Q4 2022 Apollo Investment Corp Earnings Call
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Good morning, and welcome to the earnings Conference call for the period ended March 31st 2022, where Apollo investment Corporation.
At this time, all participants have been placed in a listen only mode.
All will be open for a question and answer session. Following the speakers prepared remarks, if you would like to ask a question at any time simply press star one on your telephone keypad.
If you would like to withdraw your question press the pound key I will now turn the call over to Mr. Elizabeth Boston Investor Relations manager for Apollo Investment Corporation.
Thank you operator, and thank you everyone for joining us today speaking on today's call are Howard with Dread, Chief Executive Officer, Tanner Powell, President and Chief Investment Officer, and Greg Hunt, Chief Financial Officer, I'd like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo investment Corporation and that any unauthorized broadcast in any.
Form is strictly prohibited information 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 webcast may include forward looking statements you should refer to our most recent filings with the SEC for risks that apply to our business that may adverse.
We affect any forward looking statements, we make we do not undertake to update our forward looking statements or projections with what's required by law to obtain copies of our SEC filings. Please visit our website at www Dot Apollo IC Dot Com I'd also like to remind everyone that we've posted a supplemental financial information package on our website, which contains information about the portfolio.
The company's financial performance at this time I'd like to turn the call over to our Chief Executive Officer, Howard would drive.
Good morning, everyone and thank you for joining us today I'll begin today's call with an overview of our results for the quarter followed by an update on our noncore assets, which we are pleased to say have been reduced to a nominal amount. Following my remarks, Tanner will discuss the market environment, our investment activity provide an update on merck's and discuss the portfolio's credit quality Lastly, Greg will review our financials.
Results in detail, we will then open up the call to questions.
With our results net investment income for the quarter was 42 cents, which reflects a slight increase in interest income and strong fee and prepayment income.
We recorded a net gain on the corporate lending portfolio, which continues to perform well overall, we had a net loss on our portfolio, primarily driven by a loss on merck's due to exposure to Russia, which Ken will discuss later during the call and on our remaining shipping industry, which was adjusted based on the expected net proceeds from our pending sale.
The total return feature in our incentive fee structure and a net loss of our portfolio incentive fees significantly declined quarter over quarter. We ended the period with net asset value per share of $2.79.
Shifting to an update of our portfolio. We continue to successfully execute our strategy of investing in senior secured first lien middle market loans and also continue to make substantial progress reducing noncore assets with the receipt of significant cash proceeds from the repayment of non core assets during fiscal 2020 to proceeds from the sale of non core.
Assets totaled 47 million, including $32 million in the March quarter.
March noncore assets totaled 135 million at fair value and represented about 5% of the portfolio.
Post quarter end, we have received approximately $6 million of additional proceeds from noncore assets and we have good visibility into additional repayments in the coming quarters as we earn it didnt exclusive negotiations on two of our names, which will reduce our noncore exposure to approximately 3% of the portfolio I will now provide some color on these sales.
Beginning with our shipping investments during the March quarter.
<unk> profit product tankers close on the sale of four vessels had its wage generating approximately $28 million of cash in the quarter, you will see a $3 $1 million position in dynamic at the end of March on a schedule of investment relates to net working capital adjustments since the end of the quarter. We have received a $1 4 million dollar payments from dynamic and expect to receive the remaining balance by the end.
At which time, we will have fully exited their investment.
We're in the process of starting here.
The vessels at AMC, and our other shipping and our other shipping.
The fair value of our investment in Hep C was $34 3 million at the end of March reflecting the anticipated exit values from two proposed transactions, which will be supported by a small amount of seller financing. We assign the PSA are two vessels, which we expect to close by the end of June and we anticipate closing on the sale of the remaining vessels in the M. C suite in the September quarter.
Moving to our oil and gas investments, we have some positive developments to announce first we signed a letter of intent to sell our investment in spotted Hawk and we expect a purchase agreement to be finalized in the next couple of weeks, we expect to sell or closing, we've got coupons, which we estimate will generate net proceeds at or above our $30 $1 million back at the end of March.
This asset is high and there are multiple interested parties.
<unk> another oil and cash position is also benefiting from the increase of the price of oil at the end of March the fair value of the investment in Glacier was $62 million. The company continues to perform well as a I N V received a $3 5 billion dollar pay downs during the quarter and also wrote off the investment by $3 6 million Boes.
Post quarter end Glacier paid AI AI would be an additional $4 $5 million on its outstanding obligations, which represented approximately 73% of the fair value of the position at the end of March.
Pro forma for post quarter end activity, including pending sales non core assets total approximately $63 million, representing approximately 3% of the total portfolio at fair value were focused on monetizing the remaining non core assets and our costs are you cautiously optimistic that there may be some upside in some of the remaining non core positions.
