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spk02: Good morning and welcome to the earnings conference call for the period ended March 31st, 2022 for Apollo Investment Corporation. 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 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 Ms. Elizabeth Besson, Investor Relations Manager for Apollo Investment Corporation.
spk03: Thank you, Operator, and thank you, everyone, for joining us today. Speaking on today's call are Howard Widra, 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 Widra.
spk00: Good morning, everyone, and thank you for joining us today. I'll begin today's call with an overview of results for the quarter, followed by an update on our non-core assets, which we are pleased to say have been reduced to a nominal amount. Following my remarks, Tanner will discuss the market environment, review our investment activity, provide an update on MERX, and discuss the portfolio's credit quality. Lastly, Gray will review our financial results in detail. We'll then open up the call to questions. Beginning with our results, debt investment income for the quarter was $0.42, which reflects a slight increase in interest income and strong fee and prepayment income. We recorded a net gain on our corporate lending portfolio, which continues to perform well. Overall, we had a net loss in our portfolio, primarily driven by a net loss on Merck's due to exposure to Russia, which Tanner will discuss later during the call, and on our remaining shipping investment, which was adjusted based on the expected net proceeds from a pending sale. Given the total return feature in our incentive fee structure and the net loss in our portfolio, incentive fees significantly declined quarter over quarter. We ended the period with net asset value per share, $15.79. 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 non-core assets with the receipt of significant cash proceeds from the repayment of non-core assets. During fiscal 2022, proceeds from the sale of non-core assets totaled $47 million, including $32 million in the March quarter. At the end of March, non-core 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 non-core assets, and we have good visibility into additional repayments in the coming quarters as we are in exclusive negotiations on two of our names, which will reduce our non-core 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, The dynamic product anchors close on the sale of four vessels in its fleets, 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 our scheduled investment, which relates to net working capital adjustments. Since the end of the quarter, we have received a $1.4 million payment from dynamic and expect to receive the remaining balance by the end of June, at which time we will have fully exited that investment. We're in the process of selling the investment, vessels at MC, and our other shipping investment. The fair value of investment at MC was $34.3 million at the end of March, reflecting the anticipated exit values from two proposed transactions, which would be supported by a small amount of seller financing. We assigned a PSA on 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 MC fleet in the September quarter. Moving to our oil and gas investments, we have some positive developments to announce. First, we've signed a letter of intent to sell our investment in Spotted Hawk, and we expect the purchase agreement to be finalized in the next couple of weeks. We expect the sale to close in the next few months, which we estimate will generate debt proceeds at or above our $30.1 million mark at the end of March. The demand for this asset is high, and there are multiple interested parties. Glacier, another oil and gas position, is also benefiting from the increase in 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 AINV received a $3.5 million pay down during the quarter and also rode up the investment by $3.6 million. Post-quarter end, Glacier paid AINV 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. Performer 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. We are focused on monetizing the remaining non-core assets and are 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 break out non-core assets as a separate category in our supplemental reporting. Of course, we will continue to disclose the detail of each investment on our scheduled investments and will provide updates each quarter. We also continue to reduce our exposure to junior capital positions and receive $7 million of second lien corporate loan paydowns during the quarter. Shifting gears a bit, 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 built what we believe to be a well-diversified corporate lending portfolio of true first-lead floating rate loads invested in less cyclical industries. Our corporate lending portfolio is 94% first-lead, with weighted average attachment point of 0.2 times, a key metric which demonstrates that we are truly invested at the most senior level of the capital structure. Additionally, 87% of the corporate lending portfolio is sponsor-backed, which means these companies have financial and operational support from the financial sponsors who own them. We feel very good about the ability of our corporate lending portfolio to withstand potential economic headwinds. In terms of new opportunities, we believe AIB's ability to invest in loans originated by MidCap Financial, is one of our most significant competitive advantages. In addition to cash flow loans to middle market sponsor-backed companies, MidCap's product offering includes life sciences lending, asset-based lending, lender finance, and franchise finance, products which are typically less competitive and 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 AIB's corporate lending portfolio at fair value. 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 for a total distribution of $0.36 per share, consistent with NII for the March quarter, adjusted for a normal level of incentive fees. Both distributions are payable on July 7, 2022, to shareholders of record as of June 16, 2022. With that, I'll turn the call over to Tanner to discuss the market environment and our investment activity.
