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spk03: Good afternoon and welcome to Apollo Investment Corporation's earnings conference call for the period ended June 30th, 2021. At this time, all participants have been placed in a listen-only mode. The call will be open for a question and answer session following the speaker's prepared remarks. If you would like to ask a question at that time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. I will now turn the call over to Elizabeth Besson, Investor Relations Manager for Apollo Investment Corporation.
spk11: Thank you, Operator, and thank you, everyone, for joining us today. Speaking on today's call are Howard Widra, Chief Executive Officer, Tano 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 know 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 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 affect any forward-looking statements we make. We do 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.apolloic.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 as well as the company's financial performance. At this time, I'd like to turn the call over to our Chief Executive Officer, Howard Widra.
spk09: Thanks, Elizabeth. Good afternoon, and thank you, everyone, for joining us today. I'll begin today's call by providing an update on our ongoing progress repositioning the portfolio, followed by a review of our results for the quarter. Following my remarks, Tanner will discuss the market environment, review our investment activity for the quarter, and provide an update on credit quality. Greg will then review our financial results in greater detail. We will then open the call to questions. During today's call, we will be referring to some of the slides in our investor presentation, which is posted on our website. Beginning with an update on our portfolio repositioning, we continue to make good progress increasing our exposure to first lien floating rate corporate loans while reducing our exposure to junior capital and non-core positions. From a volume standpoint, the Apollo direct origination platform was very active, closing $4.6 billion in new commitments during the June quarter. AIMV's new investment commitments were strong, totaling $332 million, all in first lien floating rate loans. We believe we have constructed a granular and diversified portfolio of high-quality senior corporate loans. We believe Merckx has successfully navigated this challenging period, and we expect AI&V will be able to generate higher revenue from Merckx in the coming quarters. We also continue to make progress reducing our exposure to non-core and junior capital investments. Repayments during the quarter included the exit of two second lien investments, as well as a small partial pay down from one of our shipping investments. We remained focused on reducing our exposure to the remaining non-core assets while ensuring an optimal outcome for our shareholders. Moving to financial results, we delivered solid results for the quarter. Net investment income for the June quarter was $0.39. We ended the quarter with net asset value per share of $16.02, up 14% or 0.9%. The increase was driven by our corporate lending portfolio, which continues to perform well. The investment portfolio grew modestly as solid fundings were mostly offset by prepayment activities. Gross fundings for the quarter were $230 million, excluding revolver fundings, while net fundings totaled $29 million. Net leverage increased to 1.39 times at the end of June, up from 1.36 times last quarter, and slightly below our target leverage range of 1.4 to 1.6 times. As we look ahead, we are confident in our ability to grow our portfolio and operate within our target leverage range, given the tremendous need for creative and flexible private capital and the unique and robust nature of the Apollo MidCap platform. With that said, as Tanner will discuss later, the current market environment is very competitive, and we will continue to focus on first lien assets and will remain disciplined in our credit selection process. Turning to our distribution, for the quarter, the Board has declared a base distribution of $0.31 per share and a supplemental distribution of $0.05 per share. Both distributions are payable on October 8, 2021, to shareholders of record as of September 21, 2021. With that, I'll turn the call over to Tanner to discuss the market environment and our investment activities.