Our $42 million investment in carbon free chemicals makes up the vast majority of the remaining non core assets as a reminder, our investment in carbon free consists of an investment in the company's proprietary carbon capture technologies and the company's chemical plant carbon free is benefiting from strong interest in carbon capture utilization and storage as part of broader ESG trends.
Going forward, we do not intend to breakout noncore assets as a separate category and our supplemental reporting.
Of course, we will continue to disclose the detail of each investment on our schedule of investments and will provide updates each quarter. We also continue to reduce our exposure to junior capital positions and received $7 million of second lien corporate loan pay downs during the quarter.
Shifting gears, let me take a minute to remind everyone about the construction of our corporate lending portfolio given the current operating environment, which is characterized by elevated inflation higher interest rates higher energy prices and other geopolitical factors.
Similar to our positioning heading into the pandemic, we have done what we believe to be a well diversified corporate lending portfolio, a true first lien floating rate loans invested in less cyclical industries.
Our corporate lending portfolio was 94% first lien with weighted average attachment point of one two times, a key metric, which demonstrates that we are truly affected at the most senior level of the capital structure. Additionally, 87% of the corporate lending portfolio sponsor back which means these companies have financial and operational support from the finance.
Sponsors alone we feel very good about the ability of our corporate lending portfolio to withstand potential economic headwinds in terms of new opportunities. We believe <unk> ability to invest in loans originated by mid cap financial has one of our most significant competitive advantages. In addition to cash flow loans to middle market sponsor backed companies mid caps product offering includes lifestyle.
This is lending asset based lending lender finance and franchise finance products, which are typically less competitive but have a lower correlation with the broader credit markets at the end of March These specialty products totaled approximately $340 million, representing about 16% of the AI. These corporate lending portfolio at fair value.
Turning to our distribution for the quarter. The board has declared a base distribution of <unk> 31 per share and a supplemental distribution of five cents per share for a total distribution of <unk> 36 per share consistent with NII for the March quarter adjusted for our normal level of incentive fees. Both distributions are payable on July seven 2022 to Sheryl.
As of record as of June 16, 2022, with that I will turn the call over to Tanner to discuss the market environment and our investment activity.
Thanks, Howard beginning with the market environment in the first quarter of 2022 risk premiums increased across asset classes as concerns about the impact of inflation on global growth and geopolitical unrest in Russia, and Ukraine drove investors to the sidelines.
In the U S leveraged loan and high yield markets volatility and weakness in secondary prices resulted in significantly reduced new issuance levels compared to the record setting pace in 2021.
Type of broader market environment benefits providers of private credit to offer borrowers fully underwritten solutions at agreed upon pricing and terms with certainty of execution irrespective of broader market conditions from a portfolio allocation perspective, we.
Believe that in the current rising rate in an inflationary environment.
<unk> is focused on diversified floating rate portfolios, particularly those with first lien can offer highly attractive risk adjusted returns.
Moving to investment activity mid cap financial was very active during the March quarter with $4 4 billion of new originations AI and these level of investment activity was driven by our focus on our operating on operating within our target leverage range for AI and the new corporate lending commitments for the quarter totaled 116 million across 16 companies for.
Average new commitment of $7 2 million.
94% of the new commitments were leveraged lending with balance sheet with the balance in lender finance and life Sciences, all new commitments were first lien floating rate loans with a weighted average spread of six six to 612 basis points and a weighted average net leverage at four seven times, 98% of new commitments were made pursuant to our.
Co investment order.
Gross fundings for the quarter totaled 115 million, excluding <unk> and revolver sales and repayments totaled $141 million, excluding boxing with Walters net revolver repayments were 28 million in aggregate net repayments for the quarter totaled $54 million.
Moving to Merck's, our aircraft leasing portfolio company <unk> investment in <unk> had a fair value of 299 million, representing 12% of the total portfolio at the end of March It is our intention to reduce our investment in box.
Through selling aircraft and deemphasizing its servicing business.
During the quarter, we recorded a net unrealized loss of $19 7 million on our investment in <unk>, primarily related to our Russian exposure.
At the time of brushes invasion of Ukraine, and the imposition of sanctions. The nurse owned portfolio included four aircrafts on lease to Chew Russian Airlines three of the aircrafts are in Russia, and one was outside of Russia for maintenance at the time of the invasion. The three aircraft that remain in Russia have been re registered in Russia. The aircraft that was outside.
Russia remains registered in Ireland and has now been repossessed by marks and moved to a storage facility in the EU.