spk10: 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 price of 2021. This type of broader market environment benefits providers of private credit who 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 and inflationary environment, strategies focused on diversified floating rate portfolios, particularly those with first lien, can offer highly attractive risk-adjusted returns. Moving to investment activity, MidCap Financial was very active during the March quarter with $4.4 billion of new origination. AINV's level of investment activity was driven by our focus on operating within our target leverage range. For AINV, new corporate lending commitments for the quarter totaled $116 million across 16 companies for an average new commitment of $7.2 million. Ninety-four percent of the new commitments were leveraged lending with a balance in lender finance and life sciences. All new commitments were first lien floating rate loans with a weighted average spread of 612 basis points and a weighted average net leverage of 4.7 times. 98% of new commitments were made pursuant to our co-investment order. Gross funding for the quarter totaled $115 million, excluding Merck's and Revolvers. Sales and repayments totaled $141 million, excluding Merck's and Revolvers. Net revolver repayments were $28 million. In aggregate, net repayments for the quarter totaled $54 million. Moving to Merckx, our aircraft leasing portfolio company, AI&V's investment in Merckx 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 Merckx through selling aircraft and de-emphasizing its servicing business. During the quarter, we recorded a net unrealized loss of $19.7 million on our investment in MERS, primarily related to our Russian exposure. At the time of Russia's invasion of Ukraine and the imposition of sanctions, the MERS-owned portfolio included four aircraft on lease to two Russian airlines. Three of the aircraft 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 of Russia remains registered in Ireland and has now been repossessed by Merckx and moved to a storage facility in the EU. In response to the various sanctions imposed by the United States and the European Union, Merckx terminated the leases on all of these aircraft. The Merckx team has been actively engaged in discussions with the lessees regarding the grounding and redelivery of these aircraft. No aircraft in the own fleet are in Ukraine or on lease to Ukrainian airlines. The three aircraft in Russia generated monthly rent of approximately $516,000 combined. As a reminder, Merck's own fleet is financed through several independent limited recourse financings. All four of the aircraft that had been leased to Russian airlines were held in an aircraft securitization known as MAPS 2019. The three aircraft remaining in Russia represent approximately 11% of total adjusted base value in the collateral pool of MAPS 2019. As is standard practice and required under the terms of the leases, the lessees have an obligation to insure the aircraft. Merck further maintains a contention insurance policy on the aircraft. We are 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 lessee policies, which are placed in the Russian market and prior to sanctions had been reinsured with reputable insurers in the London international markets, and our own contingent policy, which is placed by Aon with reputable insurers in the London and 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 aircraft during the quarter. Turning to the overall A&V portfolio, our investment portfolio had a fair value of $2.52 billion at the end of March across 139 companies and 26 different industries. Corporate lending represented 83% of the portfolio. Merck's represented 12% and the non-Korn legacy assets. represented 5%. As Howard mentioned, pro forma for post-quarter-end monetizations, including pending asset sales, non-core assets represented 3% of the portfolio at their 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 the Ukraine. Moving to credit metrics, at the end of March, the weighted average net leverage of the corporate lending portfolio was 5.29 times. The weighted average attachment point was 0.2 times, and the weighted average interest coverage ratio was 2.9 times. Investments made to our co-investment order represent 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, 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.