spk04: Thanks, Howard. Beginning with the market environment, the U.S. economy continues to recover on the back of more vaccinations, supportive fiscal and monetary policy, high stock prices, and tight credit spreads, and significant excess savings in the household sector and the corporate sector. Daily data for travel, credit card usage, and restaurant bookings continue to approach or exceed pre-pandemic levels. While there may be a slower reopening in some parts of the country, the ongoing improvements in GDP, employment, and earnings are likely to continue. The reopening of the economy has been associated with a significant spike in inflation as prices of cars, flying, and dining and other services have recovered. We generally believe that the growth backdrop will serve as an offset to the inflationary pressures at our portfolio companies. Based on the data from LCD, new issue loan volume in the June quarter was $145.8 billion. the second highest quarterly total in the last four years. Amid strong supply, the market continues to see strong demand from both CLOs and retail investors. Secondary loan prices also continue to move higher. Specific to our business, the middle market lending environment has generally returned to pre-pandemic conditions due to several factors, including a growing number of private credit providers, a strong syndicated loan market, and a strong economic backdrop, all of which have contributed to the return of borrower-friendly pricing and terms. Private equity M&A activity is robust as sponsors continue to deploy capital. As a result of the favorable conditions, more companies, including the upper end of the middle market, are seeking syndicated solutions. Moving to AI&V's investment activity, new corporate lending commitments for the quarter totaled $332 million across 24 companies for an average new commitment of $13.8 million. By strategy, 82% of new commitments were leveraged lending, 12% were life sciences, and 6% were asset-based. Consistent with our strategy, all of these new commitments were first lien floating rate loans with a weighted average spread of 620 basis points and a weighted average net leverage of 5.2 times. All of these new commitments include LIBOR floors, and 92% were made pursuant to our co-investment order. Gross fundings for the quarter totaled $230 million, excluding revolvers and MERCs. Due to the strength in the overall market, repayments We're also strong, totaling $189 million, excluding revolvers and mercs. The strength in the loan market has enabled us to continue to reduce our exposure to second liens. During the quarter, repayments included $57 million from the exit of two second lien positions, and over the past four quarters, second lien repayments have totaled $133 million. We also received $4 million repayment during the quarter from MC, one of our shipping investments, from the sale of one of its vessels. Net repayments for revolvers totaled $12 million. In total, net fundings were $29 million. Moving to Merck's and beginning with the overall market, we are optimistic that the demand for air travel will continue to improve with the ongoing rollout of the vaccine and the lifting of travel restrictions. Additionally, we expect the aircraft leasing market will continue to be an important and growing percentage of the world fleet, as airlines will need to increasingly look to third-party balance sheet to finance their operating assets. As the aircraft sector continues to recover, we have seen a notable pickup in sale leaseback transactions and in the ABS market, an important source of financing for aircraft less source. Specific to our investment, we believe Merckx has successfully navigated this challenging period. 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 this period with long-term leases or sales. Our current lease maturity schedule is well staggered. Additionally, Merckx continues to benefit from a growing servicing business, which has increased in value over time. We believe Merckx's portfolio compares favorably to other lessors in terms of asset, geography, age, maturity, and lessee diversification. Merckx's portfolio is skewed towards the most widely used types of aircraft, which means demand for Merckx's fleet is anticipated to be resilient. Merckx's fleet primarily consists of narrow-body aircraft serving both U.S. and foreign markets. At the end of June, Merckx's own portfolio consisted of 78 aircraft, 10 aircraft types, 39 lessees in 25 countries with an average aircraft age of 11.5 years and an average lease maturity of 4.3 years. Merckx's fleet includes 75 narrow-body aircraft, two wide-body aircraft, and one freighter. The Apollo Aviation Platform will continue to seek to opportunistically deploy capital. To be clear, Merckx is focused on its existing portfolio and is not seeking to materially grow its own balance sheet portfolio. However, growth in the overall Apollo Aviation Platform will inure to the benefit of Merck's as the exclusive servicer for aircraft owned by other Apollo funds. Turning to the overall AI&V portfolio, our investment portfolio had a fair value of $2.49 billion at the end of June across 140 companies in 25 different industries. We ended the quarter with core assets representing 92% of the portfolio and non-core assets representing 8%. First lien assets represented 90% of the corporate lending portfolio, up from 87% last quarter. At the end of June, the weighted average spread on the corporate lending portfolio was 616 basis points. As a reminder, the weighted average LIBOR floor on our floating rate assets is approximately 1%, well above today's current LIBOR. The weighted average net leverage of our corporate lending portfolio declined to 5.22 times down from 5.34 times last quarter. The weighted average attachment point declined to 0.4 times, down from 0.6 times last quarter. The decline in these metrics, both for the quarter and over the past few years, reflects the continued improvement in the credit quality of the portfolio. Investments made to our co-investment order represented 81% of the corporate lending portfolio at the end of the quarter. Amendment activity remained modest this quarter with no material amendments. No investments were placed on or removed from non-accrual status during the quarter. At the end of June, investments on non-accrual status represented 27 million or 1.1% of the portfolio at fair value. With that, I will now turn the call over to Greg, who will discuss the financial performance for the quarter.
