Q1 2023 Apollo Investment Corp Earnings Call
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Good morning, and welcome to the earnings Conference call for the period ended June 30th 2022 for Apollo Investment Corporation at this time all participants.
It's been placed in a listen only mode. The call will be opened for a question and answer session. Following the Speakers' prepared remarks, if you would like to ask a question at that time.
Star one on your telephone.
I would like to withdraw your question. Please press the pound key I will now turn the call over to Elisabeth <unk> 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.
Executive Chairman Tanner Powell, Chief Executive Officer, and Greg Hunt Chief Financial Officer.
Members of the management team morale and available for the Q&A portion of today's call 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 any unauthorized broadcast in any form is strictly prohibited information about the audio replay of this call.
In our press releases I would also like to call your customers your attention to the customary safe Harbor disclosure in our press releases regarding forward looking information Today's conference call Conference call and webcast May include forward looking statements you should refer to our most recent filings with the SEC for risks that apply to our business and that may adversely impact.
Forward looking statements we make.
Not undertake to update our forward looking statements or projections unless required by law to obtain copies of our SEC filings. Please visit our website at www Dot Apollo.
The dot com in connection with today's announcements, we will be launching a new website next week, but you will be able to find at www Dot Midcap financial IC Dot com.
The two presentations on our website, our standard quarterly supplemental financial information package and a second presentation, which details today's announcements.
At this time I would like to turn the call over to our executive Chairman Howard Winter. Thanks Elizabeth.
Good morning, everyone earlier today, we issued.
Releases, our quarterly earnings press release, and a second press release, which detailed several important strategic announcements, which we believe great value for our shareholders. Following my review of each of these announcements I'll provide an overview of our results and discuss today's distribution announcement.
And discuss the market environment review, our investment activity and provide an update on the portfolio Lastly, Greg will review our financial results in detail. We will then open the call to questions let.
Let me begin with today's announcement with which underscore Apollo global management's commitment to investor alignment product innovation and being at the forefront of the democratization of finance. These announcements reinforce the bdcs position as a pure play senior secured middle market BDC, providing public shareholder access to institutional quality private credit.
Best in class fee structure, among listed Bdcs. The Bdcs will continue to invest almost exclusively in senior secured loans sourced by mid cap financial one of the world's leading middle market lenders as you know over the last several years, we have shifted the BDC.
I want to first lien corporate loans sourced by Midcap financial and away from junior capital in noncore positions at the end of June investments made pursuant to our co investment order, which are primarily loans originated by mid cap financial represented approximately 85% of our corporate lending portfolio at fair value, Let me take a minute to remind everyone about <unk> Catherine.
Which I co founded in 2008, Midcap financials privately held by institutional investors and managed by Apollo Global over the last 12 months through the end of June mid cap financial originated over $21 billion in new commitments.
Including $4 7 billion June quarter, Midcap et cetera, headquartered in Bethesda, Maryland has 12 offices globally with approximately 250 employees.
Led by an experienced senior management team that has worked together over 20 years and with 27 years of average industry experience. The BDC is fortunate.
In the position to have access to loans sourced by Midcap financial given the strategic relationship between Midcap financial at Apollo Global Historically Midcap financial at Apollo as its manager have predominantly originated assets on behalf of U S.
Other global institutional investors to support.
And your security strategy, our board advisor have established what we can what we can.
<unk> industry, leading structure among listed Bdcs, the new fee structure.
Management fees by approximately 50% to the lowest rate among listed Bdcs. In addition.
Alright, Thank <unk> will now be calculated on that instead of assets, which provides a greater alignment and focus on net asset value. The new fee structure reduces the bdc's cost of capital, thereby expanding the universe of mid cap originated loans that will meet the bdc's lowered required asset yield midcap financial originators.
We have vacant amount of senior first lien loans that were previously dc's target yield, which will now makes sense for the BDC given its lower cost of capital specifically the Bdc's base management fee has been permanently reduced to one five.
5% on equity down from the equivalent of approximately three 4% on equity in other words the base management fee expressed in terms of gross assets has been reduced.
Oximetry, one 4% on assets to equivalent.
75 basis points on assets the incentive fee income has also been permanently reduced from 20% to 17, 5%.
The performance threshold remains 7% and there is no change to the total return requirement of our catch up provision.