spk11: Thank you, Tanner, and good morning, everyone. Beginning with our AIMD statement of operations, total investment income is $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. The weighted average yield and cost of our corporate lending portfolio was 7.7% at the end of March, up from 7.6% at the end of December. 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 $27.9 million, down $4.6 million quarter over quarter, primarily driven by the decrease in incentive fees. As a reminder, AIMV's incentive fee on income includes a total return hurdle with a rolling 12-quarter lookback. During 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 $0.42 per share, and net leverage was $1.51. 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 $0.06 per share, concentrated in a few positions. As Tanner mentioned, we recorded a $19.7 million unrealized loss on MRCs, or $0.31 per share, related to our exposure to Russia. We recorded an additional $6.7 million, or $0.11 per share, on non-core legacy assets driven by losses from our remaining ship investments. and reflect realizational rates that Howard had spoken about. Nav per share at the end of March was $15.79 or a 1.8 or 29 cent decrease quarter over quarter. The decrease is attributable to a 36 cent per share loss in the portfolio offset by six cents of net income relative to the distribution. Moving to capital, our liquidity position remains strong with undrawn revolver capacity while 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 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 that have a positive impact on net income. The average floor on our investments is approximately 1%. Short-term interest rates have increased significantly, with 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 quarter end rates, we estimate a 100 basis point and a 200 basis point increase in reference rates would result in annual incremental earnings of approximately $0.07 and $0.19 per share. Regarding stock buybacks during the quarter and post-quarter end, AI&V repurchased approximately $2.4 million of stock, which leaves us approximately $30 million available under our authorization for future stock repurchases. This concludes our remarks, and we'd like to open up the call to questions.
spk02: At this time, if you would like to ask a question, please press the star and 1 key on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star 1 to ask a question. And our first question will come from Aaron Siganovich with Citi Global Markets.
spk11: 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 that's starting to move down into the less liquid private markets as well.
spk00: Yeah, the spread widening, I'd say, is at least with regard to things being proposed right now. I wouldn't say the documentation is yet, and obviously that's sort of like an imperfect thing to monitor, you know, deal by deal. And as has been the case really for the last, I don't know, year or two, there have been, you know, some, you know, some groups that have driven a lot of sort of the degradation of, you know, of the documents and, you know, they're still active. So, you know, the market has not moved yet, I'd say, on terms, but I would expect it to. We've actually spent a lot of time discussing the past couple weeks about where we want to lend and how we want to make choices in a market that's going to look different six weeks from now. It just takes a little while to work its way through. So I'd say yes on the pricing and no on the terms yet.
spk11: And then you're still running kind of around one and a half times net leverage. That's It's not super high relative to your limit, but it is higher than I'd say most BDCs have been operating in lending portfolios. Is there an intention to bring that down, or do you continue to expect to run around 1.5?
spk00: Yeah, I mean, we've talked about our range being 1.4 to 1.6, but likely on the lower end of that range, so that's usually 1.5. like we don't expect necessarily to creep up to 1.6. So, you know, this goes to the underlying risk of the portfolio, you know, in large amounts. Like when we, you know, we continue to focus on or try to focus on everybody that, you know, our attachment point is 0.2. You know, there's a lot of loans that are listed as first lien loans that let a turn of leverage in in front of them from banks. And so if we're at 1.5 times leverage and we're true senior, or we're at 1.25 leverage and we have a turn in front of us, they're actually the same on a risk perspective. So, you know, we feel like from a risk perspective, we're actually at a very similar range to what people are doing, no second lien, true first lien, you know, and then also, you know, some percentage of leverage. which are, you know, which have very, very low loss given default. So we feel like the risk level is similar to where people are, but the flip side is everybody asks the question you just asked. Everybody's okay, whatever, but you're leveraged too high. So, you know, we'll, you know, we hear that. So we will, you know, our intention is to sort of like move it down as, you know, as sort of like the opportunities, you know, make sense.
spk11: Right. That makes sense. And you should benefit from the rising rates as well. So that gives you some opportunity to deal with it a little bit. The last question I had was on the Russian aircraft. Is seeking the insurance payment on that, do you expect that to be kind of a protracted process? process or is it something that you might expect to be finished within the next couple quarters?
spk10: Yeah, I'm happy to take that one, Aaron. The answer is yes. 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, I guess, unfortunately, more broadly. And thus, you have, as a result, 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 similarly. You know, a couple of quarters at least, certainly, and it'll have a lot to do with, you know, how it progresses from here. But as I will, you know, call attention to in our prepared remarks and also call attention to other, you know, public lessors in the statements, you know, we think 100% that our claims have merit and intend to pursue them vigorously.
spk12: Thank you.
spk02: Thank you. Our next question will come from Kyle Joseph with Jefferies.
spk06: Hey, good morning. Thanks for taking my questions. To start on Merck's, you know, Tanner, obviously some of what I'd 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, give us some more color given Merck's global exposure.