spk07: Thank you, Tanner. Beginning with AIMD's Statement of Operations, Total investment income was $50.5 million for the quarter, reflecting lower interest income partially offset by higher prepayment and C-income. The quarter-over-quarter decline in interest income was attributable to the pace of the investment activity and the relatively higher yield on repayments versus fundings. C-income was $1.1 million, up from $700,000 last quarter, Prepayment income was $4 million, up from $3.3 million last quarter. Dividend income was essentially flat for the quarter. The weighted average yield at cost on our corporate lending portfolio was 7.7% at the end of June, down from 7.8% last quarter. Expenses for the quarter were $25.2 million, essentially flat quarter over quarter, and there was no incentive to be paid during the quarter. Net investment income per share for the quarter was 39 cents. Net leverage at the end of June was 1.39 times, up from 1.36 times at the end of March. On page 16 in the earnings supplement, we disclosed the net gain or loss by strategy over the past six quarters. As Howard mentioned, our corporate lending portfolio continues to perform well. During the quarter, our corporate lending portfolio had a gain of $6 million or $0.09 per share. Merck's had a slight loss of $1.2 million or $0.02 per share. And our non-core and legacy assets had a net gain of $2 million or $0.03 per share. The net gain on non-core and legacy included a $9.8 million gain on carbon-free, a legacy investment, partially offset by losses on oil and gas and shipping. As a reminder, our investment in Carbon Free consists of an investment in the company's proprietary carbon capture technologies and an investment in the company's chemical plant. Carbon Free is benefiting from the strong interest in carbon capture utilization and storage. The increase in valuation is a result of a recent third-party capital raise at Carbon Free. NAB per share at the end of June was $16.02, or 14 cents, or a 0.9% increase quarter-over-quarter. The 14-cent increase was attributable to 10 cents of net share gain on the portfolio and net investment income per share of 3 cents. Regarding liquidity, given the continued improvement in the quality of our investment portfolio, our liquidity position continues to strengthen. Post-quarter end in July, we issued $125 million of 4.5% unsecured notes due in July 26. Despite the dilutive impact of these notes, we believe it was prudent to diversify and extend the maturity of our funding sources. In addition, we are pleased that Kroll affirmed their investment-grade rating and revised the outlook to stable from negative in July. Regarding stock buybacks, during the quarter, AINV purchased 145,500 shares at an average price of $13.92 for a total cost of $2 million. From July 1st, this is post-quarter, through August 4th, 2021, We purchased an additional 44,000 shares at an average price of $13.46 for a total cost of $600,000, leaving approximately $24 million of authorization for future purchases under the Board's current authorization. Now, before opening the call to questions, we wanted to briefly remind everyone that given the total return hurdle feature in our fee structure, and the recovery in our portfolio over the last several quarters, we expect to begin to pay a partial incentive fee in the quarter ending September 2021. The exact timing and amount will vary based on future gains and losses, if any, as well as the level of net investment income for the quarter. As we said on last quarter's call, we believe AINV net investment income may fluctuate over the next few quarters as we begin to pay incentive fees. That said, we expect to generate higher revenue from certain investments, including MERCs, which will help offset the impact from incentive fees. We remain confident in the trajectory of our earnings and our long-term plan. As mentioned last quarter, we intend to declare a quarterly-based dividend distribution of $0.31 per share and a quarterly supplemental distribution of $0.05 per share for at least the next two quarters. To be clear, this would be in addition to the distribution declared today. This concludes our prepared remarks, operator, and please open the call to questions.
spk03: You may withdraw your question at any time by pressing the pound key. Once again, that is star and one. And we will take our first question from Vinny Anoshe with Wells Fargo. Please go ahead. Your line is open.
spk05: Hi, everyone. Good afternoon. Just a question, I guess, for Howard on the rebound and origination outlook and so forth. Can you... Give us, I guess, your high-level thoughts on how much a lot of this is pent-up demand versus a more sustainable shift in the demand for private credit.
spk09: Sure. I mean, I don't know if – so I think it – The activity has been very robust versus historical standards, so it's hard to say that it's like a permanent shift. at a higher level. That said, there are some secular things that are happening that seem to suggest that it can stay elevated for some period of time. One is just a lot of dry powder out there for equity firms to do deals. That's likely to keep things elevated, for one. You know, if you combine that with the fact that there continues to be, like, this secular shift to the private credit market, both from the higher-end deals from broadly syndicated market and also, you know, continuing from what banks provide for different companies, both of those things secularly suggest that there will be more activity. That said, this is also – there's also some pent-up demand. So, I mean, our expectation is that activity across the industry, and I think you've seen it from some of the other BDCs, will be robust certainly through this quarter, and we would expect it to continue in the near and medium term.
