Apollo Investment Corporation

Good afternoon and welcome to Apollo Investment Corporation's earnings conference call for period ended September 30th, 2021. At this time, all participants have been placed in listen-only mode. The call will be open for 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.

Thank you, Operator, and thank you, everyone, for joining us today. Speaking on today's call are Howard Widred, 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 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 Wager.

Thanks, Elizabeth. Good afternoon, and thank you, everybody, 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 by 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 successfully execute our strategy of increasing our exposure to first lien, floating rate corporate loans, and reducing our exposure to junior capital and non-core positions. We have constructed what we believe to be a well-diversified portfolio of high-quality senior corporate loans as evidenced by improving credit metrics, including lower leverage, lower attachment point, and higher interest coverage. Regarding our aircraft leasing portfolio company, we believe Merckx has successfully navigated this challenging period. As a result, AIMV earned more income from Merck's during the September quarter compared to recent quarters. Repayments during the quarter included the exit of two second lien investments. Post-quarter end, MC, one of our shipping investments, sold a vessel, which will result in a small pay down to AIMV in the December quarter. Moving to our results for the quarter, after market closed today, we reported net investment income for the September quarter of 33 cents per share, two cents above our quarterly base distribution of 31 cents. As mentioned on our last conference call, given the total return feature in our fee structure and the strong performance of our corporate lending portfolio, we resumed paying incentive fees during the quarter. Net investment income for the quarter reflects a full incentive fee. We ended the quarter with net asset value per share of $16.07, up 5 cents, or 0.3%, driven by our corporate lending portfolio, which continues to perform well, as well as the accretive impact of stock buybacks. Regarding investment activity, the Apollo Direct Origination Platform, which includes AI&V, was very active, closing $4.6 billion in new commitments during the quarter. AI&V's new investment commitments were strong, totaling $222 million, all first lien floating rate senior corporate loans. Given this solid level of activity, our investment portfolio grew, and our net leverage ratio increased to 1.51 times at the end of September, right in the middle of our target leverage range. We remain focused on increasing AI&V's earnings power. Let me discuss how we think about our baseline earnings and the embedded upside in our portfolio. First, as a result of the stability we expect to continue to see from Merckx, during the re-quarter we recast the capital structure and received $6.9 million of interest income from Merckx during the September quarter, $2.1 million more than last quarter. Second, although net leverage was 1.51 times at the end of the quarter, average leverage for the quarter was 1.46 times, a good baseline for projecting earnings going forward. Third, fee and prepayment income totaled $1.7 million for the quarter. Although these sources of income can fluctuate from quarter to quarter, we expect to generate approximately $3.5 million of fee and prepayment income per quarter on average. As an illustration, in the March 2021 and June 2021 quarters, fee and prepayment income totaled $3.9 million and $5.9 million, respectively. Conversely, although we earned a $2 million dividend from MC during the September quarter, we expect to earn approximately $1 million on average going forward, a level consistent with prior periods. Taking these items in aggregate would produce a baseline of approximately $0.34 per share. From that $0.34 baseline, there are a number of items we are focusing on to grow earnings in the near term. First, we continue to generate incremental cash proceeds from the portion of our non-core assets that are not generating income. For every $10 million of cash we generate from these non-income producing assets, we can generate approximately $650,000 of annual net investment income, or approximately one cent per share. In this regard, we have generated incremental cash each quarter and are very focused on executing some more significant progress in the coming quarters. Second, we continue to make progress with MERCs. Prior to COVID, MERCs generated a 13% return on average over a number of years. The current payment level, as recently adjusted this quarter, is approximately 9%. Although we don't expect to close this gap completely, we do believe that we can improve the return by either reducing capital in MERCs with the same gross dollar return or increasing the cash return by improving the capital structure. Third, we continue to focus on monetizing underyielding assets, specifically Spotted Hawk, Dynamic, MC, and Chiron. Taken together, these assets and a few others account for approximately $230 million of fair value and generate only $16 million of annual income. Redeploying those assets at our approximate all-year yield should generate an incremental $2 to $3 million of annual net investment income. And last, we continue to buy back our stock when the price dictates. We obviously hope these opportunities become more and more infrequent, but when they occur, the buybacks are both accretive to book value and moderately accretive to EPS. We believe these items provide additional support to our baseline earnings and also provide a path to generating the earnings above the baseline. 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 January 6, 2022 to shareholders as of record on December 20, 2021. I'd like to remind everyone that as we've indicated previously, we intend to declare a quarterly base distribution of $0.31 per share and a quarterly supplemental distribution of $0.05 per share for at least one more quarter. With that, I will turn the call over to Tanner to discuss the market environment and our investment activity. Thanks, Howard.