navigate this period of market stress and the requisite capabilities to mitigate potential adverse outcome.
Additionally, the Apollo aviation platform will seek to Opportunistically deploy capital in the face of the widespread uncertainty in market disrupt disruption.
To be clear Merck's is focused on its existing portfolio and is not seeking new investment opportunities. However growth in the overall Apollo aviation platform will American the benefit of marks as the exclusive servicer for aircraft owned by other Apollo fun.
Increased pressure on airline finances has resulted in airline specific outcomes raking from rent deferral requests to insolvency at certain airlines dissolve and aircraft or return updated lease rates and residual values will gradually make their way into the market. We continue to witness regional governments, providing assistance where possible to avoid insolvency.
In the nature of the situation. In addition, lower fuel prices provide a slight offset to the corona viruses impact on airline costs that have not that have not otherwise been hatch.
We believe that merck's portfolio compares favorably with other major less source in terms of asset geography age maturity and Lee and lessee diversification at the end of March the portfolio consisted of 81 aircraft.
10 aircraft types 40, lessees in 27 countries 78.
Aircraft are narrow body like most lessors Merck's has received rent deferral requests from most of its lessees to date Merck's has received requests for red deferral from 36 out of its 40 lessees for 70 81 aircraft. We are evaluating each request on a case by case basis.
First in all cases marks is working with its aircraft customers to provide the necessary flexibility during these unprecedented times.
I can't our investment in Merck's reflects the underlying aircraft collateral.
Merck's is portfolios skewed towards the most widely used types of aircraft, which means demand from Merck since fleet should be somewhat more resilient and lastly, as we've mentioned on prior calls over the last few years Merck has it has diversified its revenue beyond aircraft leasing Merck's has built a best in class servicing platform.
Which generate income from aircraft manage on behalf of other Apollo affiliated capital.
Shifting back to the to our overall portfolio as Howard mentioned, we are having ongoing discussions with our portfolio companies and their financial sponsors regarding how to address the impact from the Corona virus related shutdown.
I'd like to make some high level observations about our portfolio.
Prior to the onset of the debt pandemic, our corporate lending portfolio companies were generally performing well, meaning they entered this period in relatively good position.
Although we have received some data from our companies, we expect to get a much better idea of the financial impact in the coming months.
We believe most of the corporate lending portfolio has been relatively resilient during the economic shut down our corporate lending portfolio is generally invested and less cyclical industries, such as healthcare and pharmaceuticals business services and high Tech industries and is underway to the more impacted industries, such as travel restaurants hospitality dental.
And retail.
Investments on nonaccrual status Roses, six new positions across five companies were placed on nonaccrual status during the quarter, including our second lien investment in glacier oil and gas a first lien tranche and.
In spotted Hawk, our first lien investment can so, let's let's see our first lien investments and the power and a small first lien position in garden fresh.
At the end of March 12 positions and eight different companies, where on nonaccrual status in total investments on nonaccrual status represented 159 billion EUR 5.1 of the portfolio at cost at the end of March up from 2% at the end of December and 49 million or 1.7% at fair value at the end.
March up from 0.7% at the end of December.
For reference the new investments placed on nonaccrual status during the March quarter contribute approximately three cents per share on a quarterly basis.
Looking ahead, we expect to see significant increase in the number of amendments and restructurings in our portfolio.
We believe these amendments will provider portfolio companies with the flexibility needed to operate in this economic downturn and may include things like waving covenants converting the cash interest to pick and delaying amortization payments. We can use such amendments to reprice, our risk tighten loan documentation that covenants and secure additional equity capital with that I will now.
I'll turn the call over to Greg, who will discuss the financial performance for the quarter.
Thank you Tanner and good morning, everyone.
Beginning with the income statement total investment income was 71.6 million for the quarter of 3.1 million or 4.6% from the prior quarter.
The increase was attributable to higher interest income.
And fee income, partially offset by lower dividend income.
Interest income rose due to a higher average portfolio.
Partially offset by a decline in the yield to the portfolio due to the decline in LIBOR and a lower yield on new investment compared to sales repayments.
The weighted average yield.
On our corporate lending portfolio declined to eight to half percent down from 9% last quarter.
Quarter over quarter, one month LIBOR to client 77 basis 0.11, 0.76% to 1%.
In three month LIBOR declined 46 basis points from 1.91 to 1.45.
The income was 3.3 million for the quarter up from 1.2 million last quarter.
Prepayment income was 2.5 million down slightly from the prior quarter.