Incentive fee on capital gains has also been permanently reduced from 20% to 17, 5% to changes to the fee structure will be a perfect fit for the period beginning January one 2023.
Moving on we are pleased to announce that midcap financial has made a $30 million.
Aligning equity investment in the BDC.
Asset value, representing a significant premium to the current trading price at the BDC.
We will issue approximately $193 million connection with this transaction, which will be subject to a minimum two year hold period. This investment serves to first validate the value.
D C senior investment strategy second provide the BDC powder.
Powder towards loans sourced by Midcap financial and third create a strong alignment of interest cap financial on the Bdc's performance.
Pro forma for this investment in Midcap financial on approximately 3% of the Bdc's common stock.
In connection with today's changes the BDC has elected to change its name from Apollo and operation to Midcap Financial investment Corporation, which reflects seasons.
<unk> investment strategy are primarily investing in loans originated by midcap financial for the sake of clarity Apollo Global will continue to manage both midcap financial and the BDC throughout todays call in order to avoid confusion.
Refer to the BDC as either the BDC, whereas the <unk> IC and we will use midcap financial to refer the letter the lender headquartered in Bethesda, the Bdc's ticker will be changing to add that.
Okay. Thanks particular changes will be effective on or around August 12, moving.
New leadership promotions I am pleased to announce that Tanner Powell, who has served as president of the BDC since 2018.
Has been promoted to Chief Executive Officer Officer in my place in that role I have been named Executive Chairman of the Board John Hatten, who has served as chairman since 2006 will now serve as Vice Chairman I will continue to serve as Apollo's global head of direct origination and will remain involved in the day to day management of MF IC.
<unk>.
Who was a managing director in Apollo's direct origination business has been promoted to president of the BDC and Chief investment officer for our investment advisor Ted brings a wealth.
Parents and expertise to the role he joined Apollo in 2014 and over the last several years has been instrumental in the successful monetization of the Bdc's legacy assets last but not least Kristen Hester who has been a senior member of our legal team. Since 2015 has been promoted to chief legal officer.
Joe glad who served as the BDC officer, Chief Legal officer since 2000 and was promoted to a new role as partner in Apollo's, United States financial institutions.
These promotions recognized the value valuable contributions made by Tanner, Ted and Christian over the years. We are very excited about today's announcements, which will allow us to capitalize on the benefit of midcap financials, leading middle market platform, and which we expect will generate attractive risk adjusted returns for shareholders.
Next moving to a summary of our results net interest.
For the June quarter was 37%.
Which reflects lower fee and prepayment income, partially offset higher recurring interest income results also reflect a higher incentive fee compared to the prior quarter. We recorded a net loss of $17 8 million or 28 per share on the portfolio during the quarter. We ended the quarter with net asset.
Sure <unk>, 52 down, 27% or one 7% quarter over quarter, we repurchased some stock during the period below NAV.
At <unk> <unk> accretive impact.
Now switch our focus to our distributions given the progress we have made repeat portfolio combined with a four.
Goodbye.
With the forthcoming reduction in our fee structure, we are raising our quarterly base dividend from <unk> 31 to 32 patients.
Perfect.
<unk> share payable to shareholders of record as of September 22022, We believe this dividend level is appropriate at this time future supplemental distributions will be declared as appropriate with that I'll turn the call.
In order to discuss the market environment and our investment activity.
Thanks, Howard beginning with the market environment, the public credit markets continue to experience volatility during the quarter as elevated inflation rising interest rates concerns about a possible recession supply chain issues and geopolitical uncertainty weigh heavily on market sentiment negative fund flows contributed to the volatility in the liquid loan market credit fundamentals. However have remained relatively stable.
As leveraged loan default rates continue to hover near historical lows against this uncertain macro backdrop, we saw reduced level of M&A activity. This type of broader market environment can benefit providers of private credit who offer borrowers fully underwritten solutions at agreed upon pricing and terms with certainty.
Houston irrespective of broader market conditions, moving to investment activity Midcap financial which as Howard mentioned sources investments for the BDC was very active during the June quarter with $4 7 billion of new originations for the BDC, new corporate lending commitments totaled $195 million across 18 companies for an average new commitment of 10.
8 million new commitments made during the quarter by product where $100 million in leveraged lending approximately $80 million in life science lending and the remaining $15 million and lender finance all new commitments were first lien floating rate loans with a weighted average spread of 622 basis points and a weighted average net leverage of four nine times.
