Q1 2021 Apollo Investment Corp Earnings Call

[music].

Good afternoon, and welcome to Apollo Investment Corporation earnings Conference call for the period ended June Thirtyth 2020.

At this time, all participants have been placed in listen only mode.

The call will be open for question and answer session. Following the speakers prepared remarks.

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Simply press Star one on your telephone keypad.

If you would like to withdraw your question that's the town key.

I'll now turn the call over its Elizabeth bus and Investor Relations manager for Apollo Investment Corporation.

Thank you operator, thank you everyone for joining us today speaking on today's call. Our Howard We drive Chief Executive Officer enter Pal, President and Chief Investment Officer, and Greg <unk>, Chief Financial Officer, I'd like to advise everyone that today's call. It went catcher being recorded. Please note that the other property Apollo investment Corporation, and then any I'm not.

Broadcast in any form is strictly prohibited information about the audio replay of this call is available.

He's 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 Webcasts may include forward looking statements forward looking statements involve risks and uncertainties, including but not limited to statement that to our future results, our with our business prospects in the past.

And our portfolio companies you should refer to our most recent SEC filings with the FTC and.

And apply to our businesses Amanda.

Well the efficacy for risks and apply more businesses 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 gain copies of our NTT filings. Please visit our website at www Dot Apollo I see dot com.

I'd like to remind everyone that we posted a supplemental financial information package on our website, which continues to information about the portfolio as long as the Companys financial performance at this time I'd like you're trying to call over to our Chief Executive Officer Howard Winter.

Excellent.

Good afternoon, and thank you for joining us today before we can I'd like to say, we hope everyone is healthy and doing well.

Begin today's call with an overview of how portfolio when I review of our financial results for the June quarter.

So to start todays distribution.

And my remarks, Kinda will review, our congrats and activity for the quarter I will discuss in packet Nikobar Nike pandemic economic shut down on our portfolio in greater detail.

Greg will then review our financial results and provide an update.

Well then open the call for questions.

Today's call, we will be referred to some of the slides about investor presentation, which is posted.

As we all know the koby Nike pandemic has been an unprecedented shocks in the global economy.

Repositioning of the last several years has allowed us to enter this challenging period with a well diversified senior corporate lending portfolio. Congrats in west cyclical industries with granular position sizes.

Despite the significant economic headwinds through the pandemic, our corporate lending portfolio continues to perform well as evidenced by that gains during the quarter. We believe the performance of our corporate why the portfolio. During this challenging period demonstrates its resiliency.

No investments within our corporate lending portfolio, replacing nonaccrual status during the quarter, the corporate lending portfolio, which represent 79% of a total portfolio is 85% first lien, 100% floating rate at 86% sponsored.

We continue to work closely with our sponsor clients and portfolio companies. We have generally been pleased with how sponsors and borrowers have been managing through the current.

A wait and corporate lending results for the quarter were negatively impacted by non core legacy investments.

On our last call call, we said that our intention to its foreign country to reduce the farms leverage over the coming quarters. During the June quarter. We made considerable progress do you ever get Apache by exiting approximately 233 million of assets on a gross basis or $95 million on a net basis, which reduced our leverage to 1.66 times down from 1.7.

In one.

Since the ended the quarter, we've received net pay downs of approximately $50 million, including one long documents in escrow pro forma for these additional pay downs and assuming no changes to fair value up or down that leverage is currently approximately 1.61 times, we have visibility into meaningful additional repayment through the remainder of the September quarter and for the December quarter.

Remain focused on further de leveraging tool within our target range of 1.4 to 1.6 times over the coming quarters.

It depends debit began many of our portfolio properties, drawing a revolvers during the March quarter to shore up liquidity. Many of the draw downs were repaid in the June quarter capture the agent for nearly all of our revolver and delayed draw term commitments and is actively monitoring every commitment.

Contracts I'd be TCAP leverage long revolvers were worth 23% utilize before the pandemic revolver utilization peaked at 70% in mid April and that's has declined to 48% today.

Greg will discuss our liquidity and unfunded commitment exposure in greater detail later in the call.

Moving to our financial results.