Dividend income was 2.4 million down from 3.2 million last quarter.
Approximately 97% contractual interest payments for the quarter were collected and we received a similar percentage for the payments that were due on May onest.
Expenses with for the quarter were slightly up.
Due to higher interest expense given the increase in the average portfolio.
Due to the net loss no incentive fee.
With that crude or paid during the quarter.
Interest expenses rose.
$800000 quarter over quarter due to higher average debt balance partially offset by a decline in the weighted average funding cost due to the decline in library.
The quarterly weighted average interest cost on our portfolio declined.
Approximately 26 basis points from 4.2% to 3.93%.
Net investment income per share for the quarter was 59 cents.
Compared to 54 cents for the December quarter.
As Tanner mentioned, new investments placed on nonaccrual status.
Impacted net investment income by three cents.
Net leverage at the end of March was 1.71 times compared to 1.43 times at the end to December.
The net loss on the portfolio for the quarter totaled 186 million.
2081 cents per share.
On page 16 on the earnings settlement, we've broken out the net loss by strategy.
Our corporate lending portfolio accounted for 97 cents for 35% to the net loss.
Works accounted for 44 cents or 16% of the net loss.
And noncore and legacy assets accounted for $1.39 cents for 50% of the net loss.
The net loss non core portfolio was primarily driven by oil and gas investment do this the significant decline in the price of oil the net loss on our investment in Merck's.
It was attributed to the impact of rent deferral, the Tanner mentioned earlier.
And higher discount rates due to weaker conditions in the industry.
Approximately 77 cents per.
Per share or 79% of the net loss on the corporate lending portfolio was driven by the impact of credit spreads widening on the valuations of the company's investments the vast majority of our corporate lending portfolio is valued using a yield approach changes in market spreads are incorporated into.
The quarterly valuation of our investment in.
In addition.
To looking at the weighted average life for duration of alone LIBOR floors industry characteristic in specific issue were factors.
NAV per share at the end of March was 15070 cents, a 14% decline quarter over quarter.
Moving to liquidity.
Our capital and liquidity at the end of March.
We had.
1.79 billion of debt outstanding up.
Slightly $9 million from the prior quarter.
As a reminder, we have no.
From debt maturities in 2025.
During the quarter in prior to the volatility.
Caused by the pandemic.
We worked with their lenders to improve our revolving credit facility in liquidity.
We greatly appreciate the support from our banks.
We amended our credit facility to remove the 200% bar asset coverage covenant.
In addition.
We increased commitments to our facility by $100 million, increasing the total size of the facility to one point.
From 1.7 billion to 1.8 billion.
At the end of March we had 224 million of immediate availability.
Liquidity and 131 million of additional capacity under the credit facility.
Moving to unfunded commitment.
Page 18 in earnings supplement shows our outstanding commitments at the end of March.
During the month of March we experienced increased draws.
Request on revolving credit facilities that we provide current portfolio company.
As many of them sought to solidify their liquidity.
We have seen drug request drop off significantly in April and May.
Of the 270 million of unfunded revolver and bridge loan commitments outstanding at the end of March.
132 million or not available to borrowers.
And 138 million are available.
Availability is based on barring base limitations and other covenants.
Since the end of March we've had modest net repayments from revolvers.
There is no significant drawn delayed draw term loan commitments during the quarter, which are generally used to support portfolio company acquisitions and have incurrence covenants.
Turning to the portfolio composition.
Our investment portfolio had a fair value of 2.79 billion at the end of March.
And was distributed across 152 companies in 28 industries.
We ended the quarter with core assets, representing 90% of the portfolio.
Up from 88% at the end of December.
Noncore assets decreased 10% to 10% of the portfolio down from 12%.
First lien assets increased to 85% of the corporate lending portfolio up from 82% last quarter.
The weighted average attachment point.
Remained at 0.9 times.
Investment made two investments made pursuant to our co investment order were 76% at the end up.
The quarter lastly, during the quarter, we repurchased approximately 1.3 million shares of our stock at an average price of $11.62.
For total cost of $15 million.
Leaving $27 million available for future stock purchases.
This concludes our prepared remarks.
Operator, please open the call to questions.
Thank you once again you asked a question simply press Star one one moment well your first question.
Your first question comes on line of Finian O'shea with Wells Fargo Securities.
Hi, Good morning, everyone is doing well.
First question for Howard you, guys smiled and new shelf yesterday.
Updated from just a few months ago.
Can you tell us what what's changed what you're applying for and how we should think about it.