97% of new commitments were made pursuant to our co investment order.
Excluding revolvers gross fundings for the quarter totaled $165 million in sales and repayments totaled $121 million net revolver repayments were $1 million in aggregate net fundings for the quarter totaled $43 million. We ended the quarter with net leverage at a high end of our target range, given our visibility into Paydowns post quarter end.
Net leverage at the end of June was $1 five to eight times adjusting for net pay downs post quarter end, including a $15 million cash paydown from merck's and including the impact of the $30 million investment from Midcap financial which is expected to close in the next week net leverage is currently approximately 145 times.
As discussed on our last conference call, we intend to accelerate the reduction of our investment in merck's by selling aircraft and deemphasizing its servicing business. As you know <unk> is a successful global aircraft leasing management and Finance company established in 2012 and led by Gary Rothschild head of Aviation Finance for Apollo at the end of June <unk> investment in Merck's had.
Fair value of $284 million, representing 11% of the total portfolio during the June quarter, Merck sold three aircraft, reducing the number of planes in the fleet from $65 to 62, we.
We expect our investment in <unk> as well as the income we receive from March to decline each quarter going forward at the end of June two additional aircrafts were under purchase agreement, including the freighter in the fleet, which was sold in early July despite the uncertain macroeconomic environment. There are no signs of a slowdown in daily global flight activity and we feel constructive about our plans.
To sell the plains owned by Merck's, turning to the overall portfolio our investment portfolio had a fair value of $2 $5 5 billion at the end of June across 140 companies in 27 industries corporate lending and other and other represented 80%.
Churn of the portfolio and merck's represented 11% of the portfolio.
94% of the corporate lending portfolio was first the weighted average spread on corporate.
611 basis points as of the end of June our portfolio of companies generally continue to experience strong fundamental performance, while not from the impact of inflation. We believe our companies are generally able to pass through most although not all of higher input costs that you're seeing.
So our portfolio is generally weighted towards industry that are less impacted by inflation and supply chain issues moving to credit quality. Our credit metrics remained very favorable at the end of June the weighted average net leverage of our corporate lending portfolio was five four or five times, a slight increase quarter over quarter.
Repayment of lower.
And the impact of funding delayed draw term loans. The weighted average attachment point was 0.2 times and the weighted average net leverage weighted average interest coverage ratio was two eight times no investments were placed on non accrual status during the quarter and our investments.
Sure oil and gas was restored to accrual status and also repaid $4 5 million to the BDC during the quarter closer continues to generate strong cash flow to support the small loan balance which is now in $4 million at the end of June investments on non accrual status totaled $9 million or 0.3% of total.
Palio at fair value with that I will turn the call over to Greg to discuss our.
Financial results in detail.
Thank you Tanner and good morning, everyone beginning with it okay.
Mint of operations total investment income was $53 4 million for the quarter down two 4% quarter over quarter recurring interest income rose due to the impact of higher base rates, along with returning glacier oil to accrual status.
Payment income was $1 9 million down from $3 8 million last quarter due to lower quarterly prepayments correspondingly.
Fee income was approximately 500000 down from $1 3 million last quarter dividend income was flat for the quarter.
The weighted average yield at cost on our corporate lending portfolio was 8% at the end of June up from seven 7% at the end of March the increase in the yield.
Primarily due to higher base rates as the weighted average spread on the portfolio remained at 611 basis points net.
Net expenses for the quarter totaled $29 9 million up $2 1 million quarter over quarter, primarily due to higher interest expense related to our credit facility, which bears a floating rate interest floating interest rate.
As a reminder, <unk> incentive fee on income includes a total return hurdle with a rolling.
12 month look back.
Given the net loss of $17 8 million for the quarter incentive fees.
Totaled $1 4 million up slightly from last quarter.
Net investment income.
37.
During the quarter, we recorded a net loss of $17 8 million or 28.
Mr Scherr our portfolio.
The majority of our corporate lending portfolio is valued using a yield approach changes in market spreads are incorporated into the quarterly valuation of our investments. In addition to other factors on page 16 in the earnings supplement we disclosed the net gain or loss.
Over the past five quarters NAV per share at the end of June 15.
50%.
7% decrease quarter over quarter.
The decrease primarily attributable to the net loss in the portfolio.
By one.
Yes.
Good income relative.
