Q2 2021 Apollo Investment Corp Earnings Call

To begin momentarily until that time your lines will again be placed on music hold thank you for your patience.

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Great and thank you everyone for joining us today speaking on today's call are Howard Widra, Chief Executive Officer, Ken or Palle, President and Chief Investment Officer, and Greg Hunt Chief Financial Officer I'd.

You know Greg will then review our financial results and provide an update on our liquidity position. We will then open the call to questions. During today's call, we will be referring to some of the slides in our investor presentation, which is posted on our website.

The fund's net leverage ratio declined to 156 times at the end of September compared to 166 times at the end of June and 1.71 times at the end of March the decline in September quarter was due to a combination of strong repayment activity a net gain of the portfolio and retained earnings repayments in the September quarter included upon.

Doximity $21 billion from non core assets since the end of September through November 3rd we have received additional gross paydowns of approximately $130 million pro forma for these paydowns and some net fundings and assuming no changes to their value up or down net leverages currently approximately.

147 times.

Given our progress to date on our visibility into additional repayments for the remainder of the December quarter and beyond we are now in a position to make new investments as market activity resumes. While we also continue to manage our existing portfolio.

It declined significantly since peaking in late March or early April. Additionally, covenant waivers and credit amendments have slowed down the new issue market has also been gaining momentum as borrowers sad to complete deals ahead of the election.

The use of proceeds has been expanding from mostly add on acquisitions to buyouts sponsors sponsor sales and dividends and while Craig documents and structures of tightened borrowers are seeking private credit solutions over broadly Cindy syndicated capital.

Aviation assets across the broader Apollo platform Mercs is now benefiting from a growing servicing business, which has helped partially offset the decline in fair value of its fleet during the quarter.

We believe in marks his portfolio compares favorably with other major lessors in terms of asset geography age maturity and let's see diversification marches portfolio skewed toward the most widely used types of aircraft, which means demand for marks as fleet should be somewhat more resilient.

At the end of September investments on nonaccrual status represented $143 million or $4, 9% of the portfolio at cost and 30 million or 1.2% at fair value with that I'll turn the call over to Greg who will discuss the financial performance for the quarter.

Assets the increase in net assets were driven.

Continued in the September court.

Incidental net revolver pain.

And the number one on your telephone keypad again that is star then the number one to ask a question. Your first question comes from the line of Canada, Lee with our B C capital markets.

Hi, Thanks for taking my question just wondering whether you could just provide any further details behind the visibility into additional be payments for the December quarter, and whether you see any additional.

Hello, Thanks again.

Your next question comes from the line of Kyle Joseph with Jefferies.

Mr. Jason go ahead with your question.

Oh policy.

Thanks, guys for Amnion apologies I was on mute anyway, I'll get right on that question.

Good plan and in light not surprisingly over the last few quarters. As you guys are focused on de levering, but yeah, I think it sounds like you've gotten to a point, where you're comfortable that evaluating new transactions Tanner I think can you give us a sense for for how the pipeline looks at it.

You know in terms of size and then you know in terms of terms, how it looks versus kind of pretty covered deals.

Yes sure.

Thanks for the question. So I think you're spot on that debt has certainly been a focus getting back within our targeted leverage level and you saw some deployment in the <unk>.

September quarter, I would expect that to increase in the December quarter as it relates to pipeline, it's something we've stressed in the past.

And especially once again the good news is when you look at the middle market platform in its totality, including mid cap that origination continues to be strong and our participation in that in.

As well as the rest of the market in terms of those unfunded commitments getting funded.

Proactively bye bye borrowers at the onset set of Covid. So that's how I would capture it will better definitely tightening relative and importantly, A&D, having done done some sufficient deleveraging would expect us to participate more.

The origination coming off the mid cap platform in the broader Apollo platform.

Got it.

You're very helpful.

The portfolio yields in the quarter, obviously, there is a little.

Q on keep pressure, obviously that I would get that's not right driven is that more of a mix shift in terms of the the assets that are being paid down.

Yeah, I'll mentioned that you've you've got a little bit of that dynamic where your highest.

You'll be in investments are not surprisingly the ones that are most targeted for repayment.

From from the borrower side.

So that was one dynamic but then so to also do you have where LIBOR contracts.

Our set prior to the period and so some of that was also a function of those finally kind of rolling through the system right. The that does the LIBOR kind of came down steeply earlier in the year and it takes time for those some of those contracts to roll off and then that that was contributing to a lesser extent.

To what you saw in terms of yield movement.

Got it and then last question for me.

From a modeling perspective, probably for for Greg, but just based on the losses in the earlier part of the year.

When would you if we can assume that status quo no more losses.

No more gains from here when would you expect the incentive fee to begin being paid out again just to check my math.

Yeah, I think on it based on your assumptions.

You you'd be December of 21.

Okay. That's it for me thanks, a lot for answering my questions.

Things come.

Your next question comes on the line of Matt Jaden with Raymond James.

Everyone afternoon, and thanks for taking my questions Tan.

10, or maybe first one for you I know you said last quarter on the call that through July cash flows mercs, we're tracking at or above expected levels did that hold throughout the entirety of gallons of the third quarter any commentary you can give on what you're seeing thus far to November.

Yeah sure happy too.

So so so that was what we're seeing through July I would say that that held true through September that forecast is based on the deferrals granted and what we had expected.