Great you want to answer that.
Into that Im sorry.
Well what was that again and.
I was asking about the.
The change in the in your new shelf application filed yesterday.
Oh, yes, we'd yes, we filed it just to be on up to date on relative to current standards and all of that on we had filed.
Good day to day in January when we needed to do.
Several other.
Kind of tweaks to it so.
Just to kind of current.
Okay.
I'll move on to Merck's.
To 10 or you provided some very good color there appreciate it.
Can you you know as you go through these potential rent deferrals or contracts.
Renegotiations as outlined you touched on being in those discussions can you give us some color on what kind of.
Impact to those would have on the triggers or see merck's is securitization debt or other term debt.
You know what level of.
What level of.
Asset coverage is is ample there for it for that to remain.
Well performing.
Yes, Sir and Havent hope you're doing well.
First it is a generic comment or perhaps getting a little bit more granular on the these deferrals themselves.
This is obviously a pretty unique situation in which you know airlines across the globe and less stores by extension are all grappling with.
The same situation at the same time and generally speaking the deferrals. While every negotiation is somewhat situation dependent have generally speaking generally speaking been like a three month deferral in some cases longer but didnt paid back six to nine months.
Thereafter, as it relates to the meat of your question their fan I think you highlighted in some ways. One of the attributes that is a I think a good fact in terms of our funding in that just over two thirds of our exposure Finn is actually in Securitizations.
And relatively speaking and securitizations provide for more flexibility for the management and really.
You know really relate to pay me UBS senior interest.
As as the trigger and we feel a while it is as you could probably imagine difficult to speculate given how die or the situation. It is at the very moment in time, and we'll have a lot to do with the duration of the pandemic feel good about where we where we stand.
Aspect to the securitization structures I would also add a you know we do have a in addition to the liquidity that Greg outlined at the eye in D. level. There is cash at at Merck's and then there is cash within the securitization.
Structures as well.
Defray any of those potential needs.
Sure.
Very helpful. And then one final one for meal I'll jump back in I think Greg.
Gregor Howard mentioned a bit of de leveraging through repayments.
Can you give us any any color on on sort of what level or what level of leverage or portfolio that you're thinking.
You know given the current environment.
Yeah, I mean, not you know our goal is to sort of operate on a city stated the range, we talked about before so say you know.
Four to one six right and so we're at one seven now.
Obviously, there is another part of that to see if there's you know.
Further pressure on on ads in the coming quarters, depending on sort of how sort of the global economy works, we're putting that aside.
You know there there.
The.
Net pay downs, we would need to get down to the ballpark of level. We would want is a couple hundred million dollars.
And so we're we're sort of focused on that with regard to which which borrowers have liquidity options. There are a although you know when the normal market people are repaying all the time. This is not a normal market, but that said there arent you know almost every borrower is looking at sort of their capital structure going forward and there you know there are.
Manny.
Who have opportunities to refinance.
Or or have other alternatives, which were encouraged you to take so our hope would be too you know over the next.
A few months or quarters to sort of be able to sort of hit that to leverage but it should be.
It should be a.
A straight lined down it just depends on the slope of that line depending on how how successful we are but we we have a we have a list of transactions that we expect to have some liquidity. For example, there is a few that have you know.
Sale processes or four really sales contracts signed up we know they're getting taken out there are other one center asset basically we have other financing options. So we're pretty pretty focused on that and so that's the size. We're talking about a couple of hundred million dollars over the next.
Three four months or so.
Okay. Thanks, so much everyone.
Your next question comes from the line of Kenneth Lee with RBC capital.
Hi, good morning, and thanks for taking my question.
I think you touched upon this in the prepared remarks, but wondering if you could just further elaborate on on the potential benefit from the Fccs recent relief on co investments frictions. Thanks sure.
The one of the constraints prior to that relief was any any affiliate of hubs are they I envy, which was not and you know a lender in the transaction when they I envy entered couldn't couldnt step into the transaction and lend as well and so that that meant that it's.
If there was an add on to accompany or sort of you know one other lending opportunity that pool of capital was not available immediately come from a third party or one of the other Apollo entities that were already in the deal.
And they are these case as you know a lot of the deals already had mid cap in them and so there's an opportunity but now you know there's also this release now changes that rule as I described in said affiliates.
Hi affiliates can invest.
Subject to certain conditions.
Hi, even if they were not ended at the outset. So what that just means it just gives you another sort of.
Tool to use if there's a capital needs or or liquidity needed companies beyond you know.
