Q1 2022 Apollo Investment Corp Earnings Call

And with the Apollo direct origination platform was very active closing $4.6 billion and new commitments during the June quarter, AI and these new investment commitments were strong totaling $332 million all in first lien floating rate loans. We believe we have constructed a granular and diversified portfolio of high quality senior corporate loans, we believe merck's has successfully NAV.

Against this challenging period, and we expect AI and <unk> will be able to generate higher revenue from Merck and the coming quarters. We also continue to make progress reducing our exposure to noncore and junior capital investments repayments. During the quarter included the exit of 2 second lien investments as well as a small partial pay down from 1 of our shipping investments we remain focused on reducing our exposure to the remaining.

Non core assets, while ensuring an optimal outcome for our shareholders moving.

Moving to financial results, we delivered solid results for the quarter net investment income for the June quarter was 39.

We ended the quarter with net asset value per share of $16 and <unk> up 14% or 9%. The increase was driven by our corporate lending portfolio, which continues to perform well the investment portfolio grew modestly as solid fundings were mostly offset by prepayment activity.

Gross fundings for the quarter were $230 million, excluding revolver fundings, while net fundings totaled $29 million net leverage increased to 139 times at the end of June up from $1.3 6 times last quarter and slightly below our target leverage range of 1.4 to 1.6 times as we look ahead, we are confident and our ability to grow our portfolio.

Folio and operate within our target leverage range, given the tremendous need for creative and flexible private capital and the unique and robust nature of the Apollo Midcap platform with that said it is kind of will discuss later the current market environment is very competitive and we will continue to focus on first lien assets and will remain disciplined and our credit selection process.

Turning to our distribution for the quarter. The board has declared a base distribution of 31 per share and a supplemental distribution of <unk> <unk> per share. Both distributions are payable on October 8.2021 to shareholders of record as of September 'twenty, 1.2021 and with that I'll turn the call over to Tanner to discuss and market environment and our investment assets.

Thanks Howard.

Beginning with the market environment, the U S and economy continues to recover on the back of more vaccination support and fiscal and monetary policy high stock prices and tight credit spreads and significant excess savings and the household sector and the corporate sector Dale.

Daily data for travel credit card usage and restaurant bookings continue to approach or exceed pre pandemic levels.

While there may be a slower reopening and some parts of the country. The ongoing improvements in GDP and employment and earnings are likely to continue.

The reopening of the economy has been associated with the significant spike and inflation as prices of cars flying and dining and other services have recovered. We generally believe that the growth backdrop will serve as an offset to the inflationary pressures that our portfolio of companies based on the data from LCD, New issue loan volume and the June quarter was $145.8 billion.

The second highest quarterly total and last for years amid strong supply the.

The market continues to see strong demand from both cielo and retail investors secondary loan prices also continued to move higher.

Specific to our business the middle market lending environment has generally returned to pre pandemic conditions due to several factors, including a growing number of private credit providers are strong syndicated loan market and our strong economic backdrop, all of which have contributed to the return of borrower friendly pricing and terms.

Private equity M&A activity is robust and sponsors continue to deploy capital as a result of the favorable conditions more companies, including the upper end of the middle market are seeking syndicated solutions.

Moving to AI and these investment activity, new corporate lending commitments for the quarter totaled $332 million across 20 for companies for an average new commitment of $13.8 million by strategy, 82% of new commitments were leveraged lending, 12% were life sciences, and 6% of our asset base consistent with our strategy all of these new.

Commitments were first lien floating rate loans with a weighted average spread of 620 basis points and a weighted average net leverage of 5.2 times. All of these new commitments include LIBOR floors, and 92% were made pursuant to our co investment order.

Gross fundings for the quarter totaled $230 million, excluding revolvers and merck's due to the strength and the overall market repayments were also strong totaling $189 million, excluding revolvers and merck's the strength and the loan market has enabled us to continue to reduce our exposure to second liens during the quarter repayments included $57 million from the <unk>.

Net of 2 second lien positions and over the past 4 quarters second lien repayments have totaled 133 million and we also received 4 million repayment during the quarter from M. C..1 of our shipping investments from the sale of 1 of its vessels net repayments for the for revolvers totaled $12 million and total net fundings were $29 million.