Okay.
We were pleased that croll affirmed our investment.
<unk>.
In July our liquidity position remained.
With Undrawn revolver.
That capacity well in excess of unfunded commitments to borrowers consistent with our historical cadence.
Back to amend our revolving credit facility.
We are well.
To benefit from rising interest rates based on quarter end rates, we estimate that a 100 basis points and a 200 basis point increase in reference rate.
The result in annual incremental earnings of approximately <unk> <unk>.
And 25% respectfully.
Regarding stock during the.
Quarter.
Actually $1 $6 million.
Stock, which leaves $29 $2 million of the authorization under for future repurchases.
Okay.
Remarks, operator, and please open the call.
At this time, if you'd like to ask please.
Please press star one on your Touchtone phone you may withdraw your question at any time by pressing the pound key.
Once again to ask a question that is star one and we will take our first question from Kenneth Lee with <unk>.
Capital your.
Your line is open.
Hi, Good morning, Thank you my.
Question.
In terms of the announcement on the strategically as.
As well as the potentially shifting investment strategy, what are your expectations for future Roe.
Our expected targeted returns based on the new senior secured loan investments. Thanks.
Yes. So so so first I would say like it's not really a shifted.
Okay.
It's really sort of.
A D.
<unk> point, where we think the investment strategy.
Okay.
<unk>.
Yeah.
Really the story going forward as we exit out of noncore and sort of we're moving away from Merck.
Is the same.
There is a broader set of loans.
They meet our criteria.
The ROE I would say.
If you just took an apples to apples approach and said.
No.
The fees and everything else stays neutral you'd have an increased Roe.
Like 2%. So if you assume some reduction in yield and some reduction in leverage from where we were now youre talking about an increase of the ROE from the low eights to low nines.
10% increase in ROE.
Sort of like as a base case, obviously, there's moving parts right now, including rising interest rates, which will which should raise equity.
But just apples to apples basis, it should be around a 10% increase the Roe.
Gotcha Gotcha very helpful. There.
And one one follow up if I may you talked about having some visibility in term.
Sure.
Paydowns just wondering if you could just give a little detail behind that thanks.
Yes, I think.
No.
Thanks for the color.
I would point to the.
The guidance we gave in.
In terms of the approximately 145.
<unk>.
We have.
Of things.
Slip.
And then also as we alluded to.
Knowledge of D.
Strategic investment aligning equity investment being made.
We're at a little bit higher at the end of the quarter, but use that $145.
Guidance there.
Great very helpful. Thanks again.
Okay.
Our next question from Kyle Joseph with Jefferies. Please go ahead. Your line is open.
Hey, good morning, Thanks for taking my question.
A lot going on so pausing.
Okay.
But focusing on.
On repayment activity, obviously that came down in the income EBIT denser and I know you've talked about in the near term repayments, there, but just sort of the.
Turning to the remainder of the year is that really a function.
Pizza volatility recognizing those go hand in hand, then would you expect repayment activity to be kind of muted given the macro backdrop going forward.
Yes, I think you said it at the end there Kyle.
<unk> M&A volume activity is down and that.
Certainly affects us in terms of level of repayments and so.
All things being equal we'd expect more muted activity in the back half of the year absence.
Some of the prepayments that we alluded to in our prepared remarks.
Got it and obviously kind of remained sound right now.
What's the outlook here in terms of.
With in placed in.
Howard.
Adapting to rising rates and kind of what are expectations for credit.
And then more broadly into 'twenty three.
Sure.
As we never to do each and every quarter, we look at it.
Okay.
All of our portfolios both.
Im sorry, both at <unk> and Midcap more broadly.
And in the most recent quarter.
When we take.
Roughly 90 companies. So we haven't our leveraged loan book it was showing us.
Hi, sorry load.
<unk>.
Our revenue growth and kind of mid single digit EBITDA growth, indicating what.
What we saw in last quarter as well supply.
Chain challenges in labor costs, and resin costs going up.
Affected.
Our companies.
We would now.
Yes.
And a lot of cases theres a lag to recover and then also the data Kyle as you know.
It relates more to the March quarter, and so backed.
Backed those challenges and you that.
That said in aggregate do you feel.
In terms of our underwriting our detachment on where we're financing these companies and the equity cushion that we have and from the sponsor.
And behind Us.
<unk>.