In response to the various sanctions imposed by the United States and the European Union Merck's terminated the lease leases on all of these aircrafts. The merch team has been actively engaged in discussions with the lessees regarding the grounding and Redeveloped re delivery of these aircraft no aircrafts in the owned fleet are in Ukraine.
Or at least your Ukrainian Airlines, the three aircraft in Russia generate generated monthly rent of approximately 516000 combined as a reminder, merck's own sleep is financed through several independent limited recourse financing.
All four of the aircraft that had been leased to Russian Airlines were held in the aircraft securitization known as Mats 2019, the three aircraft remaining in Russia represent approximately 11% of total adjusted base value and the collateral pool of map 2019.
As is standard practice and required under the terms of the leases the lessees have an obligation to ensure the aircraft's merck's.
<unk> further maintains a contention and contingent insurance policy on the aircraft were vigorously pursuing all claims available to us under these insurance policies management based on consultation with legal counsel believes we have valid insurance claims for the total loss value of the aircraft, we are claiming under both the lessee policies.
Under both the lessees policies.
Which are placed in the Russian market and prior to sanctions had been reinsured with Reparable insurers in the London International markets and our own contingent policy, which is placed by a on with replicable insurers in the London in international markets.
Our valuation reflects various uncertainties, including the probability of recovery under our claims among other factors, which resulted in a meaningful decline in the value of these aircrafts during the quarter.
Turning to the overall A&D portfolio, our investment portfolio had a fair value of $2 $5 2 billion at the end of March across 139 companies in 26 different industries corporate lending represented 83% of the portfolio Merck's represented 12% and the noncore and legacy assets represented 5%.
As Howard mentioned pro forma for post quarter end monetization, including pending asset sales noncore assets represented 3% of the portfolio at fair value.
First lien assets represented 94% of the corporate lending portfolio.
At the end of March the weighted average spread on our corporate lending portfolio was 611 basis points. We continue to monitor the impact of inflation on our portfolio companies. We believe our portfolio is generally weighted towards industries that are less impacted by inflation and supply chain issues, it's worth noting that none of our corporate lending portfolio companies are domiciled in.
Russia or do you currently.
Moving to credit metrics at the end of March the weighted average net leverage at the corporate lending portfolio was $5. Two nine times the weighted average attachment point with 0.2 times and the weighted average interest coverage ratio was two nine times.
Investments made to our co investment order, representing 85% of the corporate lending portfolio at the end of the quarter.
No investments were placed on non accrual status during the quarter.
At the end of March investments on non accrual totaled $15 million or 0.6% of the total portfolio at fair value was essentially unchanged quarter over quarter with that I will now turn the call over to Greg who will discuss the financial performance for the quarter.
Thank you Tanner and good morning, everyone.
Beginning with our and the statement of operations total investment income was $54 7 million for the quarter down slightly quarter over quarter results for the quarter reflect a slight increase in interest income and strong fee and prepayment income.
Weighted average yield at cost.
Of our corporate lending portfolio was seven 7% at the end of March up from seven 6% at the end of December weighted.
The weighted average spread of our corporate lending portfolio was 611 basis points compared to 605 basis points at the end of December .
Net expenses for the quarter totaled 27 point.
$9 million down $4 6 million quarter over quarter, primarily driven by the decrease in incentives.
As a reminder, <unk> incentive fee.
Our income includes a total return hurdle.
A rolling 12 quarter look back given the net loss during the quarter incentive fees.
During the quarter totaled approximately $1 million compared to $5 4 million.
Last quarter net investment income for the March quarter was 42 cents per share and net leverage was one.
Five one on page 16 in the earnings supplement we disclosed the net gain or loss by strategy over the past five quarters during the March quarter, our corporate lending book.
Had a net gain of $3 8 million or six cents per share concentrated in a few conditions as Tien mentioned, we recorded a $19 $7 million unrealized loss on Merck's <unk> 31 per share related to our exposure to Russia, we recorded an additional $6 7 million.
Or 11 cents per share on noncore and legacy assets driven by law.
Losses from our remaining ship investments and reflects realization all day.
And as Howard spoken about.
NAV per share at the end of March was 15 point $15.79 or 1.818, or 2009 cent decrease quarter over quarter. The decrease is attributable to.
A 36 cents per share loss in the portfolio offset by <unk>.
Net income.
Relative to distributions.
Moving to capital and our liquidity position remained strong with undrawn revolver capacity well in excess of unfunded commitments to borrowers consistent with our historical cadence, we do expect to amend our revolving credit facility in the fall given the increased focus on current in the current interest.
Rate environment I'd like to provide some comments on the impact of higher reference rates on our portfolio.