Moving to <unk> and beginning with the overall market. We are optimistic that the demand for air travel will continue to improve with the ongoing rollout of the vaccine and the lifting of travel restrictions. Additionally, we expect to see we expect the aircraft leasing market will continue to be and important and growing percentage of the world fleet as airlines will need to increasingly look to third party balance sheet to finance their <unk>.

Operating assets as.

As the aircraft sector continues to recover we have seen a notable pick up and sale leaseback transactions and then the ABS market and important source of financing for aircraft lessors.

Specific to our investment we believe Merck has successfully navigated this challenging period.

The level of lease revenue generated from our fleet and stabilized we have worked through our exposure to airlines that have undergone.

Undergone restructurings.

<unk> been able to remarket aircrafts during this period with long term leases or sales and our current lease maturity schedule is well staggered and Additionally, merck's continues to benefit from our growing servicing business, which has increased in value over time.

We believe <unk> portfolio compares favorably to other lessors in terms of asset geography age maturity and lessee diversification merchants portfolio is skewed towards the most widely used air types of aircraft, which means demand for merchants fleet is anticipated to be resilient.

<unk> fleet, primarily consist of narrow body aircraft, serving both U S and foreign markets at the end of June <unk> Zone portfolio consisted of 78 aircraft 10 aircraft types 39, lessees and 25 countries with an average aircraft age of 11, 5 years and and average lease maturity.

For 3 years merchant fleet includes 75 narrow body aircraft to wide body aircraft and 1 freighter.

And the Apollo Aviation platform will continue to see 2 to seek to opportunistically deploy capital to be clear <unk> is focused on its existing portfolio and is not seeking to materially grow its.

Oh and balance sheet portfolio, however growth and the overall Apollo aviation platform will inure to the benefit of merck's as the exclusive servicer for aircrafts owned by other Apollo funds.

Turning to the overall AI and V portfolio, our investment portfolio had a fair value of $2.49 billion at the end of June across 140 companies and 25 different industries. We ended the quarter with core assets, representing 92% of the portfolio and noncore assets, representing 8% first lien assets represented 90% of the <unk>.

Corporate lending portfolio up from 87% last quarter at the end of June the weighted average spread on the corporate lending portfolio was 616.

Basis points.

As a reminder, the weighted average LIBOR floor on our floating rate assets is approximately 1% well above today's current LIBOR.

Weighted average net leverage of our corporate lending portfolio declined to 5.2 times from down from 534 times last quarter. The weighted average attachment point decline to zero point for times down from 6 times last quarter and the decline and these metrics both for the quarter and over the past few years reflects the.

Continued improvement and the credit quality of the portfolio.

Investments made to our co investment order represented 81 per cent of the corporate lending portfolio at the end of the quarter and then.

Amendment.

Amendment activity remained modest this quarter with no material amendments no investments were played on were placed on or removed from non accrual status during the quarter at the end of June investments on non accrual status represented $27 million or 1.1 per cent of the portfolio at fair value with that I will now turn the call over to Greg.

We will discuss the financial performance for the quarter.

Thank you Tanner.

And the statement of operations total investment income was 55.

And 5 million for the quarter.

And net gain on non core and legacy included a $9.8 million game and carbon free <unk>.

<unk> investment, partially offset by losses on oil and gas and shipping.

As a reminder, our investment and carbon free and system investment in the Companys proprietary carbon capture technologies, and and investment and the company's chemical plant.

Carbon free is benefiting from the strong interest and carbon capture utilization and storage and the.

The increase and valuation as a result of a recent third party capital raise and carbon free.

NAV per share at the end of June was $16 and <unk> for 14.

Hence our 9.

On a 9% increase quarter over quarter, the 14th increase was attributable to <unk>.

Net share gain on the portfolio and net investment income per share of <unk>.

Adding liquidity given the continued improvement and the quality of our investment portfolio. Our liquidity position continues to strengthen post quarter and in July we issued $125 million of 4.5% unsecured notes due in July 26.

Spite the dilutive impact of these notes we believe it was prudent to diversify and extend the maturity of our funding sources. In addition, we are pleased that Kroll affirmed our investment grade rating and revised the outlook to stable from negative and July.

Regarding stock buybacks during the quarter AIA and purchased 145000.

500 shares at an average price and $13.92.

For a total cost of $2 million.

And from July 1 and this was post quarter through August 4th.

2021, we purchased an additional 44000 shares.

And and average price of $13.46.

For total cost of $600000, leaving approximately $24 million of authorization for future purchases under the bird boards current authorization.