To kind of come back online you had a dynamic where.

Obviously wow.

Unfortunately, this has affected all parts of the world it hasn't necessarily been equal and so and in Asia, you've obviously seen a return.

Greater return or pick up an air travel and then also in the U S. Wow.

Air traffic still remains very very challenged obviously, the capital markets and the government support have been.

Have been very very robust and so in general we are still seen a modest outperformance relative to our expectations in terms of.

At least at least cashflows I would caution and I think we remained appropriately cautious as if you think about a lot of those deferrals that were granted Matt they were in that.

April to June period, and where typically six to nine months and so it is it is during this period, we're kind of real time on those coming back online and so while we are encouraged by a relative to expectations, what we've seen to date.

Remain cautious in as much as not all of those borrowers.

All of those lessees.

Have you had been scheduled to come back online as of now.

Great. That's helpful. My last one for me just a quick one I know you said, 40% drop in amendments during the quarter any commentary you can give on the seriousness of those amendments compared to the park order.

Yeah sure I think.

I think so so you were right to recognize that I think this is it makes sense is.

In the midst of the pandemic.

The worst of the downdraft you saw a lot of borrowers reaching out proactively and then at that activity is past you've been in a phase where.

We were especially in light of or coincident with sponsor support for transactions. We obviously gave the runway for for those transactions in terms of the activity. We saw it was down 40% you we had about eight at about nine amendments in the.

In the quarter.

About half of which.

What we would consider more substantive again, many of which entailed equity contributions from the sponsor and then the other half.

It would be more kind of strategic.

Less less substantive so in terms of in terms of your specific question.

I'd say those that were substantive sort of very much.

With underperformance or covid effects, but in terms of volume as we mentioned in our prepared remarks definitely.

Less less activity and importantly, where there were those.

More covid effected games, so good sponsor support.

In those particular amendments.

That's it for me I appreciate it.

Extend probably prefer to answer if you can.

Thanks first question. Thanks.

Yes, sure and Greg might have the specific numbers. So so I'll jump in first in an answer.

They are relatively modest in terms of the up in the down and obviously the net down five 5.9.

Million and in terms of collateral value versus the servicing and then in terms of your other question earlier.

Related to the servicing platform, we mentioned in our.

Yes.

Our August call, we done a big transaction.

For Delta there.

The pipeline remains very very robust.

In terms of other opportunities as.

As well as also the servicing platform also benefits to the extent that transactions are harvested and and part of the write up.

It was related to some of that debt that harvesting and so.

Not not as much a specific quantum.

I can point to in terms of what drove that increase except to say, though we do have we have successfully raised a dedicated fund.

Which is still has available capital to it to undertake these transactions and also.

Had the benefit of the broader Apollo platform and their potential demand for aircraft leasing transactions as well.

And I don't know, Greg if you had the specific numbers, but but relatively modest.

Okay, I think I have I think the ballpark of the numbers were you know theres a total write down of five and I think the servicing platform was written was was increased in value between like the sort of the medium single digits. So between something like finding tenants and that took the abbey.

The collateral par was down 10 to 12, it's like that ballpark so.

And the servicing platform went off went up for a couple of reasons, both because theyre more transactions on the platform and also because there was some.

Split fees generated that are now receivables.

All off either dispositions implants and Thats even.

On.

That's even more direct value because it will be cash coming.

Right.

Well.

In the other directional can you again the metal.

The way we look at it.

In written down in end user based on cash flow neutral and all of that over 18%. Okay. So that's kind of the magnitude that we have written down the metal side of it and Thats reflected in kind of if you look at market comps and stuff.

Mhm.

And nothing.

That's from March right or as we say, yes, thats Ron that's from March through on the September quarter, Yes.

Yes.

That's helpful and.

To that.

Matter.

Assuming things as we've talked about.

A lot of these aircraft are tied to.

Government sponsored or major airlines.

Around the world.

Maybe they were somewhere being renegotiated and such.

So now you have.

So I assume now that youve been through most of that.

What kind of like topline impact.

Overall for the business.

Merck's exposure.

Experience and how far along do you think you are.

In in that process.

Which gives us further question into sort of the value we had as well as building are servicing platform.

And does that make sense.

Then.

Yeah, it's been very helpful.

And that's sort of how we're looking at it and so the key is keeping these lease.

These we now know what to expect it's not as good as it was before but it's but you know effectively when you look at a I M V. You're you're paying for that through the lower return me have often works, but we've models are dividend off those lower returns off marks and we believe in addition.

We we have some ability to outperform because we can we can we can generate liquidity off some of our our planes better either cargo planes or you know or or have some strategic value to somebody to bring our basis down some as well over the next few quarters and that's our goal to even further make.

That picture of that gap less impactful to our cash flows and and give people a sense of.

You know a more range bound on sort of where the value is or cushion we have an evaluation.

Great I appreciate that Howard and thank you for taking my questions.

We have no further questions at this time I would like to turn it back over to management for closing remarks.

That's neat.

Thanks, everybody for listening today in our behalf argument. Thank you again for for taking the time and support us.

Through this challenging environment feel free to reach out to any of us with any questions and we hope everybody.

Have a nice day.

Thank you. This concludes today's conference call you may now disconnect sneakers. Please hold the line.