We are well positioned to benefit from rising interest rates, we expect increases in short term rates as they exceed the floors on our investments while the positive impact on net income yeah.
The average floor on our investments of approximately 1% short term interest rates.
Increased significantly.
LIBOR, increasing from 21 basis points at the end of December to 96 basis points at the end of March.
And as of yesterday.
LIBOR was about 150 basis points.
Based on our based on quarter end rates, we estimate 800 basis points and a 200 basis point increase in reference rates would result in annual incremental earnings of approximately seven cents and 19 cents per share.
Regarding stock buybacks during the quarter and post quarter end.
And we repurchased approximately $2 4 million.
Of stock, which leaves us approximately $30 million available under our authorization for future stock repurchases.
Includes our remarks, and we'd like to open up the call.
Two questions.
At this time, if you would like to ask a question. Please press star one on your Touchtone phone you may remove yourself from the queue at any time by pressing the pound key.
Once again that is star one to ask a question.
And our first question will come from Aaron <unk> with Citi Global markets.
I was wondering if you could talk a little bit about the.
Spread widening if there's any kind of improvements in terms of documentation just given the kind of volatility we're starting to see in the more liquid markets.
And if it's not starting Q2.
To move down into the into the private markets as well.
The the spread widening I'd say is at least with regard to things being proposed right now.
Hum.
I wouldn't say the documentation is Ah Ah, yet and obviously, that's sort of like an imperfect.
Staying to monitor because you know deal by deal.
And it has and as has been the case really for the last.
I don't know year or two there had been some you know some some groups that have driven a lot of sort of the degradation of.
All of the.
All of the documents in there.
Yes, they are still active so you know.
The market is not that the market has not moved yet I would say on terms, but I would expect it to do we've actually spent a lot of time discussing in the past couple of weeks about.
Where we want to land and how we want to make choices and in a market is going to look different six weeks from now just takes a little while to work its way through so I'd say, yes, or a pricing and Dow on the terms yet.
And then you you're still running kind of at around one and a half times net leverage.
But it's not super high relative to your to your limit, but it is higher than let's say most bdcs.
Bdcs have been operating new lending portfolios.
Or is there an intention to bring that down or do you continue to expect to run around one in that.
Yes, I mean, we you know we've talked about our range being one four to one six but likely on this or the lower end of that range. So that's you know usually like you know, we don't expect necessarily to creep up to one six so.
This goes to the underlying risk of the portfolio.
And and enlarge amounts like when we you know we continue to focus on.
<unk> tried to focus on everybody that you know our attachment point at this point too you know theres a lot of loans that are listed as first lien loans that wed, let a turn of leverage it in front of them from banks and so if we're at one five times leverage and we're true senior or where at 1.25 leverage and we have a turn in front of us are actually the same on a re.
Risk perspective.
So Ah Ah.
We feel like from a risk perspective, we're actually a very similar range to what people are doing very no second lien true first lien are you know Ed and then also some percentage of our assets.
Which are you know, which have very very low loss given default. So we feel like the risk level is is it.
Is similar to where people are but the flip side is everybody asked the question you just asked.
Okay, whatever but your leverage too high so you know what.
Bill will tell you we hear that so we will we will you know our intention is to sort of like move it down as you know as sort of like the opportunities make sense.
Right that makes sense and you should benefit from the rising rates as well so that should give you some opportunity to get a little.
The the last question I had was on the on the Russian aircraft.
Is that is seeking the insurance payment on that is.
Do you expect that to be kind of a protracted.
Process.
And or is it something that you might expect to be.
Finished within the next couple of quarters.
Yeah, let me take that one here.
The answer is yes.
It will be it will be disputed not surprisingly.
From the other side and the insurance companies.
And ultimately it is a problem that is not unique to us.
Unfortunately more broadly.
And thus you have as a result, you know quite a bit of focus on it.
And quite a bit of institutional heft kind of on our side. So to speak as you would expect broadly speaking for lessors that are in a similar position to be treated relatively separately. So.
A couple of quarters at least certainly and it'll have a lot to do with it.
You know how it how it progresses from here, but as I will call attention to it and in our prepared remarks, and also call attention to other public lessors in the statement. We think 100% that are our claims have merit and intend to pursue them vigorously.
Okay. Thank you.
Thank you.
Our next question will come from Kyle Joseph with Jefferies.
Hey, good morning, Thanks for taking my questions.
Start on Merck's Caner, obviously, some what I would consider one time negative impacts in the quarter can you give us a sense for how the business is performing outside of that obviously, we know the domestic airline industry is crushing it but you know on a global basis get us some more color again in our global exposure.
Yeah, Yeah. Thanks, Thanks for the question Kyle.