And before opening the call to questions. We wanted to briefly remind everyone that given the total return hurdle feature in our fee structure and the recovery and our portfolio over the last several quarters.

Back to begin to pay a partial incentive fee and the quarter ending September 2021 day.

The exact timing and amount will vary based upon based on future gains and losses, if any as well as the level of net investment income for the quarter.

As we said on last quarter's call, we believe ANV and net investment income may fluctuate over the next few quarters as we begin and pay incentive fees that said, we expect to generate higher revenue from certain investments, including merck's, which will help offset the impact.

And from incentive fees.

We remain confident and the trajectory of our earnings and our long term plan as mentioned last quarter, we intend to declare a quarterly base dividend distribution of 31 per share and our quarterly supplemental distribution of <unk> <unk> per share for at least the next 2 quarters.

To be clear this would be in addition to the distributions declared today. This concludes our prepared remarks, operator and please open the call to questions.

And at this time, if you would like to ask a question. Please press Star then 1 on your Touchtone phone.

And regarding your question at any time by pressing the power and key once again that and star and 1 and we will take our first question from Finian O'shea with Wells Fargo. Please go ahead. Your line is open.

Hi, everyone.

Good afternoon, just a.

A question I guess for Howard on.

The rebound and origination outlook and so forth.

Can you do.

Give us I guess your high level thoughts on how much.

A lot of this is.

And the pent up demand.

Versus our versus sustainable shift and the demand for private credit.

Sure I mean, I don't know if.

So I think.

I think.

And the activity has been very robust versus historical standards. So it is hard to say that it's like a permanent shift at a higher level that said there are some secular things that are happening that seem to suggest that it will it can stay elevated for some period of time. So 1 is.

Just a lot of dry powder out there for equity firms.

Due to do deals so that's likely to keep things elevated for.

1.

And.

And and.

And so.

If you combine that with the fact that there continues to be like the secular shift to the private credit market both from the higher and deals from broadly syndicated market and also continuing from what banks provide for different companies. Both of those things secular suggests that there will be more activity that said. This is also theres also.

Some pent up demand.

And so.

I mean, our expectation is that activity across the industry and and I think you've seen it from some of the other bdcs will be.

Robust certainly through this quarter and we would expect it to continue and the near and medium term.

Oh <unk>.

Well, thank you and.

Can you give them.

Second question also sort of high level platform level can you give.

Update on generally the.

The direct lending.

The middle market side.

It is.

Apollo with mid cap and so for us at the BDC invest with.

Sort of the.

<unk>.

For allocable capital or sort of.

And fund complex that we're co investing with us at this stage.

Sure.

No.

Probably a little bit about and.

So you know we are in a benign credit environment. So.

When you have a lot of growth with a good amount of capital without a lot of sort of.

Without a headwind of credit problems across very many sectors, because there's just sort of the growth and that quantify economy and the liquidity, obviously, that's a pretty favorable environment.

And that's that's that's where we are.

Very well.

The color that's all for me. Thank you.

Hello, and welcome our next question from Kyle Joseph with Jefferies. Please go ahead. Your line is open.

Hey, good afternoon, and thanks for taking my questions I guess.

First 1 for China really it sounds like.

Merck since kind of kind of out of the woods and you talked about drilling and <unk>.

Revenues and.

Going forward can you give us any sort of recognizing theres a lot of uncertainty remaining but give us a sense for the potential magnitude and also the farm whether it be dividend or interest income.

So let me just sort of take a crack at it I mean, I think last quarter, we talked about sort of like the earnings capability of ore or sort of really not be earning stability.

The earnings momentum of Merck's and that is in sort of the ballpark of Av.

The low.

The low $30 million across the whole investment, let's put aside for a second interest or dividends.

<unk>.

And right now or.

Over the last few quarters that cash flow or that income has first of all it's built up as we work for the leases, but it's also been used to pay down debt to get to sort of the debt facilities back in line.

And so the expectation is that.

Okay.

Most of that will be available for distribution because again, we're not growing right. So that's what it will be available for building up cash right now we have $190 million.

And of our investment is and that and that pays and has been paying and the low fours per quarter.

And it is expected the rash.

First would come through dividend income.

And so that's like that's that's where we are right now could you know something be restructured to make it.

To make more of a dent and less of an equity, possibly if that made sense for some other reason, but as we've sort of always said you Shouldnt view it is vastly different.

The income coming off Mark.