spk10: Yeah, thanks for the question, Kyle. And I think your dichotomy actually is a good one. The issues in Merck's and the write-down that we saw was really just related to our assessment of the Russia situation and the insurance claims as we mentioned. And more broadly, we have seen a market that continues to heal itself. Obviously, it continues to be very volatile in terms of fuel prices and inflationary impacts. But we have seen a progressive healing within the broader air traffic market, which has benefited, not surprisingly, aircraft values and underlying airlines as things have come back online. And that was reflected in the stability outside of the Russia situation within the Merck's portfolio.
spk06: And then obviously your non-accruals were stable. How is the corporate lending portfolio doing in terms of revenue and in EBITDA, either growth or margins, and then, you know, can you give us any sense for, you know, your thoughts on the shift in rates impacting credit in the middle market?
spk10: Yeah, absolutely. And this is something that, you know, we track pretty closely. I'll make the same caveat that I make each and every quarter. We do our best to – 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 sponsors that want to roll up industries, that gets increasingly difficult. But notwithstanding, when we do our best to try to tease out those issues of comparability, We're seeing revenue climb kind of in the mid single digits. In aggregate, you've seen, obviously, we were in an inflationary environment even before the invasion of Ukraine and would expect some of that to have knock-on effects, particularly as it relates to oil prices. and food, but we did see a slower growth on EBITDA and keep in mind that those results would not have digested kind of the most recent rise in commodity prices. And I think as a generic statement or speaking generally, I think it once again reaffirms our strategy which Howard discussed wherein we're creating these companies oftentimes at first dollar you know, to kind of a 60% LTV. And, you know, the effects on these companies is unequivocal. Higher interest rates will, you know, inevitably increase costs. And there's, you know, differing levels of, you know, how inflationary effects affect, you know, companies' earnings. But, you know, again, you know, with how we've positioned the portfolio and where we're creating these companies, we think that that gives us a lot of, you know, mitigation to those effects and ultimately, you know, our credit quality and the loans and securities that we were investing in.
spk06: Guy, thank you. And then one last one from me, just, you know, where we are in your fiscal first quarter. Can you give us a sense for, you know, investment activity, not asking for guidance, but maybe just comparing it to the quarter end in March 31st for reference?
spk10: Yeah, it remains strong, and I think that's a couple things. I think broadly speaking, we are seeing a decline in M&A more broadly. I think there's a little bit of, as we mentioned in our prepared remarks, private solutions. This is our opportunity to shine to an extent. And then the other point there, Kyle, which we tried to make ad nauseum, is that the BDC and AINB really benefits from the dynamic wherein We're a $2.5 billion fund with an origination for Salesforce that's sourcing for kind of $25 billion of capital. And so the activity levels, even in markets where M&A is more challenged, our position as small relative to the overall business enables us to calibrate our originations and not suffer, and even in periods where M&A might decline.
spk00: And I'll just put a number on one thing. And I think, you know, in the first quarter, meat cap did $4.4 billion of origination. In April, it did $2.2 billion. May will not be as strong as that. But as Tanner said, the activity is pretty similar. The mix may be a little bit different, meaning there may be some more asset-based lending as the market moves a little bit. But, you know, still the velocity is pretty good. That doesn't all trickle through to AI and V, especially when we're at our 1.5 leverage because we're picking our spots differently.
spk15: Yes, that all makes sense. Thanks very much for answering my questions.
spk02: Thank you. Our next question will come from Kenneth Lee with RBC Capital Markets.
spk08: Hi, good morning, and thanks for taking my question. Sounds like you're making great progress on the non-core acid dispositions, and by now, carbon-free is the main remainder there. Just wondering if you could just give us, what's your best sense on a potential timeframe for disposition there? Is that dependent on any kind of milestones or factors? Thanks.
spk15: Dan, do you want me to do it?