I think your dichotomy actually yeah. It is it is a good one is the the deep issues in merck's and the write down that we saw was.
Really just related to what would be our assessment of the Russia situation and the insurance claims as we as we mentioned and more broadly we have seen.
A market that continues to heal itself.
Yep Yep.
Obviously, you know continues to be very volatile in terms of fuel prices and and and and inflationary impacts, but we have seen a progressive healing within the broader air traffic market, which has benefited.
Not surprisingly aircraft.
Aircraft values and underlying airlines as as things have come back online and that was reflected in the stability outside of of the Russia situation within the <unk> portfolio.
And then obviously your non accruals or were stable you know how are.
How is the corporate lending portfolio doing in terms of revenue and.
And EBITDA either growth or margins and then you know can you give us any sense for how your thoughts on has.
Shifting rates impacting credit in the middle market.
Yeah, absolutely and this is.
Is something that.
We track pretty closely I'll make the same caveat that I make each and every quarter, we do our best.
You try.
Try to disaggregate the portfolio.
From those names that are particularly acquisitive to try to get as close to a more organic number obviously given our capital is particularly attractive to two to June and sponsors that wants to roll up industries.
That gets increasingly difficult, but notwithstanding when we do our best to try to tease.
Tease out those does.
Issues of comparability, we're seeing.
Revenue fine kind of in the mid single digits.
In aggregate you you've seen you know obviously, if you're in an inflationary environment, even before the the invasion of Ukraine, and and would expect some of that to have knock on effects, particularly as it relates to pitch in to oil prices.
And and food, but we did see.
Slower growth on EBITDA and keep in mind that those results would not have digested you know kind of the most recent rise in commodity prices and I think you know as a generic statement or are speaking generally I think it.
Once again reaffirms our strategy, which Howard discussed wherein we're creating these companies often times at first dollar you have to kind of a 60% LTV and and you know the effects on these companies.
Is unequivocal higher interest rates will.
And inevitably increased costs in there as you know different different levels of how inflationary effects.
Effect.
These earnings, but you know again with how we position the portfolio and where we're creating these companies. We think that that gives us a lot of mitigation to those effects and ultimately you know our credit quality and and and.
And then the loans and securities that we were investing in.
Got it. Thank you and then one last one for me I'm just you know where we are in your fiscal first quarter can you give us a sense for.
Yeah investment activity not asking for guidance, but maybe just comparing it to the quarter ended March 30.
<unk> 31 for reference.
Yeah. It remains strong and I think that that's a couple of things I think broadly speaking we are we are seeing a decline in M&A more broadly you know I think there's a little bit of as we.
And in our prepared remarks private solution. This is our opportunity to shine two to an extent and then the other the other point there Kyle which we tried to make ad-nauseum is that the BDC in AI and be really benefits from the dynamic wherein you were.
Two and a half billion dollar fund within origination force sales force.
That sourcing for <unk> 25 billion of capital and so the activity levels, even in markets, where M&A is more challenge our position is small relative to the overall business enables us to calibrate our originations and not not not not suffer and even in periods, where M&A might.
Might decline.
And I'll just I'll just put a number on on one thing and I think you know and in the first quarter mid capped at $4 $4 billion origination in April into $2 2 billion.
Net may in May we will not be as strong as that but it is 10% of the activity is pretty similar to the mix may be a little bit different meaning there may be some more asset based lending as a as the market moves a little bit but you know it's.
Still the velocity is pretty good.
That doesn't all trickle through to a I N V, especially when we're at our one five leverage because we're you know we're picking our spots.
Okay.
Yes that all makes sense, thanks, very much for answering my questions.
Thank you. Our next question will come from Kenneth Lee with RBC capital markets.
Hi, good morning, and thanks for taking my question it sounds like you're making great progress on our noncore asset dispositions and by now.
It is.
Is the remainder there just wondering if you could just give us.
What's your best sense on a particular timeframe for disposition, there or is that dependent on on any.
Also normal factors. Thanks.
Okay.
Dan do you want me to do it.
I'm not going to do it sorry.
Yeah, yeah. Thanks.
Thanks for the question Ken.
This is as we've talked about in the in the past.
Accompanying technology that we're really really excited about and one that is squarely in the fairway.
The broader are very attractive secular trends around ESG and their carbon capture technology, it's something that.
It is modular as I'd really great traction with with with companies to gauge and we would expect that to what might be in.
Hence in the years to come as that becomes even more of a focus.
Is earlier stage.
And I think in in more volatile markets probably.
Fewer fewer opportunities for disposition.
The good news with respect to amongst many good news, but when one very good fact is that.
The company had had a raise to convert and so they have capital to execute on their business plan.