Thats been income for the quarter was 43 cents per share, reflecting a smaller portfolio given the reduction in our leverage and a lower contribution from Merck's, which channel will discuss later in addition, given the total return feature in our incentive fee structure no incentive fees were accrued during the quarter. The portfolio had a net loss of 25.2 million were 39 cents per share driven by doing that.

Awesome noncore legacy assets, partially offset by net gain on corporate website.

Slide 16 at our Investor presentation shows and that was for the quarter broken out front strategy had asked for value net asset value per share at the end of June was 15029 cents, a 2.6% decline quarter over quarter.

Turning to our distribution in light of the challenges on uncertainty created by the Coca 90 pandemic and our plans to further reduce the funds leverage we've reassessed the long terms, earning power portfolio and accrued and concluded that it's prudent to adjusted distribution at this time, we believe it distribution level should reflect the prevailing market environment can be aligned with the long term earnings power the portfolio.

Going forward. In addition to a quarterly based distribution companies board expects to also declare supplemental distribution and it amounts to be determined each quarter. We believe it 31 cents based distribution reflects a long terms, earning power of the core portfolio, including Merck's. We believe there are several sources of earnings which will allow us to pay an ongoing supplemental distribution.

Including the redeployment of non hurting or lower yielding assets from our non corn legacy portfolio. The recovery of earnings from Merck's and the rebound at fee income to historic levels. The base supplemental distribution construct is intended to provide shareholders with a minimum annualized yield on NAV of 8% a level, which is consistent with some of our peers and allows for.

For some upside via supplemental distribution.

To that end the board is quite a base distribution of 31 cents per share payable on October seven 2020 to shareholders of record on September 20, Onest results.

The board has also to quite a supplemental distribution of five cents per share payable on October 7th 2020 to shareholders of record as of September 21st 2020, again, the board expects to declared quarterly supplemental distribution in amounts will be determined to each quarter with that I will turn the call over to Tanner to discuss our investment activity and our portfolio.

Thanks, Howard starting with the market environment since the March load leverage loan prices have recovered and loan spreads have tightened significantly which had a positive impact on the fair value of our corporate lending portfolio.

Given the economic backdrop middle market loan volumes during the period were light in both the syndicated market and the private credit market.

Activity in the middle market remains slow as sponsor new lenders and sponsors and lenders continue to struggle to evaluate how to price risk.

Well deal activity has been like.

We do see that pricing in terms of shifted in favor of lenders.

In addition, borrowers are increasingly CDIM acid that that asset backed lending solutions, an area, where we via mid cap have expertise and significant market share.

Even the composition of our corporate lending portfolio, which is primarily first lien loans to less cyclical businesses. We believe that the credit quality of our corporate lending portfolio has held up relatively well during this period.

However, we have seen an increasing request for loan amendments today I envy has completed whereas in the process of completing 23 amendments across the portfolio representing 15% of portfolio companies.

Most of these amendments have been for covenant waivers or resets generally in exchange for a new covenant to date only four amendments have impacted interest rates are principal payments.

Given the lack of investment activity than the overall market and are focused on reducing leverage new investment activity was limited during the quarter, new corporate lending commitments for the quarter were only 17 million across two companies sales were 68 million repayments were 49 million and revolver Paydowns were 115 million per total exits of 233.

These sales were executed at prices around our March at the end of March.

Net repayments for the quarter were 95 million, including 31 million of men revolver pay downs going forward given our visibility in the upcoming repayments, we expect to be the position to make new commitments as market activity reasons moving to merck's, our aircraft leasing portfolio company.

As discussed on our last call. The pandemic has caused an unprecedented decline in global air traffic, which has led to a widespread leased deferrals throughout the industry. Although aircraft air traffic trends have improved slightly more recently, we remain significantly below pre pandemic limit levels.

Merck's isn't working with its lessees to provide the necessary flexibility. During these unprecedented times during the June quarter. The I envy converted 105 million of merck's revolver into equity and reduce the interest rate on the revolver from 12% to 10%.

Accordingly at the end of June our investment in Merck's totaled 329 million at fair value consisting of a 200 million dollar revolver at 10% and 125 million of equity, which also reflects a $4.3 million write down during the period.