spk10: I'm happy to do it. Sorry. Yeah, thanks for the question, Ken. This is, as we've talked about in the past, a company and a technology that we're really, really excited about and one that is squarely in the fairway of the broader, very attractive secular trends around ESG and their carbon capture technology is something that is modular, has had really great traction with companies to date, and we would expect that to only be enhanced in the years to come as that becomes even more of a focus. It is, you know, earlier stage, and I think, you know, in more volatile markets, you know, probably, you know, fewer opportunities for disposition. I think the good news with respect to, you know, amongst many good news, but one very good fact is that The company had raised a convert, and so they have capital to execute on their business plan. But I would think of this as a longer-term hold, 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 It's a very attractive solution to refineries and then the broader industrial complex with regards to its carbon capture technology.
spk08: Very helpful there. In terms of follow-up and impact, looking at impact of rising short-term rates on portfolio companies, would you be able to give us a sense of how the portfolio expense coverage ratio would get impacted if rates were to sharply rise over the near term? Thanks.
spk10: Yeah, sure. And Ken, just to clarify, your question is at the underlying company level or at the AINV level?
spk08: The underlying portfolio company level.
spk10: Yeah, sure. So if we reported the interest coverage First of all, I make the risk of being redundant here. Our solutions and our origination tries to focus on stretch senior and in a more limited way, unit tranche type financing and overall lower levered profile, which is one benefit that we have in terms of our origination and portfolio construction. As of that first quarter, when LIBOR was firmly below the floor, we were at 2.9 times. And so that number would not have any of the effect of anything above 1, but suggests, you know, some really nice cushion as rates 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, LIBOR ultimately outperforms its rising forward curve that's shown on the screen, but we're in a place of pretty good coverage, and again, I think that emanates from the lower lever profile and intentional focus on stretched senior solutions from our mid-cap origination engine.
spk15: Gotcha. Very helpful there. Thanks.
spk14: Thank you.
spk02: Our next question will come from Finian O'Shea with Wells Fargo Securities.
spk09: Hi, guys. Good morning. It's Jordan. I just have two questions for Tanner. They're kind of related, so I'll throw them both out there. It looks like, if I'm looking at this correctly, Merck's wrote down their assets on the Merck's balance sheet. by 47 million for the jets in Russia. Just hoping to get some idea on, you know, whether that reflects basically the full value of those jets or if that's, like, probability-weighted. And then, secondly, on the AIMB balance sheet, Merck's is down, say, 20 million. Does the difference there basically reflect, you know, some probability-weighted assumption of what you'll recover? Just any color you can give on that.
spk10: Yeah, very, very good question. So when we look at the Russia situation, you know, again, distress, you know, we think that our claims are very strong and have merit and fully intend to pursue 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 of probability weighting that you kind of alluded to in your question there. And if you think about it, the value was somewhere in the mid-40s, and we took a haircut to $25 million kind of on a net discounted value. as what we have in our evaluation on those Russia planes in particular, and assume that those proceeds take about two years to come in. And then as it relates to the other movements within Merckx, there were some ins and outs, but outside of that Russia write-down of roughly 20 million, The Merck's portfolio was roughly flat and in line, and that goes to that comment that I made to Kyle's question that, you know, we are seeing some stabilization outside of the Russia-specific situation.
spk00: Let me just jump in. The difference between the two, between the Merck's financial statements and the valuation, is the Merck's write-down of the assets was the full value under GAAP. which is the same thing you're seeing from all lessors. Because under DAP, if you no longer have the asset, you can't have it on the balance sheet. On the same token by DAP, you don't put the insurance claim on the balance sheet as an asset because it has some contingency. So the balance sheet shows the full reduction, but the valuation rules obviously require you to value what your asset's worth. And so Tanner just walked 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 big lessors who have big exposure. They said two things. We've written down our exposure completely, and we expect to recover a lot. That's sort of what you've seen from the industry, and that's what this shows. And we feel like our valuation methodology was relatively conservative versus the strength of our claims.
spk09: Yeah, I would agree. And thank you, guys. That was really good color. So that's it for me.
spk02: Thank you. Our next question will come from Robert Dodd with Raymond James.
spk01: Morning, guys. A different angle on Mercs. I think, Tanner, you said it was the intention to reduce the investment in Mercs by selling down aircraft. Obviously, Mercs has been selling some. I mean... Is the plan essentially to reduce the ownership of aircraft effectively on the AI and the balance sheet to zero, i.e. take the corporate lending book up to 95% plus of all the assets and reduce that? And obviously Merck also does some servicing for some other things. Or... Is there some in-between where you expect Merckx to still be a material, but a decent chunk of the portfolio? Can you give us any color on how big you expect to or how much you expect to shrink Merckx's ownership of aircraft exposure on the BDC balance sheet, if that makes sense?