These balance sheet and we're just underlining that because it's important to be able to support our companies.
Both defensively and offensively hot at the same time, it's really important that we you know hit that de levering Mark we want to hit and so that that FCC relief just provide sort of the full array of Apollo capital available for opportunities that make sense.
Great very helpful and just one follow up if I may you mentioned it in the prepared remarks, seeing a drop off and revolver requests from portfolio companies into April to May timeframe Wonder if you could just show with us or any particular details I'm on the what participate.
All going to drop off and whether you expect a request to pick up or in the near term. Thanks.
Sure I they were there they're sort of twofold.
One let's talk about the one that that is sort of most.
Hi.
It's across our whole you know the whole BDC industry, which has been on on the non ABL ones. The leverage loan revolvers really what happened is everybody.
Hi, everybody.
We're not everybody the vast majority of bars at the end of March sort of knee jerk drew on their revolvers. If they thought they may have a liquidity need so not everyone, but a lot.
And and so the peak revolver draws came really right at the ended the quarter.
As the first few weeks of the.
The April came on that sort of abated, but everyone sort of sat on their capital to figure out what's what's going on since that time, probably over the last three weeks. There has been pay downs on net pay downs because effectively people now realize they won't need that capital base. They.
They projected out what they need and they don't want to sit on cash and pay interest on it and so we are seeing each week.
A modest amount of repayments as people pay downs and very little draws if any and I don't think that experience on the revolver level is any different than the vast majority of our can you know of our competitors, who do leverage lending. So in other words revolver utilization is down.
You know in sort of I would say the single digits as a percentage basis on the leverage loans you know just because of the dynamic of the way the market work. That's that's one obviously as we work to amendments with people. We achieved we also try to address some of that and get repayments. So people on covenant relief, we want cash back, we shrink revolvers and things like that and so.
I would expect that will also provide some sort of downward pressure on utilization as well separately, we have a b L commitments.
And so l. commitments, you know their utilization could go up or down depending on their collateral, but you know.
Because we have a few health care, our you know deals and there's been a lot of stimulus money for these healthcare companies. There they have been relatively flush since since the end of the quarter and that has also provided some downward pressure on maybe I'll utilization.
Great very helpful. Thanks, again, and hope everyone stay safe.
Your next question comes from the line of Casey Alexander with Compass point.
Hi, good morning.
A lot of good questions already.
Let me ask.
A couple here first of all in relying on the Exemptive order for co invest does that preclude AI, indeed from making new investments are participating in structuring in origination fees or does that they are because those.
Restrictions only apply to the BDC, if you sell additional senior securities.
I thought it can be more to it it could be even more tactical than that but first of all the exemptive order is generally are sort of skewed to protect the BDC. So whats. So generally I will get sort of two answers to that way. The bdcs projected one is if there is an opportunity to lend going forward.
The BDC has its option to take as much as it wants to take it worth as much at to take its portion of that origination. So it has the option to come in or come out.
One.
Two.
Generally when theres, new lending coming in a requires an amendment to the existing facility and so as as sort of one of sort of the required lenders. They also I'd also needs to approve those new the new funds coming in so generally what would happen is that.
They are wouldn't necessarily they wouldn't actually get the origination fees, if they put into new capital, but generally there would be fees to the existing capital for allowing the capital structure to expand so put another way I envy should benefit from that perspective want it can always investing money, if it's particularly appealing and it's certainly won't get unit.
Disadvantaged in that it will be a you know.
It will be higher priority will be disproportionally higher yield because it can it will also it can also sort of make sure that the economics go to the whole to where the risk as being taken across the board does that answer the question.
I think so maybe I'll try to follow up with Greg on that one.
Afterwards.
'cause it as it is pretty technical.
Let me ask a different question here you did your leverage ratio kind of presupposes that you need to do some de leveraging would you discussed about a couple hundred million dollars and as you say, that's likely to come from repayments and repayments of of healthy in interest earning investments.
The same point in time, you mentioned that Theres, an increase in discussions with borrowers that kind of suggests that there and it is likely that there are more non accruals on the way.
Which would hamper your your interest earning investments.
How does the board think about maintaining the dividend at 45 cents.
And and not again reset that dividend at level, that's more sustainable for the long term against this interest rate environment and allow for some NAV accretion as you over earn that dividend.
So so without obviously you know I don't speaks to the board them on the board, but then speak for the board I think the intent of the board is to set the dividend policy that is long term sort of achieves the goals you just talk about.