But I would think of that says you know.
A a a longer term halt one that will likely not avail itself of an exit within 2022, but importantly runway to continue to execute on its growth plan and prove out.
What's very attractive solution to them.
Binaries and then the broader industrial complex and then with regards to its carbon capture technology.
Yeah.
Great very helpful. There.
In terms of a fault block.
And impact looking at impact of rising short term rates on portfolio company would you be able to give them.
Of how the portfolio.
Expense ratio would get impacted if rates were to go shopping.
Thanks.
Yes sure.
And Ken just to clarify your question is that the underlying company level or at the <unk> level.
The underlying portfolio company level.
Yeah sure. So if I'm you know, we reported our and the interest coverage.
First of all I make that the risks are.
I'm being redundant here are our solutions and our origination tried to focus on you know stretch senior and in a more limited way Unitranche type financing.
And in an overall lower Levered profile, which is one one benefit that we have in terms of our origination and portfolio construction as that first quarter.
When LIBOR was firmly below the floor.
We're at two nine times and so that number would not have any of the effect of anything above a one but suggests some really nice cushion.
As rates are.
Increase now certainly you know it will be path dependent from here and we can all do the math to the extent that you know.
At LIBOR ultimately LIBOR so for ultimately outperformed its rising forward curves that are shown on the screen.
But we're in a place that's a pretty good coverage and again I think that emanates from the lower levered profile and intentional.
Focus on stretch senior solutions from our mid cap origination engine.
Gotcha very helpful. There. Thanks.
Thank you.
Our next question will come from Finian O'shea with Wells Fargo Securities.
Hi, guys. Good morning, It's Gordon answer Sam.
I just had two questions for Tanner, a kind of related so throw them both out there it looks like if I if I'm looking at this correctly mark stroke down.
Their assets on the balance sheet by 47 million for Chad and.
In Russia, it just hoping to get some idea on.
You know whether or not reflect the full value of those faster.
If that's like probability weighted and then secondly.
On and be balance sheet, Mercury's down say $20 billion.
Does the difference there basically reflect.
Probability weighted.
Function of what you'll recover just any color you can give on that.
Yes.
Very very good question. So when we look at the Russia situation, you know again distress, we think that.
Our claims are very strong in and have merit and fully intend to Jed.
Sue a full payout.
Owing to the potential that it's either a negotiated solution and or you know could be protracted.
We took a discount to the value the insured value.
Based on the methodology.
Based on the methodology of probability weighting, but you kind of alluded to in your in your in your question there and if you think about it the value with somewhere in the in the mid Forty's and we took a haircut to 20 $25 million kind of on a net a discounted value.
You know as what.
We have in our in our evaluation on those Russia planes.
Particular, and assume that as those proceeds take them about two years to come in.
And then as it relates to the other movements within Burks, there were some ins and outs, but outside of that Russia write down of the rough roughly $20 million. The March portfolio was roughly was roughly flat and in line in that and that goes to that comment that I've made to kyle's question that.
We are seeing some stabilization outside of that.
Russia specific situation.
But somebody correct me if I can.
Let me let me just jump in the difference between the two between the Merck's financial statements and evaluation is the merck's rates out of the assets what is the full value under GAAP, which is the same thing youre seeing from all all lessors because under that you know if you don't if you no longer have the asset.
Can't have it on the balance sheet.
On the same token by GAAP, you don't put the insurance claim on the balance sheet as an asset because it has some contingency sort of balance sheet shows the full reduction, but the valuation rules. Obviously require you to value what are your assets worth and so 10, and just walk through why the valuation, but that's why there's a difference and it's not that different than you see from some of the day.
Lessors, who have you know a big big exposure. They said you know two things we break down our exposure completely and we expect to recover a lot.
Great. That's that's sort of what you've seen from the industry and that's what this you know that's what this shows and we feel like our valuation methodology was relatively conservative versus the strength of our claims.
No I agree and thank you guys. So that's really good color. So that's it for me.
Thank you.
Our next question will come from Robert Dodd with Raymond James.
Good morning, guys a different angle on talent.
<unk> you said.
With the intention to reduce the investment in most by selling down aircraft, obviously looks huh.
Ben.
Selling some I mean is the plan essentially to to the juice.
The.
Ownership all the aircraft effectively on the AI and the balance sheet as you know I take the the.
The corporate lending book up to 95% plus.
All the assets and reduce that in all these Cmos who suggested so there's some other things or is there some in between where you expect to still be a machine in a.
I wouldn't say material, but a decent chunk of the portfolio. What can you give us any color on on on how big you expect to or how much you expect to shrink books is ownership aircraft exposure on the BDC balance sheet that way.