Did that that credit will hold up and that we created the credit risk at a good place to weather any continued or.
More pronounced volatility going.
Got it thanks very much for answering my questions.
And we will take our next question from Matt.
<unk> with Jpmorgan. Please go ahead your line is open.
Thank you I appreciate you taking my question.
You have already been asked.
But I was hoping that we hit.
True.
More perhaps on.
<unk> leverage in the economy.
An increasing shift.
The first one.
Got it might have a bit of a lower yield it sounds like youre not sure.
Target range on leverage.
But im wondering if I guess one is that I think is that thanks.
And then too.
Do you have is there any shift in your thinking around where you'd like to Brian within that range.
The current environment and.
More alignment with the Midcap strategy.
Yes look I mean, so so a couple of things like that.
R R.
Our leverage as we talked about sort of I think on on.
Diddley over over the last few years, we felt like was.
Not particularly.
As aggressive as perceived to be.
Sort of like the first lien focus of our book and the attachment point and obviously.
We expect to even go further in that direction, given our cost of capital that said I think the feedback we've gotten from all the constituencies is that that is not.
Okay.
It's sort of not in complete agreement with that and so I think.
Whether we're moving our range or not.
I'd say either you can look at it as moving our range down some or expecting to operate like in the $1 35 to one five range as opposed to what we articulated before is one four to one.
Six and so our expectation is to operate around that 1415 range, which is.
Andrew said before so I would say that we are leaning towards lower even though the profile of our of our.
Of our of our book will get more conservative in.
We've made a lot of changes here with a goal towards this being.
Hopefully a relatively unique investment for individual investment available amongst bdcs and one of the keys to that obviously is to have a structure that all the constituencies feel really strongly about and so we're focused on all parts of that and the reduction in the fees gives us a lot of room to be able to do that.
Yes, the other put an emphasis there would be that with our with our new cost structure, which is on our management fees on equity. We think that also enhances the alignment, but howard points about taking the feedback from all constituencies are are are well understood and and also go to R. R.
Our thinking as we approach leverage going forward.
Okay I appreciate that thank you.
Yes, as a follow up.
It would be helpful to understand if there is any real change in the way.
<unk>.
In Iraq are engaged with the mid cap could we dig a little bit deeper there.
Is this just additional additionally, leveraging or opportunities from that platform.
Okay.
Inside baseball changes in terms of.
The thing that ing selection things like that.
No no inside baseball changes to the way things will operate and just to sort of understand.
It operates.
Paolo as a manager of mid cap and.
The manager of MFC.
And.
On the primary portfolio manager for mid cap.
And happen.
Since really since.
Since inception, and Tanner is effectively the primary portfolio manager for.
AI envy.
Sure.
Hey.
And we will continue to be obviously like Ted will take a larger broader role, but he has already had a pretty important and broad role before and.
The only inside baseball sort of there is as Tanner moved to Bethesda about 18 months ago 12 months ago 18 months ago.
And so is.
<unk>.
Day to day connection to everything we do at mid cap has been more since then but that has nothing to do with these changes.
Thanks, Eric.
We will go next to Ryan Lynch with Keybanc. Please go ahead. Your line is open.
Hey, good morning.
First question I had was I would just love to hear because I know you work closely with mid cap in the past I would just love to hear kind of a ballpark of.
What percentage of deals.
Historically <unk> could predict.
And kind of the mid cap deal flow because I knew there were some lower loans.
It really fit into AI envy.
But what sort of deal flow percentage rough rough ballpark could you guys participate in historically with mid cap and then with the new.
Structure, what sort of changed expect.
For more access from deals from from mid cap.
Well so.
So generally overall mid cap originates through a variety of assets, some which are you know.
Don't fit BDC mandate any way like real estate.
So a percentage of the overall mid cap deals.
So let me just sort of.
If you have a little bit and say the percentage of deals related to the.
The product, which is a lot of products.
Originates that said so what's the bridge loan.
Asset baseline day.
And effectively.
<unk> in the ballpark of 100 or 120 deals a year that close in those categories.
And so.
We can slice it.
And a bunch of about double the amount of deals available in those.
Categories that are sort of now available.
Okay.
So and so really almost everything <unk> in those categories are both the ones that don't end up being sort of relevant are the smaller ones because.
There's some asset based loans that are that are too cheap.