Putting aside the specifics all the pressures you're talking about like I don't know it sort of the court for example, if the corporate discussions will necessarily give rise to significantly more non accruals, but that said a shrinking book.
You know, obviously loses interest income as well as sort of less velocity of transactions means west transaction fees. So thats. Another source of pressure you know.
Project and potentially less dividend income at Merck's, all things put pressure on our earnings and I think you know the intent of the board will be too to set a dividend policy that sustainable in the long term hot and so the dividend paid this quarter, obviously was well covered by the earnings this past quarter and if you look forward.
To where our portfolio is right now also assuming no incentive fee. You know is is in the ballpark of earnings power for next quarter, but that said, we would expect that the board will look at setting a dividend that is in the ballpark of wide.
Uh huh.
Most bdcs pay against they're not in order to achieve the goals. We're talking about so so I think the shorter answer is we want to have a clearer picture as we work through this next quarter in terms of how some things will play out both with merck's cash flow and portfolio cash flows and get the board a clearer picture with regard to how to think about.
That for the longer.
Okay. That's that's very fair answer thank you and lastly on on leased deferrals on the aircraft since their deferrals do you still a crew that income from a book standpoint, and then if the if the less or.
Files for bankruptcy down the road that has to be reversed or does that sort of go on like an internal non accrual versus that lease.
And hopefully recaptured down the road.
So premium.
So to answer that I guess grade you want to take a shot.
Yes, I'll answer, yes, I mean are Merced financials, which were filed today.
Along with our 10-K.
No we apply gap standards.
On and as I'm sure you're very familiar with.
You do a crew income within merck's, okay, not at the I envy level.
And then we also provide reserves against those receivables.
To the extent that Theres on.
Short term impairment, so we evaluate that every month.
And so.
Hopefully that answers your question.
Okay.
It definitely gives me an idea.
I'll step back in the queue and open it up for other questions now thank you very much.
Your next question comes down the line of Kyle Joseph with Jefferies.
Hey, good morning, and thanks for taking my questions and hope everyone is doing well I'm just trying to step back and go more high level question given the current.
Environment, where your leverage is just talking about how you envision capital allocation priorities over the coming months in terms of debt pay downs investing in new companies investing in an existing companies.
Our events share repurchases.
Sure.
I guess you know it.
In terms first for the first priority is our portfolio companies, both because you know.
Those of the company's we noted that so we can we can get a sense it as opportunities the best in there in front of us and also because they support.
Both through our existing clients are and and and our existing investment.
To the extent that there's capital needs. There, we expect to be able to support them again, almost all of them have mid cap involved in them. So the amount that eight I'd be will choose to do will just depend on sort of.
How appealing we think it is how much paydown activity, we've had in that quarter et cetera.
No.
But we will we will lean towards wedding and other balance sheets.
You know are put in the extra capital, especially if sort of the whole.
Facility get stronger if you will be economically and from a credit perspective in terms of new opportunities I think you know.
The whole market for new opportunities is interesting one because a lot of people are talking about you know they have dry powder and are ready to invest but there has not been a whole lot actually executed in the market and the markets still finding its footing. We wouldn't expect obviously as were shrinking the portfolio to be to do we get significant amount of new business that said under our.
Exemptive order in order to basically invest in companies.
Down the road, we need to be part of facilities day, one and so there is a reasonable chance, we'll take nominal amounts of new origination in order to basically habit foothold in those facilities. So in other words, you may see a bunch of names being added it's very small numbers in order to enable us to sort of continue to be involved in those names going forward.
As there is opportunities.
Lastly, with regard to share buybacks you know our our position has always been that if it isn't it appealing it investments you know and accretive.
Value created for our shareholders, it's going to be part of what we will consider doing when we're trading at a significant discount to NAV. The math of those buybacks are almost in all cases better than new origination.
So we would expect it to be depending on how the world goes part of what we do but our first priority right now is de lever. So thats going to go further down on the list until.
No. There's you know until there's more liquidity in the company or you know there is sort of such overwhelming value that is that it you know that it's sort of has to be done.
Does that it's covered off.
Yep Yep, that's very helpful. Thank you and then just just one follow up from me in your discussions with sponsors and tracking your portfolio companies I know, it's early but anything on any sort of positive sign.
[music].
The economy kind of started to reopen slowly.
Yeah, you know I have positive signs I guess I would say.
Less negative side, you know the first pro form as you've gone from people on that and from sponsors, especially as they start to think about how they want to plan out. The next three quarters were relatively negative projections and now we're starting to see sort of.