Yeah, I mean, we.
I mean significantly if not completely.
You know, it's it actually goes to.
You know what tenor was saying before.
The rest of Merck's is actually sort of have sort of.
If you will like recover you know to the extent that they're released lease problems from Covid. They theater, they've been replaced and released and we were in a good spot.
At the same time, if there was like a good market for planes and you don't feel like there's a good market for assets, obviously, the Russia create some noise.
Both both with regard to just the fact that there's a three planes there, but also down one of the assets as an insurance claim.
But putting that aside because it's not that large an amount you know our goal is to basically you know have the assets.
B.
Very minimal or or or or not a part of the portfolio long term.
Got it I appreciate it yeah, that's the tough one on any any color you can give us a timeframe for that obviously the D. What the weighted average life left on our leases for years, but often it it's easier to sell an asset that's still unbelief someone that's out so.
And any color you can give us on how fast that might occur I mean bottom line obviously the.
The noncore is now very useful mostly shrinking as well I mean, what kind of timeframe could we expect you to be reporting say just the.
The portfolio is just corporate lending.
Well certainly in this calendar year, you should see a significant reduction you know theres a question of whether all the assets are sold together or all the assets are sold in there are.
And their component parts, and if there and theres different securitizations or different pools, if they're sold in their different pools. There are some tax considerations with regard to timing.
Depreciation versus gain on our planes and so that could drive some some timing issues and.
And so it's hard if you got into the weeds on your hybrid Cross Ah.
Bye bye.
The answer is that you know we would like at this time next year, we would expect to be you know to.
To be out or to have a.
Our view or to have a view like are you now have some under contract I mean, certainly obviously as you know that's no guarantee and we wanted to make sure but we think that we think are valuations right and constructive we think theres a market for these claims and you know we're focused on it.
Okay I appreciate it and thank you.
Thank you.
Our next question will come from Melissa Wedel with JP Morgan.
Good morning, Thank you for taking.
My question.
I was hoping to get a little bit of clarification on.
The elevated prepayment and fee income could you break that down for us on sort of a person basis is what that contribution was this quarter.
Yeah.
Alright, great driven on a per share I'm going to pull up.
The exact detail.
I mean, it was it was about $4 $9 million right.
Right.
Yes, yeah, yeah, so $4 $9 million.
We had six straight yeah, I mean, it depends how was that we didn't have an incentive fee this quarter, but.
Presumably that rolls through incentive fee so.
It depends how you look at that but like if if if.
We have said you know our expectation for quarters is for.
Certain quarters or for the average quarter is about three and a half million dollars per quarter.
The last two quarters have been higher than that I think the one prior to that was generally the numbers are lower than that.
And you know hope and think based on this activity, that's a three and a half or was.
Three and a half million why it is like a low estimate, but if you look at where we generated those those fees from a lot a lot of sort of little with medium size fees.
Based on sort of.
Just you know normal turnover of assets.
So there wasn't anything.
Uh huh.
Huge or or or.
Disproportionately large.
Okay. That's helpful. Thank you and then looking out.
So you talked about already this quarter.
Is there anything we should be thinking about in terms of that.
Just in line with that.
And then longer term average it correctly.
Yeah.
With these exits, but she is sort of again sort of novelty.
Yes.
Would stay with the three and a half if only because you know there are there is lots of transactions or lots of there are enough transactions that are scheduled to close like in the latter part of June that could go to July you know that or you know so it could be below it could be a bar, it's just not it's not.
Right right Yeah I.
Let me turn or would you say anything different from that yeah, and I would also clarify a lot of the guidance. We gave in terms of a sell down has to do with the noncore that three and a half million dollars is really more generated by our corporate portfolio, whether prepayment fees or acceleration of OID to the extent something comes up.
Out earlier, and so that that number we only had to do with normal churn in our in our corporate lending portfolio and would echo Howard's comment that three and a half million dollars is a good a good a good a good number to stay with understanding that it will.
Will will ebb and flow and some quarters will be above that in some more people.
Okay appreciate that and then maybe.
Last question is around <unk>.
It's really a capital allocation question.
Notice.
Decrease quarter over quarter share repurchase activity.
Got it.
Taking into account your comments earlier on the call about them wanting.
Why didn't you take your leverage potentially a little bit at the margin.
And maybe some better pricing opportunities on Hulu investment target.
That's crazy passing by volatility.
That filters through in terms of illiquid.
Private.
Wonder if you.
Appetite for share repurchase in sort of an outsized way.
December quarter.
That's what it is.
Okay.
All right.
It may be it may be reduced because this past quarter really the buyback activity was not really the result of a.