It's part just smaller deals once they're divided up the allocations based on sort of the size of the relative balance sheets are small that it sounds like it doesn't make sense from a cost evaluation on that perspective.
The vast majority of what made <unk> in those categories.
Okay.
That's helpful. And then what are you thinking in terms of I don't know if the best way to think about it yield or spread because obviously.
Right.
Is that accelerating higher but is there a meaningful.
<unk> of what you guys are expecting or willing to put on the books.
Going forward or when this new fee structure goes into effect.
Spread standpoint versus.
What you've done historically.
More flexible.
From a from a spread or a new.
New loans, we have done historically, so I'd just love to hear if there's what sort of changes we should expect from that standpoint.
No.
As we started first penciling this out I guess, what I would say is and I'll caveat. This afterwards as that.
Having the overall spread.
Book go down about 35 basis points, what is meaning like from six <unk> to $5 75, or something like that would basically split the difference between the shareholders and the lower spread and that seem to make sense and so thats average spread on the portfolio that said, we don't expect that to happen right now because spreads are widening a lot.
Hi.
So forget it forget the base rate going up that's a separate issue that's our widening.
And and and.
If we go into a recession or even like a contraction we would expect rates to continue.
<unk> to be higher, especially because there'll be more asset based loans with higher yields and will have an opportunity to grow that category. So.
I think right now what we would say is we expect spreads to stay pretty stable meaning.
The increase in spreads in the market will be offset.
Sure.
Like our reduction.
But regionally been comfortable with about.
Thinking that the book with sort of average down.
$25 35 basis points.
Okay.
It went down 25, 35 basis points, which is where spreads are going at that probably won't happen in this year.
Right.
And then just lastly, it doesn't sound like.
This change as much.
Or maybe mid caps.
Let's see.
Middle market.
And then a really rough.
Space.
Right.
Participating in that marketplace.
Obviously.
Broader has Apollo debt solutions, which which participated in that area a lot.
Does this change.
No.
Is your willingness to participate in that upper middle market space and co invest with like Apollo that solutions or is that something that we don't expect to change is that something that mid cap is not really interested in.
No I don't think Youll see a change.
There.
Overlapped synergy something whatever you want to call in yields between 50 and $125 million of cash flow the origination.
The sponsor tracked channel is is combined between sort of apollo's focus on the very largest sponsors and sort of a mid cap team on almost all the rest of the sponsors and so.
Execution in the middle of those ranges to spending.
There can be shared underwriting there is certainly the option for each BDC to party.
In the <unk>.
That.
That the others might do.
So for example at AVX, if there is a company with $70 million of EBITDA and the deals five times. So it's a $350 million deal and Thats being done by mid cap at AIG and a bunch of our managed accounts. There is a very good chance avs will be part of that by the same token if there is.
So we have a strong relationship with especially if it came to our channel and it's got $100 million six times I don't want to say.
$750 million deal.
At that.
Is more core to <unk> strategy, we could potentially do a portion of that at <unk> as well.
But we will we will tend not to.
Hi.
Not for any reason other than it's not sort of core strategy.
Actually I will say there are always loans very many that ground.
<unk> and grow to the size gets bigger and bigger refi that always can grow with the company well because those are sort of profitable and sort of generally you know the credit so nothing.
Yes.
Is communication and sort of overlap.
<unk> overlap, but part there'll be separate and I think youll see im totally making this offer school but.
10% overlap of assets.
Okay.
Alright, I appreciate you taking.
All my questions and also very much appreciate the.
The reduction fee.
Overall, just just better aligned.
With shareholders to execute the strategy.
Thanks.
Next question, Robert Dodd with Raymond James. Please go ahead gentlemen.
Hi, Thanks, and good morning in line just that the vast bulk of my question. So I do have another one.
The cycle.
Dividend program did.
Obviously.
Most of it in this quarter looking at expanding although we.
Okay already covering that.
The base dividend I think you've got to have.
Can you give us any color obviously the notes up.
This quarter was 30.
<unk>.
Is it.
This increase.
So I think until January .
And any color on what the plan.
Would be with any.
Yes earnings.
The dividend.
Please.
You had previously.
The supplemental program, it's not likely to be reinstituted or any color there.
Yes so.
Previously we had said we will declare a supplemental.
You pretty much equal to the amount above our base dividend each quarter with these changes as well as the interest rate changes.
If it came about.
Over dividend.