Real time results that are better than those negative projections because things are opening up like a lot of people had cases, where revenue doesn't start till June 1st and now revenue was started sooner and so thats pretty meaningful because that means people are sitting more cash than they expected, which means. They you know they may need less capital when they will pay down the revolvers all of those things.
You know that so so I wouldn't necessarily call that that positive as opposed to less negative, but you are seeing that youre seeing effectively numbers come in real time that are above sort of people sort of base cases. They said at the end of March which as you know which is positive because obviously when you refer.
Between lender you have a bunch of cushion and these companies because of their revolvers or because of just the position. They were in had reasonable liquidity. So like that type of improvement in sort of revenue and cash coming in or the cash flow the cash coming in really actually extends the.
The runway, but also just sort of changes the the band of outcomes for companies in terms of capital they need and so so we are seeing that but I wouldn't you know.
It's not it not enough to sort of right home about.
Got it well thanks very much for answering my questions, let's not get into definitely positive in this environment. Thanks guys.
Thank you.
And your last caller question is from Aaron.
No that's what's city.
Thanks.
One is wondering mentioned kind of wanting to get back down to leverage level one quarter one.
Yes.
This is really the right level, we're leveraging should be targeting should should to be lower I think that.
Missing that companies that have started.
No one finders type leverage heading into the.
Our words raise capital of course the rubber.
I don't have much.
You know dry powder and to work as you get out of this.
That's something that you might want to consider is too.
The appropriate amount of leverage.
Yes.
Well, obviously, you know environment like this should make you consider everything in terms of what your strategy is but I would say our strategy has always been that we can operate at the higher range of leverage versus other bdcs, because we are putting together the most granular and and on the most grow.
Annular and and.
Highest off the balance sheet of portfolios.
And so one thing I would say is as we you know do our he noted our forensics on what happened here over the next few quarters. The appropriate answered that question will be let's see how that corporate book performed and how volatile it was and how much it moved.
No.
Leverage versus what happened to some other people and see if then that's appropriate conclusion I'm not sure. It will be we feel pretty good about the volatility on a corporate book I to be fair I'm not sure it won't be either but but I do think you know in looking at our relative.
The relative performance of that book versus other assets. We have you know that that you wouldn't necessarily reached a conclusion you just said if it was only that book, which was sort of our you know sort of most of our goal to get too. So certainly for sure I think there needs to be a sort of as.
Everybody works through this a re articulation of where your strategy falls, we haven't yet seen anything that suggest what our strategy was watson sort of the safest of all the strategies, we could have chosen unfortunately, we weren't all the way through getting to where that portfolio should have been and so we were absorbing that here.
And that May be you know pretty that made pets substantial impact on it so.
You know.
Hopefully that sort of addresses that so I don't I I think operating with a pure first lien granular book at the one for one five leverage range would be.
Especially without an SP I see where you have hidden leverage or JV down below where you have hit and leverage is not is probably less volatile than a 111 to book with a lot of second lien exposure in sort of hidden subordinated certificates exposure those type of things.
Okay.
Hum and then I guess looking India. So there is a chemicals company pickup mark down pretty dramatically.
Cool.
Yes.
About that.
Yes, that's a that's a legacy that's one of those legacy investments.
Carbon free.
[music].
10, or do you want to spend time on it.
Yes sure. So this is they.
Petrochemical plant in Texas referred to as carbon free.
With a technology think of it as a greener alternative to carbon capture.
And.
Guarantee historical issues in terms of ramp.
Of the facility is attracted significant equity capital.
Over it it's it's like it create it it produces three separate.
Outputs.
One of which is hydrochloric acid, which itself is used heavily in fracking.
Of wells in that.
Prices for that has also have obviously gone down significantly in the current market environment offset to a certain extent.
Bye.
The other output or the other two outputs and in particular bleaching caustic soda bleach being something that has seen.
Manned relatively resilient and pricing relatively resilient and so the and then this is also an investment in which.
We undertook a restructuring whereby we would have a greater deal of our.
Value with the value of the IP, which we do believe to be about valuable and the company's go forward strategy.
It's too finding a partner for use of that that IP and if you can think about in the context of the broader concerns and motivations and mandates two to two.
Make more green such processes, we're hopeful that that will drive some value. So that's that investment.
Thank you.
You didn't have several more questions. Then next question is from a Ritchie with JP Morgan.
Hey, guys. Thanks for taking my questions and I hope everybody is doing well.