spk00: Yeah. I mean, significantly, if not completely. Okay. You know, it actually goes to, you know, what Tanner was saying before. The rest of Merck's is actually sort of had sort of, if you will, like recovered, you know, to the extent that there were at least, you know, least problems from COVID. You know, they've been replaced and released and we were in a good spot at the same time that there was like a good market for planes and, you know, feel like there's a good market for assets. Obviously, the Russia creates some noise. both with regard to just the fact that there's those three planes there, but also now one of the assets is an insurance claim. But just putting that aside because it's not that large an amount, our goal is to basically have the assets be very minimal or not a part of the portfolio long term.
spk01: God, I appreciate it. The tough one on that. Any comment you can give us on the time frame for that? Obviously, the way the average life left on a lease is four years, but often it's easier to sell an asset that's still under leased than one that's out. So any comment you can give us on how fast that might occur? I mean, bottom line, obviously, the – The non-core is now very small. Merck is shrinking as well. I mean, what kind of timeframe could we expect here to be reporting, say, just the portfolio is just corporate lending?
spk00: Well, certainly in this calendar year, you should see a significant reduction. There's a question of whether all the assets are sold together or all the assets are sold in their component parts. And there's different securitizations or different pools. If they're sold in their different pools, there's some tax considerations with regard to timing, depreciation versus gain on the planes. And so that could drive some timing issues. And so if you got into the weeds, your eyes would cross. But the answer is that we would like at this time next year, we would expect to be, you know, to be out or to have a view like, you know, to have stuff under contract. I mean, certainly, obviously, as you know, that's no guarantee, and we want to make sure, but we think our valuation's right and constructive. We think there's a market for these planes, and, you know, we're focused on it.
spk15: Guy, I appreciate it, and thank you.
spk14: Thank you.
spk02: Our next question will come from Melissa Waddell with JP Morgan.
spk05: Good morning. Thank you for taking my questions today.
spk04: 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 per share basis and what that contribution was this quarter?
spk15: Yeah. I think, Greg, you have it on per share. I'm going to pull up. I mean, it was about $4.9 million, right, Greg? Yes.
spk00: Yeah, so $4.9 million.
spk11: I think it's $0.06, right?
spk00: Yeah, I mean, it depends. We didn't have an incentive fee this quarter, but presumably that rolls to incentive fee, so it depends how you look at that. But, like, you know, we have said, you know, our expectation for quarters is – for certain quarters or for the average quarter is about $3.5 million per quarter. The last two quarters have been higher than that. I think the one prior to that, which I don't have the numbers, was lower than that. And, you know, hope and think based on this activity that the 3.5 was – $3.5 million is like a low estimate. But if you look at where we generated those fees from, a lot of sort of little and medium-sized fees, you know, based on sort of just, you know, normal turnover of assets. So there wasn't anything, you know, huge or disproportionately large in there.
spk05: Okay, that's helpful. Thank you.
spk04: And then looking at some of the exits that you talked about already at this quarter, is there anything we should be thinking about in terms of sort of above or below or just in line with that, the longer term average of roughly three and a half million? Or would these exits put you sort of, again, north of that level, do you think?
spk00: Yeah, I would stay with the three and a half if only because, you know, there are 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 are – you know, so it could be below, it could be above. It's just not – it's not, you know, just not going to happen right now. Yeah. I mean, Tanner, would you say anything different from that?
spk10: Yeah, and I'd also clarify, you know, a lot of the guidance we gave in terms of sell-down has to do with the non-core. That $3.5 million is really more generated by our corporate portfolio, whether prepayment fee or acceleration of OID to the extent something comes out earlier. And so that number really has to do with normal churn in our corporate lending portfolio and would echo Howard's comment that $3.5 million is a good number to stay with, understanding that it will ebb and flow and some quarters will be above that and some will be below.