Yes.
And over time I think over time we.
<unk> Merck's plays through in these changes go through we have the ability.
Right.
And over time and Thats, our goal to continually do that and we also think there.
Potential dividends, whether they are declared.
So once a year and paid over four quarters or declared over each quarter will sort of.
Okay.
<unk> both are.
Our spillover is on which we have a substantial amount right now.
Okay.
And where the earnings were so the answer really is yes, we expect there to be meaningful supplemental dividends paid.
Because there's we're covering we're not going to pay the excise taxes were going to distribute.
To stay in.
To stay in compliance so youre right theres quite a bit of room, but we just effectively what we did is we raise the base dividend and we got rid of.
Our standing promise that we will distribute at least five of supplemental each quarter.
But if you look at our earnings power, we have substantially more than that once the fee changes kick in.
Got it. Thank you. Thank you.
Once again as a reminder to ask a question today that is star and one and we will go next to Dan <unk> with Bank of America. Please go ahead. Your line is open.
Thank you congratulations on the promotions and the enhanced.
Shareholder alignment my question revolves around credit.
Based on the forward curve and kind of given the comments on.
The overall.
You had mentioned the mid cap.
Polio EBIT.
EBITDA growth could you comment on interest coverage and how high benchmark rates would need to rise before debt service coverage.
Oh, yes, we're interested.
Coverage would trend closer to one times versus.
Two eight times today.
Yes, sure I might need to follow up with the specifics, but as we said in our prepared remarks, we're at two eight times and then.
That test when we run through our portfolio of companies.
We're actually using actual.
Interest expense historically and.
As you probably know the LIBOR contract okay.
At.
Kind of especially in a rising environment rising rate environment like we've seen.
They are set in advance of the particular period.
And so right now we're at two eight times and that reflects kind of <unk>.
On average three months ago, LIBOR, which was as opposed to the two <unk> that we see today.
Something more like.
Sub two are kind of in the mid ones and <unk>.
They have to be in excess of 100 100 basis points, but we can do that math.
And revert, but a lot of cushion there, which is which is the good news and one of the aspects of our more stretched senior strategy on the mid cap side is that on average we are.
Deploying into lower Levered enterprises and thus.
Are equipped to deal with the increase in interest rates.
Okay. Thank you for that and then just in terms of I might've missed this earlier, but in terms of portfolio. The BDC portfolio overlap excluding merck's what portion of the BDC portfolio was also co invested with midcap.
Yes.
90, 97% 98, okay.
Got it darn near 100, yes, okay, great. Thank you.
And we will take our next question from Finian O'shea with Wells Fargo. Please go ahead.
Hi, everyone first a follow on.
This earlier question I think you said.
There is no changes on the inside.
But can you bridge us.
Two the sort of material concession that midcap has made by investing at NAV I think there are third party investors there right. So how do they look at it any color you could provide there.
Okay.
Sure I mean mid cap has.
A economic relationship with Apollo as its manager and so as part of that.
As part of that aligning investment we've take into account the overall economic relationship with Apollo, which is sort of adjusted all the time as an example.
We have taken great pains to ensure that all origination that's done anywhere at Apollo, including mid cap.
<unk>.
<unk> now gets full economics on those deals. Despite the fact that there have been other bdcs that have kept profits at the manager the way that has been chewed up before is that Apollo has paid for some of that origination paid mid capex. The manager right. It's like something that would be a relevant effect that we the AIB shareholders other than they are.
Getting full economics.
So we are.
Sort of the strategic and economic relationship with capital power was sort of broad and complicated and what this is an important strategic investment for mid cap because the growth of AI envy is.
It is.
It's really important to growing mid caps footprint and apollo's footprint across the whole middle market and so our goal is really for.
<unk> to grow and so it's sort of like it makes sense strategically, but theres also.
Lots of economics that are unrelated to this investment between the two parties.
Great. That's really helpful and then just.
Expanding on somewhat.
I was going to ask about future growth potential.
So in the event this.
<unk> future better performance might drive you above net asset value can you talk about what your.
Capital formation or raising plans would look like there are.
A lot of models out there on on periodic secondaries.
Private to public or sorry, yes private to public.
And some keep their shareholder base is very good.
Just sort of where you would fall on the spectrum and any sort of initial thoughts.
Yes, I mean I think.