I wanted to talk a little bit about the aircraft portfolio I'm curious.
Within the fleet, what the mix between classics and Nexgen claims are.
And I'm curious, particularly how that impacts your ability to.
Released the planes and what the collateral value is.
And the reason I ask as we've seen jet fuel prices basically back to 20 year lows and historically when that happens the price between the price discrepancy between classics and nexgen planes convergence because fuel efficiency as much less of an issue.
So I'm curious how you guys look at your portfolio on what the actual impacts are.
Yes, sure. Thanks, Rick I'll take a stab at this so.
If you think about I'll kind of put it in three different categories and sometimes the nomenclature can be a little bit confusing the classics.
Would be the 700 and and previous on the same 37, and then what's called Nexgen is.
What has been produced over that Kinda last 10 to 15 years and then the did the the Nexgen Nexgen would be the neo and Max and right now in your your comment was was very astute and correct and you may recall, we had actually previously been in.
Method in some classics and some other assets such as the MD 80, which itself were older equipment and with the downdraft in oil prices. The last time in the 15 16 period saw significant excess value to in end of life that that would have otherwise been retired but.
Into the fact that.
Fuel prices were less.
I did they continue to operate our current fleet had very little classic by this point in time Theres Theres not as many classic out there and most of both of approach there 20 to 25 year.
Lifecycle and they're very few in in operation our.
Fleet would be very much in that middle category, we have very little exposure to the the the most recent technology be it the neo and Max obviously, good as it relates to the Mac given given some of the issues there.
But also lets a less less opportunity and so while not as pronounced and I'll just thinking your Rick while not as pronounced as they benefit.
Relative to the classics for instance in terms of oil price and fuel efficiency that.
The 737 800, the 320 200 versus the Neo and Max do have some of that fuel benefit and that's one thing that we think could could help.
Some of the resiliency in the in the period I would also.
Note that our AR as I mentioned in her prepared remarks were disproportionately narrow body, which itself as an asset class or a broader asset class I would expect to be more resilient not just because.
The likelihood that domestic flying in various countries probably picks up.
Sooner and is more robust relative to trans Atlantic, but so to also the Max I referenced in the we're entering this period of time with less of an imbalance.
So a lot they're very good question, Rick I would say there is some some benefits not not as pronounced as we saw in 2016 with the classic that we had in the MD eightys.
But some some modest benefit and we do take some modicum of comfort in that our portfolio.
Is almost exclusively narrow body at this point.
Got it that's a very helpful answer and I do appreciate the the clarification or the starting point on the on the narrow bodies in terms of.
How we could imagine.
Sure.
Air travel starting to pick backup domestically first thank you guys.
Your next question comes from the line of Robert Dodd with Raymond James.
Hi, guys.
He said, Hey, I've got a few questions.
Chris on the oil and gas.
In place.
The.
Hedges upcoming.
Since you.
Yes.
I think genomics and cash flow into knits and by monetizing those hedges, but.
Oh, good again, if you depending on how low oil prices stay low oil and gas is business.
So the juice exposure, but what's your appetite.
Putting essentially putting it.
Cool into those businesses is hedged small all the tech.
Sensual eventual recovery.
Segment.
Get into the itself.
No.
How's that.
No [laughter].
I mean, you know well glacier is mostly near term. It's most of its value is being either sort of will be monetized through the hedges are pumping.
Spotted hawk a lot of evaluation is staying in the ground and so its valuation will sort of stay there. So it's just like if prices stay down. It's just it's value stays down for longer but it's more you know, it's a lot of option value to its valuation anyway, because it's not going.
So, but we were we don't want to invest more capital there.
Obviously, if there's something defensive we have to do and to ensure you know downside value, we'll do that but other than that.
On the books.
The head box and then in there.
Mentioned, obviously nickel cash that is.
Yes.
Well level, all of whom east of the goals.
And well.
Near term cash flow.
Still service that to you.
No. This that we could see books, maybe the interest in the second both the.
Who is that the cash levels mission.
To maintain cash hey, the debt shoot.
Yeah.
Hi.
10 or gray.
I want to answer that.
Yes.
Yeah, I think it at this point, Robert I mean, where we're assessing it.
And we continue to.
Considering you if you think is the debt as.
The entire investment there.
As our equity.
Sitting in the structure.
We'll look to.
Combined are dead in our dividend and look at the appropriate level.
On one to support leaving capital in like we did this quarter.
And but it really will be.
A function of what happens as we look into July.
Most of the deferrals are.
Completed.