You know that's sort of it was it just had to do with you know.
Our window being closed longer than having a <unk> five plan doing sort of automatic purchasing at a lower level and when we do when the windows open aikido, we'd either buyback at our discretion at times during the quarter and then at some point through the window closes and it just depends where that occurs.
Obviously in terms of sort of weighing you know delevering versus buying stock versus two in the Ingrid incremental next loan.
Those things are all sort of Uh huh.
We weigh all of them, we do think buying the stock is a good use of the capital because you know it's it's you know, we obviously believe it or not and so we think it's it could purchase the flip side is at some point you just don't want to cannibalize all your capital and so we try to just balance all of that.
And sort of have made it a regular part of what we do but.
Yeah, I like to just buy back in a huge way I think where our leverage is and where the opportunities in the market are not it's not likely.
That's really helpful. Thanks, so much.
Thank you.
Once again that is star one to ask a question.
And our next question will come from Ryan Lynch with K B W.
Hey, good morning.
I had another follow up question on Merck's just wanted to clarify.
So I think you said.
The fair value of the insurance contract is around it and kind of the mid $40 million and you guys have your aircrafts.
Aircrafts with a value of those aircrafts mark at around 25 million today.
Did I get those numbers correct.
Yeah, although the fair value is not the right number that the contractual claim.
The fair value of the all of the aircraft was 44 is that what you're saying previously and now it's now the claims 25.
Yes.
Okay.
Fair value of the claim is in the nominal value of the claim is higher than the 44.
Yeah. So that was my okay. So that was that was kind of my my point. So is where my next question is.
I'm not as familiar with how these claims insurance claims work is this sort of an event, where you guys would expect to get that was zero or expect to get all of the amount and so the current value that you guys Havent Mark that it is not correct and it's gonna be either a bifurcated abandoned either zero or a pretty big.
Gain in these dependent on on how that works and obviously you guys are just doing a probability of somewhere in the metal but is that how.
We should think about the end result, being either a big game or a big loss ultimately.
No I don't think so I mean, there's multiple insurance policies.
He has them we have them and then we have.
Global coverage. So there's multiple claims are and so that creates like a diversity of results and then add to that the fact that you know the more likely result to choose is some kind of settlement below the full face value.
It's only because we want to get the money sooner I mean, we think we have to write claim but you know the big issue is really that if it was just to US we think the claim wouldn't be all that hard but theres. So basically insurance companies have so much exposure to the industry that they're going to take a more protracted approach our bodies, but it is not binary it.
It is not by any means binary I mean, I think you know our view is sort of like we have we have a valid claim. We think you know there's a possibility of some of the insurance that we have you know having arguments against it that you know is cut into that and then there's also sort of room to negotiate so.
To enter into discussions.
Okay understood.
Understood.
And then just my other question I know, you're shipping to becoming a smaller and smaller portion of your portfolio.
You guys are making some progress this quarter.
Do you see that I'm, just wondering can you give us any just some background on why does that you know that that sector. You know your exposure in that sector has been weak I would just state.
With that sort of a lack of shipping and kind of the need to move goods around right now and over the last really several quarters.
When you guys shipping exposures all spent many months quarters.
The dynamic that that's really been hurt most of those investments.
Yeah, I'm happy to turn it so our exposure there Ryan.
Is predominantly in product tankers, so think you refined oil products distillates.
That sort of thing and ultimately the demand for a mid range product tankers in particular has a lot to do with you know the.
The regional trade and where where goods are moving.
More broadly also is when you look at the shipping I don't I don't want it suggests that it's you know it's a perfect universe by by any stretch of imagination, but there is a dynamic wherein you know when you know near term oil is lower and the curve then contango as in people anticipated.
At rising significantly that pulls on supply you know across the chain and results in a little bit better.
Day rates and charter rates.
And in an environment like this.
A little bit more challenged because there's less demand for storage anything that anyone can have either a barrel oil and or.
You know like a distillate of refined product or they're trying to sell.
Anywhere they can oh into what the current prices are and so that's just that's just one example of a dynamic that that creates the ebb and flow in those in those markets and then and so and then the last point there to emphasize is the.
Mark levels that we have on our shifts reflect where where we are intending to to to transact.
And then B exposure.
Understood.
I appreciate the time this morning. Thank you.
Thank you.
We have no further questions in the queue at this time I would like to turn the call back over to our speakers for any additional or closing remarks.
Thank you operator, and thank you everyone for listening to today's call on behalf of the team. We thank you for your time today. Please feel free free to reach out to any of US. If you have any other questions have a good weekend.
Thank you ladies and gentlemen, this does conclude today's presentation. We appreciate your participation and you may disconnect at any time.
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