There, we think the opportunity to invest in assets of this quality is much larger than AI and these capital base right. Now so we think that there is.
<unk> for people for two.
Drive good returns for the capital that would invest at NAV or above NAV, meaning we're confident in our dividend.
Ability to sort of cover.
Cover that well and grow it and pay supplemental is as we've talked about before.
Hi.
Obviously, we're also conscious though of our current shareholders.
Being able to sort of drive upside for them as well.
Interesting thing is for all those things.
Don't conflict right now and Thats, because we still have a a little bit of a drag on our earnings.
Sort of some older assets that are still not generating income and so raising money at NAV or above NAV spreads that out over a broader base and is it.
And of itself even to the existing shareholders. So the answer is we would expect to.
Hi.
Grow our capital if we trade it enough.
Above NAV to sort of.
To support that because we just think there is opportunities there as you can see from the amount of origination coming through mid cap and now the amount.
Great.
Sure very helpful. Thanks for taking the questions and appreciate all the progressive moves you Amit.
Question will come from.
With the investments. Please go ahead.
Hi, Thanks for the question and congrats on the overall positioning reset so two questions first on leverage and second kind of following up on that Brian .
And then the Apollo ecosystem and growth goals.
Is $1 35 to one five versus one four to $1 six really splitting hairs given.
Mid cap leveraged its own <unk>.
Loan portfolio.
Great sort of level.
And one could argue maybe something at $1 75 to closer to two would be even comfortable given where the loan book is heading.
Second.
Given the dependency you mentioned on trading.
Above NAV to raise equity capital.
The best vehicle to.
Given that.
The minimum wound.
To third party investors given.
Okay.
Around $2 billion within six months and the non treated.
Non traded REIT channel.
Yes.
How does your ground that limitation have always traded at Nab to grow in line with doubling.
Yield over for Apollo.
Okay.
The first question with regard to bridge is that our discussion with regard to risk related to lab is that one five times one six times to one four it is all splitting hairs. It's all based on <unk>.
Within the AAA or AA of the close of this pool of loans, if we see a loaded and write in midcap is leverage higher and so from a risk perspective, we always felt like that is very safe. The issue is we can't lever.
More than two times.
Under the BDC rules and in fact, you have to have enough headroom, because you can't control, how sort of markets moving things get marked and so.
That's why we talk about outside constituencies like the rating agencies and.
And the analysts investors are comfortable with.
With more room, so from that perspective isn't splitting because our our discussion is fine we get that we agree there has to be headroom. We believe we have less volatile assets and we've also taken great pains to have a very diversified portfolio.
I would like the concentration risk of those type of marks so we can be at the high end of range that people are comfortable with for Bdcs. So moving that range down I think is meeting.
It shows that like we are.
We want to be at the point, where everybody is comfortable.
So that's the first answer with regard to.
It being the best vehicle, there's pros and cons of every vehicle.
Private bdcs are have liquidity, but less.
You know they raise money.
At the NAV as its marked at each quarter with with fees.
They have different fee structures, which are better in some ways and not better than others and so.
This is I would say it is.
Okay.
Overall, this theme of democratization of finance and making the asset bubble as broadly as possible and these changes.
Make this a investment I think for individual investors, who want access to these type of assets it given the pros and cons the daily liquidity.
<unk>.
It gives people.
Another option, which is actually fairly good because youre your competitive.
But if you compare it to investing in mid cap individually and investing mid cap period.
Hi.
Visuals actually can then sort of.
Co mingle the rest to take those assets you need actually need to be.
The ability to get these assets at these fees is not terribly dissimilar.
To the fees that institutions are paying in those different structures and so.
I think it actually is pretty meaningful and I think if you looked at Apollo overall and said, what's apollo's focus over the next five to 10 years is to grow assets and grow assets, obviously always asset I just want to go assets, but grow assets in a way that.
Aloud.
On a set of people to access them and this is a really sort of good way.
We think so hopefully that answers the question yes.
Yes, perfect. Thank you so much and thanks for the good work as the CEO of <unk>.
Yes.
Yeah.
And there are no further questions at this time back over to management for any closing remarks.
Thanks.
And thank you everybody for listening to today's call on behalf of <unk>.
Thank you for your time today feel free to reach out.
If you have any questions okay. Good day.
Thank you and this does conclude today's book.
Thank you for your participation you may disconnect at anytime.
Okay.
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