In terms of you know it was pretty predictable historically this caused the glitch and 2 it was steady and for that that component part, which was contractual but we would expect it to go from this for $5 million.

Level per quarter moving towards you know.

Most of the net income is producing over over the.

Near and medium term I can't predict exactly just depends on where we want to use the capital.

And that's really helped.

Appreciate it.

And then in terms of credit performance I know non accruals were stable.

In the market and concerning.

Just how you whether inflationary pressures will be transitory or not we've certainly seen it and certain of our businesses.

The way, we think about that part of the equation is if we've done our job right and we are indeed, creating risk first lien risk at roughly 60% LTV.

Is that what ultimately drives the ability to repay is not going to be and French by it by some inflationary.

Pressures and so we're not as concerned on that side, but to your larger question definitely seen some some some fundamental strength a lot of fundamental strength.

Consistent with what you hear about the broader economy and that our overall leverage could go down you know point just over a 0.1 cross.

Roughly $2 billion corporate book.

To some of that that underlying strength and deleveraging within the portfolio due to strong economic performance.

Got it really helpful answers thanks a lot.

Well I think and all of our language you asked a question that is star and 1 on your Touchtone phone.

And we'll take our next question from Mt.

Raymond James Please go ahead.

Hey, all afternoon and I appreciate you taking my questions first 1 for me following up on marks.

And the ryzen and Covid cases, and the U S and and the Delta variant has it slowed the recovery at merck's versus kind of where we thought maybe 3 months ago.

Yeah, I would say I would say.

And the recovery was was never going to be linear obviously, the delta variant is something that.

Everyone is.

It is looking at and scrutinizing and very very heavily.

It is still too early to too.

And to judge whether that's a meaningful change certainly on the margin people are very cognizant of it but I wouldn't say it's changed the outlook. Yes, we did mention that and this is not exactly to your question there, Matt but 1 other things we made mention of in the.

And our prepared remarks, 1 of the things that has helped helped the market has been the reemergence of financing markets and that's something that has contributed to the strength alongside and increased and sale leaseback activity.

And that's helped to.

Provide some sense and back into the market. So just specific question I think I think delta Varian and it's still too early to say we were cognizant that this was never going to be linear and in any case and that's not.

Certainly how we manage the business or what we anticipated we are encouraged by the level of sale leaseback activity and.

The repairing a reemergence of the financing markets and notably the ABS market.

<unk> as a very good sign for for the.

The industry.

Got it that's helpful last 1 for me kind of a more high level 1.

From a from the perspective of a shareholder returns how does AI and be balanced higher target leverage versus peers to to your cost of unsecured debt currently.

How do we balance.

I'm, just wondering and transfer the question Youre asking.

Hi.

How do we take on and instead at this cost.

Even the returns we want to generate.

Yes, Sir.

Well I will say this.

We felt like this.

This offering was <unk>.

Very well price for the investors overpriced and certainly versus the relative risk of our peers, but we also felt like that there was a lot of.

Interest announced from all our constituencies are our equity.

Our equity holders as a lot of our investors. The rating agencies are senior debt holders when are we going to issue again, and it's sort of like it's sort of like you get you want to get back on the train to be able to bring your cost of debt down so.

What we did was a small issuance to reestablish our name we focused very much on the quality of the investors long term holders who have big appetite in this space. So they can get familiar with how the portfolio is performing.

In order to sort of bring bring down the cost too.

And to a level that is consistent with driving the ROE, we want to drive that sort of those 9% Roe. So.

And it's a great question and probably the most apt question and this quarter.

We felt like it was the right strategic thing to do and it was a a bite size enough that the strategic benefit and flexibility it gives us and so.

And by the way also like it's 125 million for 5%. It's obviously, we pay down revolver with it which is and the 2 so that's a financial loss but.

It did it does extend out.

Greg 18 to 20 months beyond the existing bonds, which when those get redeemed or more expenses, obviously thats a little ways down the road, but when you sort of look at our overall capital structure, we're focused on long term, bringing down our cost of debt and we just thought like this step was a necessary step.

That's it for me I appreciate the time.

And then no further questions I'll now turn the call back for any closing remarks.

Thank you and thanks, everybody for calling in today on behalf of all of US that we thanks for your time today and feel free to reach out to any of US. If you have any questions have a good day.

Thank you and net.

And today's program. Thank you for your participation and that's come up and our own.

Okay.

Okay.

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