Q2 2022 Apollo Investment Corp Earnings Call

Closed today, we reported net investment income for the September quarter of 33 per share two cents above our quarterly base distribution of 31 cents as mentioned on our last conference call given the total return feature in our fee structure and the strong performance of our corporate lending portfolio.

We resumed paying incentive fees during the quarter.

Net investment income for the quarter reflects a full incentive fee. We ended the quarter with net asset value per share of $16 seven up five or <unk>, 3% driven by our corporate lending portfolio, which continues to perform well as well as the accretive impact of stock buyback.

Regarding investment activity the Apollo direct origination platform, which includes a <unk> was very active closing $4 $6 billion in new commitments during the quarter AI and these new investment commitments were strong totaling $222 million all first lien floating rates senior corporate loans, given this solid level of activity our investment portfolio.

<unk> grew and our net leverage ratio increased to $1 five one times at the end of September right in the middle of our target leverage range.

We remain focused on increasing <unk> earnings power, let me discuss how we think about our baseline earnings and the embedded upside in our portfolio.

First as a result of the stability, we expect to continue to see from merck's during their recorder, we recast the capital structure and received $6 9 million of interest income from Merck's during the September quarter, $2 1 million more than last quarter.

Second although net leverage was 151 times at the end of the quarter average leverage for the quarter was 146 times a good baseline for projecting earnings going forward.

Fee and prepayment income totaled $1 $7 million for the quarter. Although these sources of income can fluctuate from quarter to quarter, we expect to generate approximately $3 $5 million of fee and prepayment income per quarter on average as an illustration in the March 2021 and June 2021 quarters fee.

And prepayment income totaled $3 9 million and $5 9 million respectively.

Conversely, although we earned a $2 million dividend from <unk> during the September quarter, we expect to earn approximately $1 million on average going forward a level consistent with prior periods, taking these items in aggregate would produce a baseline of approximately <unk> 34 per share.

<unk> lending commitments for the quarter totaled $222 million across 18 companies for an average new commitment of $12 3 million.

88% of the new commitments were leveraged lending five lender finance five asset based and 2% life Sciences.

Consistent with our strategy on new commitments were first lien floating rate loans with a weighted average spread of six 113 basis points and a weighted average net leverage of four four times and 95% were made pursuant to our co investment order.

Gross fundings for the quarter totaled $211 million, excluding revolvers sales and repayments totaled $107 million, excluding revolvers the strength in the market enabled us to continue to reduce our exposure to second liens during the quarter repayments included $35 million of second liens, including the full exit of two positions.

Net fundings for revolvers totaled $10 million in aggregate net fundings for the quarter were $114 million.

Moving to marks the overall air traffic environment appears to be improving particularly in the U S. We are optimistic that the demand for air travel will continue to grow with the ongoing rollout of the vaccine and the lifting of travel restrictions. Furthermore, the aircraft leasing market will continue to be an important and growing percentage of the world fleet as airlines will increasingly look at third party balance sheets to finance their operating assets.

[noise] specific to our investment as Howard mentioned, we believe <unk> has successfully navigated the significant disruption caused by the COVID-19 pandemic the level of lease revenue generated from our fleet has stabilized we have worked through our exposure to airlines that have undergone restructurings, we have been able to remarket aircraft during the period.

Long term leases or sales.

And merck's continues to benefit from a growing servicing business, which has increased in value over time.

Given the stabilization of marks during the quarter, we recast $84 5 million of merck's equity into debt and as Howard mentioned <unk> received $6 9 million of interest income from marks during the September quarter, $2 1 million more than last quarter Mercury remains focused on remarketing aircraft that are due to come off lease via extensions with existing Leslie.

<unk> re leasing to other airlines on long term leases or sales.

During the September quarter, Merck sold two aircraft and signed lease extensions for six aircrafts our lease maturity schedule is well staggered we believe <unk> portfolio compares favorably with other major lessors in terms of asset geography age maturity and lessee diversification merck's portfolio skewed towards the most widely used types of aircrafts, which mean.

The corporate lending portfolio declined to 5.1 times down from five to two times last quarter. The weighted average Taschen point declined to 0.3 times down from 0.4 times last quarter are low attachment point is a clear indication of the seniority of our corporate lending portfolio compared to loans, which are classified as senior but have much deep.