As partial actually Equitization will reduce the interest more exposed to any idea from 36 million per year or 9 million per quarter to 20 million per year or 5 million per quarter.

We believe its reduce debt burden will provide merck's with the cash flow relief needed to navigate this challenging period.

We expect merck's, we'll be able to make dividend payments on our equity investment improving and the return on its overall investment when the industry recovers.

We believe merchant portfolio compares favorably with other lessors in terms of asset geography age maturity unless the diversification.

Merchant portfolio portfolio skew towards the most widely used types of aircraft, which means demand for merchants fleet should be somewhat more resilient.

Nurses fleet predominantly consists of narrow body aircraft, serving both us and international markets at the end of June merchant Zone portfolio consisted of 81 aircraft.

Types 40, lessees in 26 countries with an average age of 9.5 years.

Successfully includes 75 narrow body aircraft too wide body aircraft in one freighter.

As mentioned last quarter, the majority of rents deferrals impacted cash flow in the June quarter, we expect to recovery in lease payments going forward given the significant amount of capital that has been raised by airlines in the public markets and the level of Kevin government support around the world. So far for the month of July cash flows are at or above expected levels.

Merck's continues to diversify its revenue sources beyond aircraft leasing.

Works has built a best in class servicing platform, which generates income from aircraft manage on behalf of other Apollo affiliated capital as you may have seen during the quarter Apollo Global's dedicated aircraft leasing fund navigator entered into a sale leaseback transaction with Delta airline for 10 aircraft.

As navigator requires additional aircraft merck's will generate incremental income from servicing fees.

[noise] across merchant PK air financed the aircraft lending platform, which was acquired by Apollo Global Apollo deviation platform has 45 professionals dedicated solely to aviation look located across North America, Europe, and Asia, and providing expert in house support to the platforms. There is aviation strategies the absentee.

Has the experience to skillfully navigated this period market stress and the requisite capabilities to mitigate.

Potential adverse outcomes.

In addition, the Apollo aviation platform will seek to Opportunistically deploying capital in the face of widespread uncertainty and Mark this disruption.

Clear Merck's is focused on the existing portfolio and is not seeking new investment opportunities. However growth in the overall Apollo aviation platform will inure to the benefit of Merck's as exclusive servicer for aircraft on by other Palestine.

Moving to overall credit quality during the quarter.

Our Q first lien debt positions in carbon free chemicals were placed on nonaccrual status. The company has been thinking earnings headwind due to an unprecedented slow down for the demand for one of its project products hydrochloric acid or Hcl, which is used in fracking process.

Due to declining oil prices and production the company's profitability has been negatively impacted by the lack of Hcl offtake at the end of June investments on nonaccrual status represented 182 million or 6.1% of portfolio cost and 47 million, 1.7% at fair value.

Looking ahead, we anticipate continued need for covenant relief in our portfolio over the next few quarters. We believe these amendments will provide our portfolio companies with the flexibility needed to operating the economic downturn, we can use such amendments to reprice, our risk tighten loan documentation add covenants and secure additional equity capital with that ill turn the call over to Greg who will.

Skus financial performance for the quarter.

Thank you Tanner beginning with the statement of operations total investment income is 56.7 million for the quarter as interest income declined due to the reduction in income from Merck's nonaccrual investments in the decline in LIBOR. The this decline in LIBOR was primarily offset by core.

Spine decline and the interest expense for the quarter.

The remainder the decline was primarily as result of muted origination and prepayment activity during the quarter.

Approximately 97% contractual interest payments for the quarter were collected.

And.

The weighted average yield at cost on our corporate lending portfolio would be 0.1% versus 8.5% last quarter.

I think some light the decline in LIBOR floor levels.

<unk> expenses for the quarter were 20.4 million down 4.4 million quarter over quarter.

Merely due to lower interest expense lower management fees.

Interest expense declined due to the decline in the average portfolio in the decline in my board.

Average weighted average cost declined 81 basis point.

From 3.93% to 3.12%.

Management fees declined due to the decline in the average portfolio.

And there were not any incentive fees paid during the quarter.

Net investment income per share.

In the quarter was 43 cents, it's Howard mentioned net leverage at the ended the quarter was 1.66 times down from 1.71 times at the end of March due to Andy $5 million net pay downs, partially offset by the net write down on the portfolio.