And then let's let's see how the industry opens up and.
So as I think as Howard mentioned as we look at the distribution.
We're going to look at all the components of income.
Chairman.
You know what level.
That they can.
Pay going forward.
I appreciate the I think some building.
Right now what last one if I can move on.
So you said 1.16, which is close to one other question. She took about 1.5 I mean is it fair to say that.
Okay when the immediate.
Down towards the lower end goats, hog left which range.
Yeah, I mean, it's right it's hard to be you know that precise because you have revised revolvers that fluctuate a little bit I think the answer is no. We don't want to be at 1.59, because we want to have some room to sort of you know to take on new opportunities at things pay off and things like that.
So we'll assess that when we get.
When we get there, but we're not I would say you know it's probably the right target is the middle of that is probably one five if I just had a choose one because.
We feel like from a risk perspective, if it's a corporate portfolio. We can operate well there from from the perspective on sort of new investments liquidity in choices and things like that.
Obviously, the last one but you have been more new things you can do.
So so.
That.
That comes into the mix, but I would say you know we're targeting to get into that range and probably sort of hover around the middle of that.
Got it thank you.
Yes.
Your last question comes from the line of Brian Lynch with KBW.
Yeah.
Hey, good good afternoon, guys in a football as well.
I wanted to follow back up with the leverage and liquidity discussion. So obviously leverage increased a decent amount as was expected for you and most bdcs and and as I look at your a limited amount of UBS capacity on your credit facility.
Which is obviously subject to change be out you know how your borrowing base moves I know a lot of investors.
Coming into this quarter.
Looking at Apollo potentially media to do some sort of equity raise to be able to manage through this downturn.
You kind of mentioned that add your rights plan is just to use repayments from your current portfolio to de lever and manage through that so as you sit here today and as you try to look through.
Forecasts out the outlook.
Going forward, which I know is very hard to do do you anticipate and do you think that they will potentially be the need to raise additional equity capital to manage through there's missed this downturn.
So couple of things, obviously, it's a board decision and obviously like any any anything's possible right.
Because there's all sorts of odd.
Disclaimers I need to put on anything I say with regard to sort of predicting what's going to happen hot so, but we do we.
Our goal is to as it has been since we all started working together is to sort of navigate through what we're doing to do the things that are most you know.
Value creative given that the hand, we've been talent for our existing shareholders and doing sort of an equity raise that dilutive is not usually the highest thing on that list. So you know as we laid out what we did here we have a plan that isn't.
So.
Plan that has room in it to execute without doing that.
So I'm hopeful that sort of answered the question like I don't want to take any you know any choices away from our you know our board in terms of what they made.
Choose to do we think thats appropriate, but we think we habit.
A workable plan with with.
With a good amount of flexibility to you know.
You know to work through this and have our metrics start getting better without doing dilutive equity.
Okay Fair enough I know, it's a difficult.
Scott Murphy time to try to evaluate what the outlook looks like I. Appreciate the comments and then just just one other one just on your merck's valuation of the equity interest.
Oh exactly is the valuation for for the equity interest Don is that based on some sorted yield and discount rate that you guys used in kinetic generates or expected to generate future or is it a burn down type of analysis liquidation analysis of what goes on underlying assets are worth I just know because.
Right and I asked as you know when you look at.
The financials that that merck's filed today for 2020 fiscal year.
A pretty sounds pretty substantial net loss for that year. So just wanted to get a little more color on how the equity portion of your investment is out.
Yes.
Hi.
Greg do you want it yeah.
Present tenor.
Yes, I have just in time.
Go ahead Tanner.
Yes sure so.
So first off the as with all our liquid positions we get.
Third party.
Two to two value give us give us actual.
Valuations, but the you know in what you described it touches.
A number of those aspects, but is really a discounted cash flow into the future and at a discount rate which is determined.
Based on based on market comps and then the cash flow forecasts of course.
Representing.
Our our best estimate.
Future, which itself would also and naturally.
Involved and an assumption around ultimate residual value.
You know point in time, what's the value of the asset today discounted cash flow, which you know again, sorry, the risk of being redundant has a residual assumption embedded in it at the end of the lease or or projected hold period.
Okay.
Got it.
Those are all my questions I appreciate the time today.
Okay.
Thanks. Thank you everybody for listening today's call on behalf of all of US we thank you for.
And your support as we navigate this time period.
Obviously reach out to any of US if you have any questions and and we hope everybody stays healthy and safe.
Thank you. This does conclude today's conference call you may now disconnect.