[noise] attachment points the.

The weighted average interest coverage improved to three times up from 2.9 times last quarter. The improvement in these metrics not just this quarter, but over the last several quarters clearly demonstrate the improved quality of our investment portfolio.

Investments made pursuant to a coma small order represent 84% of the corporate lending portfolio at the end of the quarter.

Although o'berle all quality of our portfolio remains strong our second lien position in sequential brands was placed on non accrual status during the quarter schedule brands owns manages and licenses a portfolio of consumer brands and the active in and lifestyle categories. The company filed for chapter 11 bankruptcy in August and is seeking an orderly liquidation of the brands in its portfolio, our second lien position.

<unk> was marked at 91 at the end of September compared to 82 at the end of June.

The Mark at the end of September reflects the liquidation process and the resolution of our current position, which is expected to occur in the December quarter [noise].

At the end of September investments on non accrual status totaled 28 million or 1.1% of the total portfolio at fair value during the quarter spotted Hawk completed a restructuring of its balance sheet. Our second lien position tranche a was converted to equity in our third lane position tranche B was cancelled both of these positions were previously on non accrual status the valuation.

<unk> of our investment in spotted Hawk was not impacted by this restructuring.

With that I will now turn the call over to Greg who will discuss the financial performance for the quarter.

[noise], Oh, thanks, and thinner and good afternoon, everyone, beginning with a I N D statement of operations.

Investment income with $52.9 million and a quarter of 4.6% quarter over quarter.

I think higher interest income and higher dividend income, partially offset by a decline in prepayment and see income.

Slight fee offset from our Navigator fund, one which is apollo's globe, which is apollo's flagship commercial aircraft leasing fund.

Not only does merck's received income from servicing aircraft in this fund <unk>.

<unk> benefits from a direct fee offset equal to 20% of fees earned by Apollo global and in connection with managing aviation assets for Apollo, including navigator.

The increase in interest expense.

Reflects both the growth in the portfolio as well as an increase in our funding costs.

As a reminder.

In July we issued $125 million of five year, four 5% unsecured notes, which drove the increase in our weighted average cost of funding from 3.08% to three 2% quarter over quarter importantly, unsecured debt increased to 30% of our.

Standing debt at the end of September.

Up from 24% last quarter.

Net investment income per share for the September quarter was 33.

Net leverage at the end of September was 111.

<unk> five one times up from $1 three nine times at the end of June.

Capture utilization and storage as part of broader ESG trends.

Believe carbon free as a leader in this space as evidenced by partnerships announced during the quarter, which demonstrate market acceptance for <unk> technology.

NAV per share at the end of September was $16 seven.

A five.

<unk> increased quarter over quarter to <unk> increase.

Is attributable to a <unk> <unk> per share gain on the portfolio <unk> from buybacks, partially offset by <unk> <unk> from the distribution in excess of net investment income.

Regarding liquidity given the continued improvement in the quality of our investment portfolio and our recent unsecured debt issuance our liquidity position continues to strengthen.

Moving to stock buybacks during the quarter ANV.

Purchased 450.

953 shares at an average price of $13 nine.

Okay.

For a total cost of $5 9 million since.

Since the end of the quarter ANV has purchased an additional 300 308000 shares at an average price of $13 30.

For a total cost of $4 1 million, leaving $14 9 million of authorized.

Authorization for future purchases under the boards current authorization.

This concludes our remarks and operator, please open the call to questions.

Supply chain constraints, and how they affect individual borrowers and might impact them and feel relatively comfortable where we are in the capital structure that that's you know that in and of itself is not a you know a tremendous risks risk to our portfolio, but it's sort of like you know the combination of.

All of these pressures combined with you know a very aggressive debt market, which you know means you have to retain your humility.

And not everyone in the market is and so that's that's a concern you know again, it's why we've always said like the one of the key aspects is to have a very wide funnel.

Have a diversity of products and.

And be able to be as selective as you can be in a market like that so I know I didn't give you a specific answer but that's really it. It's it's it's a very benign environment. This minute, but you can see all sorts of things that could potentially come your way. So we take a very we take portfolio construction very seriously.