The net loss on the portfolio for the quarter totaled 25, and 2 million 39 cents per share.

On page 16 me earnings supplement we've broken out the net loss by strategy.

Spread to the syndicated market tightening meaningfully since the end since the peak.

Decline in March and as a result, we said several reversible unrealized losses.

Last quarter, a corporate lending portfolio had a net gain of 4.7 million or seven cents a share during the quarter Merck's had a loss of 4.3 million or seven cents. This year.

Reflecting the continued stress in the aviation industry.

Noncore and legacy assets.

At a net loss of 25.6 million or 39 cents per share.

Due to carbon free legacy positions and our shipping in oil and.

The loss in shipping.

Primarily reflect did the decrease in the residual values the underlying assets in our demand dynamic shipping investment.

The loss in oil.

Internal investments was primarily due to weakness can look forward curve.

NAV per share at the end of June 15.

2029 cents, a 2.6% decline quarter over quarter.

Moving to liquidity and capital at the end of June we had.

1.76 billion of debt outstanding down 40 million in the prior quarter.

Adjusting for settlements.

Quarter end.

We had $243 million of immediately available liquidity up from 224 million at the end of March.

And we had $205 million some additional capacity under the credit credit facility, but from 131 million at the end of March.

The net effect in the quarterly activity.

Improved our available borrowing capacity from 350 million to 450 million.

And as Howard mentioned the activity post quarter end has added to our overall borrowing capacity for this quarter.

Moving to.

And lastly.

We were pleased to accrual affirmed our investment grade rating in July.

Moving to our unfunded commitments.

On page 18 in earnings settlement.

We've laid out the I'd see any commitment the ended June.

During the quarter, we experienced meaningful revolver pay downs from our portfolio companies because many of them chose to pay down the revolvers as they had better visibility regarding the impact in the 10 damage on their respective businesses.

The 275 million of unfunded revolver commitment at standing at the ended June $180 million are available to borrowers and 95 million or not available borrowing.

Availability is based on borrowing base limitations and other covenants.

There were no significant draw downs on delayed draw term loans commitments during the quarter, which are generally used to support portfolio company acquisitions in half incurrence covenants.

As noted a significant portion of our unfunded commitments are not available to borrowers most of our revolver commitments are subject to borrowing base and many of the companies do not have direct collateral.

Delayed draw term loans are typically used to support portfolio company acquisitions and have incurrence covenants and therefore, we do not expect these facility to have any material utilization in the current environment.

Turning to the portfolio composition, our investment portfolio had a fair value of 2.67 billion at the end of June across.

149 company in 29 different industries.

We ended the quarter Weve core assets, representing 90% 91% of the portfolio.

Noncore assets decreased to 9% of the portfolio at the ended June down can 10% at the end of March 1st lien assets can for 85% into corporate we lending portfolio.

The weighted average attachment point decreased 2.8 times.

Investments made pursuant to our co investment order were 77% at the end of the corner.

We continue to remain focused on preserving liquidity in accordingly, no stock repurchases were made during the quarter.

As our leverage and liquidity continue to improve we will continue to evaluate repurchasing our securities as appropriate.

This concludes our prepared remarks, and we would like to open the call up to questions.

Thank you Sir the floor is now open for questions. If you wish to ask a question at this time simply press Star then the number one on your telephone keypad.

If at any point. Your question has been answered. Thank you wish to remove yourself from the Q press the pound Keith.

Our first question comes from line of Kenneth Lee of RBC capital.

Hi, Thanks for taking my question just one following up on on what was mentioned during the prepared remarks, you said that.

You have some visibility into investment repayments over the next few quarters. Just wondering if you could just expand upon that and what gives you some comfort around that visibility. Thanks.

Yes, well, it's Howard we have.

We go through the portfolio, there's a number of of companies that are basically in art and OS strategic transactions.

For sale that are either pending or or committed.

So there like they are pending closing.

So we're talking about things you know that are that are in a number of cases already under contract cod. So that can be broken up we're just waiting for some regulatory approval.

And in other cases are in our in our being auctioned during our in our.