spk10: Very well. Thank you.
spk05: And can you give just a second question also sort of high-level platform level? Can you give an update on generally the direct lending, the middle market side that is at Apollo with MidCap and so forth that the BDC invests with, sort of the allocable capital or sort of fund complex that we're co-investing with at this stage?
spk09: Sure. You know, it has been, and, you know, we mentioned, you know, a lot of volume, a lot of transaction volume, large pipelines across sort of the whole Apollo direct origination business, and actually across a whole, you know, sort of the full array of products. So, you know, that's lender finance, that's our real estate business, which we don't, you know, see through AIMV, it's asset-based lending. There's a lot of activity. And, you know, at the same time, there's been a good amount of capital creation, you know, at Apollo to be able to serve those clients. So one thing we've talked about before is one of the keys to be able to execute is basically to be able to speak at size for transactions of all different kinds. And so we've continued to sort of, you know, create capital through SMAs, through some significant capital raises at mid-cap on the debt and equity side. and through continued allocations from some of our insurance balance sheets to these assets. So like the sum total is a lot of growth of capital at Apollo to sort of fund these different strategies at the same time that the market generally is demanding more credit. which, again, we talked about could be secular, could be sort of cyclical. It's probably a little bit of both. And so, you know, we are in a benign credit environment. So, you know, when you have a lot of growth with a good amount of capital without a lot of sort of, you know, without a headwind of credit problems across very many sectors because it's just sort of the growth in the economy and the liquidity, obviously that's a pretty favorable environment. And that's where we are.
spk10: Very well. I appreciate the color.
spk05: That's all from me. Thank you.
spk02: We'll take our next question from Kyle Joseph with Jefferies. Please go ahead.
spk03: Your line is open.
spk01: Hey, good afternoon, guys. Thanks for taking my questions. I guess the first one for Tanner really sounds like Merckx is kind of Kind of out of the woods, you talked about growing revenues to AINB going forward. Can you give us any sort of – recognizing there's a lot of uncertainty remaining, but give us a sense for the potential magnitude and also the form, whether it be dividend or interest income?
spk09: Sure. So let me just sort of take a crack at it. I mean, I think, you know, last quarter we talked about sort of like, you know, the earnings capability of or the sort of really not the earnings capability, sort of the earnings momentum of Merck's. And that is in sort of, you know, the ballpark of, you know, the low, you know, the low 30 million across the whole investment. Let's put aside for a second interest or dividends. And right now, or, you know, over the last few quarters, that cash flow or that income has, first of all, it's built up as we work through the leases, but it's also been used to pay down debt to get sort of the debt facilities back in line. And so, you know, the expectation is that, you know, a gap. Most of that will be available for distribution because, again, we're not growing, right? So that's what will be available for building up cash. You know, right now we have $190 million, you know, of our investment is in debt, and that pays and has been paying in the low fours per quarter. You know, and it is expected the rest would come through dividend income. Uh, there, and so that, that's like, that's, that's where we are right now. Could, you know, something be restructured to make it, you know, uh, to make more of a debt and less of an equity, uh, possibly if that made sense for some other reason. But as we've sort of always said, you shouldn't view it as vastly different, you know, the income coming off Merck's, um, In terms of you know, it was pretty predictable. Historically, this caused a glitch into it, it was steady in for that debt component part, which was contractual, but we would expect it to go from this four and a half million, you know, level per quarter moving towards, you know, most of the net income is producing over, you know, over the, you know, near and medium term, I can't predict exactly, just depends on where we want to use the capital.
spk01: No, that's really helpful. Appreciate it. And then in terms of credit performance, I know non-accruals were stable. It looked like leverage came down a bit in the portfolio. I recognize 2021 is a unique year in terms of comps, in terms of revenue and EBITDA growth. And I'm sure it's all over the board depending on the company. But can you just give us a sense for how you're evaluating portfolio company performance? Are you factoring in 2019 levels of performance and how you see portfolio growth evolving as we kind of lap some of the COVID comps?