And then on individual credits try to look out at the specific risks, we see coming to see how they can absorb.

Got it.

I'm home piece unit, one and one follow up for me.

Repayments, and then sort of life of their time lower than <unk>.

Sure, Matt as you guys know.

Have you seen a little bit less despite record M&A volume is there some auto correlation Kyle to the type of companies that want a private debt solution and you and because of that you see less of our company's graduating and more specifically those type of companies that need heavy.

<unk> draws are active in narrow and M&A pipelines within the companies and as a result, the private credit players and this kind of goes to power, a accumbency, which we beat the drum on within our institution I know others do the same you see longer duration on those assets and maybe on the margin.

[noise], perhaps less of the syndicated markets really really hot and we're seeing as you might've seen in the past and names that graduate and leave our leave our market and go to the syndicated market, maybe that's happening a little bit less on the margin, but overall would echo what what however.

However to obtain as well.

Appreciate the color and thanks for answering my questions.

Okay.

And we will move next to Melissa Wedel with JP Morgan Your line is open.

Thank you appreciate you taking my question.

I'm curious how or Walmart really.

Any conversation in the board.

The board and the management team about.

<unk> in the context of NII.

Okay.

I mean, what we've been focused on with the board as the things that we focused on on these calls as is.

No.

Effectively establishing with like a very sort of hopefully like a tight band of certainty our long term earnings power. So we tried to go through that and set that up and then once that set up I think sort of obviously the major expense for all bdcs as the manager fees and that has to basically take into account.

How we deliver on that and what the return the investors have so the answer is no.

Or partially does we're very focused on the next you know within the next year to have something strategic done with all of them and you know and and hopefully that will happen linearly not like meeting some each quarter. Some each you know Ah Ah, but we're very focused.

To have that sort of done and completed so we can sort of tell what we thought what we've always thought as the core story of this without without any you know other noise.

And analysts actually that really goes to your other question, it's like well how do you look at the the fees well the fees the fees and the appropriate level of the fees will depend on what sort of but not the you know the solid clean portfolio looks like and what its yield is and what it's what it's Ah you know what it's delivering to the shareholders Ah Ah.

And and so we need to sort of prove the nape of these investments and make them earn their right return.

Uh-huh.

And as a reminder, if you would like to ask a question today. Please press the star in the one on your Touchtone telephone we will go next T. Robert Dot net Raymond James Your line is open.

Good afternoon I'm on on MX, if I can I mean, obviously this quality you you you know it'd be cast reallocated some of the equity to that at at the margin would it be you'll you'll precedents to do that kind of going forward to rotate more of of of the.

Remaining equity into that get up the all L. I C over the total committed capital that way all I mean, obviously you could would you see him at as well I mean, you talked about that or should we expect dividend income from books of the equity by my staying the same and you just call. It you know the the.

The excess cash flow, earning some books and that would flow to to maybe dividend income or would you prefer to convert it essentially T. Two interesting.

Yeah. Thanks, Thanks, Robert Thanks for the question.

And you know appreciate there there's some complexity here you know as as a reminder, this is our investment in the business and on the margin as you ask the question Robert R preference would be to characterize it as that it it creates more predictability. It takes away what is as I.

So so.

We do expect there to be some coinvest thing, but not not not a not a huge amount of color investing.

By the same token you know for US we don't expect it to take part in their deals unless we feel like they're particularly you know Ah aligned with what our strategy overall is it.

The fact that that vehicle will you know will raise capital and grow should be helpful to our overall origination effort because you know like everybody else in our market you know the the key to originating as having scale, we have quite a bit of scale. That's why we're able to originate but you know it's like.

You always need more there's like an arms race and so having a vehicle like this with permanent capital that has appetite for the deals and actually his appetite for the deals on the larger end of our spectrum.

That fits their strategy is also where we need more capital obviously, because those are bigger deals and so we would not we do not expect it to affect AI and these bite size and that's because AIB gets its full bite size on all these deals so it doesn't get cut back.

There's always enough it's always it's and so it's always about having more more capital than it is the asset. So we don't expect it now if it became a $40 billion vehicle would my answer start to change, maybe but it's only going to become a $40 billion vehicles that does a lot of a lot of those large.