spk04: Yeah, sure. And I assume I'll assume, Kyle, you're really getting at the underlying economic fundamentals. Keep in mind that these valuations are, you know, by and large, you know, the the March quarter of 2021. And so you're clearly comping against only a portion that was COVID-affected. And so in that respect, you in this quarter actually had, you know, probably the first time where, you know, sort of the rubber meets the road in terms of really getting a feel for, you know, just the level of stabilization because you're comping against a non-COVID quarter, right? And I think what we've seen is economic strength. There is obviously a very large debate in the market concerning just how whether inflationary pressures will be transitory or not. We've certainly seen it in certain of our businesses. The way we think about that part of the equation is, you know, if we've done our job right and we are indeed creating risk, first lien risk at roughly 60% LTV, you know, the hope is that, you know, what ultimately drives the ability to repay is not going to be infringed by some inflationary pressures. And so we're not as concerned on that side. But to your larger question, definitely seen some fundamental strength, a lot of fundamental strength, you know, consistent with what you hear about the broader economy and that, you know, our overall leverage could go down, you know, just over 0.1, you know, across a, you know, roughly $2 billion corporate book, you know, speaks to some of that underlying strength and deleveraging within the portfolio due to strong economic performance.
spk10: Got it. Really helpful answers. Thanks a lot.
spk02: And once again, as a reminder, to ask a question that is stars and one on your touchtone phone.
spk03: And we'll take our next question from Matt Jaden with Raymond James. Please go ahead.
spk06: Hey, all. Afternoon and appreciate you taking my questions. First one for me, following up on MERTs. Has the rise in COVID cases in the U.S. and the Delta variant, has it slowed the recovery at Merck's versus kind of where we sat maybe three months ago?
spk04: Yeah, I would say, you know, the recovery was never going to be linear. Obviously, the Delta variant is something that everyone is looking at and scrutinizing very, very heavily. You know, it is still too early to judge whether that's, you know, a meaningful change. Certainly, on the margin, people are very cognizant of it, but I wouldn't say it's changed the outlook. Yeah, we did mention, and this is not exactly to your question there, Matt, but, you know, one of the things we made mention of in our prepared remarks was One of the things that has helped the market has been the reemergence of financing markets, and that's something that has contributed to the strength alongside an increase in sale leaseback activity that's helped to provide some backing to the market. So to your specific question, I think Delta variant, it's still too early to say. We were cognizant that this was never going to be linear in any case, and that's not certainly how we manage the business or what we anticipated, we are encouraged by the level of sale-leaseback activity and the repairing or reemergence of the financing markets and notably the ABS market as a very good sign for the industry.
spk06: Got it. That's helpful. Last one for me, kind of a more high-level one. From the perspective of shareholder returns, how does AINB balance higher target leverage versus peers to your cost of unsecured debt currently?
spk09: How do we balance your, and I'm just, I want to make sure I answer the question you're asking, how do we take on this debt at this cost given, you know, the returns we want to generate? Yes, sir. Okay. Well, I will say this. You know, we felt like this, you know, this offering was very well priced for the investors, overpriced, and certainly versus the relative risk of our peers. But we also felt like that there was a lot of – interested in us from all our constituencies, our equity holders ask a lot, our investors, the rating agencies, our senior debt holders, when are we going to issue again? And it's sort of like you want to get back on the train to be able to bring your cost of debt down. So what we did was a small issuance to reestablish our name. We focused very much on the quality of the investors, long-term holders who have invested big appetite in the space so they can get familiar with how, you know, the portfolio is performing in order to sort of bring, you know, bring down the cost to a level that, you know, is consistent with driving the ROEs we want to drive, you know, sort of those 9% ROEs. So it's a great question, probably the most apt question this quarter. You know, we felt like it was the right strategic thing to do and it was of a bite size enough that, you know, the strategic benefit and flexibility it gives us. And, by the way, also, like, you know, it's $125 million at 4.5%. It's obviously we pay down Revolver with it, which is in the twos, so that's a financial loss. But, you know, it does extend out, you know, I think, Greg, 18, 20 months beyond the existing bonds, which when those get redeemed are more expensive. Right. Obviously, that's a little ways down the road. But when you sort of look at our overall capital structure, you know, we're focused on long-term bringing down our cost of debt, and we just thought, like, this step was a necessary step.
spk10: That's it for me. I appreciate the time.
spk02: There appears to be no further questions.
spk03: I will now turn the call back to management for any closing remarks.
spk09: Thank you and thanks everybody for calling in today on behalf of all of us.
spk08: We thank you for your time today and feel free to reach out to any of us if you have any questions. Have a good day.
spk02: Thank you and this does conclude today's program. Thank you for your participation. You may disconnect at any time.
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