spk04: Certainly, okay, appreciate that. And then my last question is around some of the, it's really a capital allocation question. Notice the decrease quarter over quarter in share repurchase activity. You know, taking into account your comments earlier on the call about wanting to take down leverage potentially a little bit at the margin and maybe some better price opportunities on new investments in the market as pricing is impacted by volatility that filters through from the liquid market into the private market. Makes me wonder if your appetite for share repurchase in sort of an outsized way like we saw in maybe the December quarter, if that's reduced a bit?
spk00: It may be reduced a bit, but this past quarter, really, the amount of buyback activity was not really the result of you know, less sort of, it just had to do with, you know, our window being closed longer and having a 10B5 plan doing sort of automatic purchasing at a lower level than when we do when the window's open. You know, we either buy back at our discretion at times, you know, during the quarter, and then at some point the window closes, and it just depends when that occurs. You know, obviously, in terms of sort of weighing, you know, de-levering versus buying stock versus doing the incremental next loan, uh, those things, uh, all sort of, uh, uh, you know, 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, we believe in our nav. And so, uh, uh, we think it's a good 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. Um, uh, and, and, you know, sort of have baited a regular part of what we do, but, um, Yeah, like to just buy back in a huge way. I think where our leverage is and where the opportunities in the market are are not, you know, it's not that likely.
spk14: That's really helpful. Thanks so much.
spk02: Thank you. Once again, that is star one to ask a question. And our next question will come from Ryan Lynch with KBW.
spk13: Hey, good morning. Had another follow-up question on Merck's. Just want to clarify. So I think you said the fair value of the insurance contract is around in kind of the mid-40s million dollars, and you guys have your aircrafts with a value of those aircrafts marked at around $25 million today. Did I get those numbers correctly?
spk00: Yeah, although the fair value is not the right number. The contractual claim, I mean, the fair value of the aircraft was 44. Is that what you're saying previously? And now the claim is 25? That's correct. Okay. The fair value of the claim, the nominal value of the claim is higher than the 44.
spk13: Yeah, so that was my – okay, so that was kind of my point. So is – or my next question, is the – I mean, I'm not as familiar with how these insurance claims work. Is this sort of an event where you guys would expect to get zero or expect to get all of the amount? And so the current value that you guys have it marked at is not correct, and it's going to be either a bifurcated event of either a zero or a pretty big gain in these, depending on how that works. And obviously you guys are just doing a probability of somewhere in the middle, but is that how – we should think about the end result being either a big gain or a big loss ultimately?
spk00: No, I don't think so. I mean, there's multiple insurance policies. The lessee has them, we have them, and then we have, you know, global coverage. So there's multiple claims. And so that creates like a diversity of results. And then add to that the fact that, you know, the more likely result is some kind of settlement below the full face value. if only because we'd want to get the money sooner. I mean, we think we have the right claim, but the big issue is really that if it was just us, we think the claim wouldn't be all that hard, but the insurance companies have so much exposure to the industry that they're going to take a more protracted approach. But it is not binary. It is not by any means binary. I mean, I think our view is sort of like 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 some to end the discussion.
spk13: Okay. Understood. And then just my other question, you know, I know, you know, shipping is becoming a smaller and smaller portion of your portfolio. I don't think you guys are making some progress post-quarter. of reducing that. I'm just wondering, can you give us any, just some background on, on why those that, you know, that, that sector, you know, your exposure in that sector has been weak. I would just think, um, with that sort of the lack of shipping and kind of the need to, to move goods around right now and over the last really several quarters, um, when your guys shipping exposure has also been weak in those quarters, what's the dynamic that that's really been, been hurting those, those investments?
spk12: Yeah, I'm happy to try that.
spk10: So our exposure there, Ryan, is predominantly in product tankers. So think refined oil products, distillates, that sort of thing. And ultimately, the demand for mid-range product tankers in particular has a lot to do with the regional trade and where goods are moving. More broadly also is when you look at The shipping, I don't want to suggest that it's a perfect inverse by any stretch of the imagination, but there is a dynamic wherein when near-term oil is lower and the curves in contango, as in people anticipated it rising significantly, that pulls on supply across the chain and results in a little bit better day rates and charter rates. And an environment like this is a little bit more challenged because there's less demand for storage. Anything that anyone can have, either a barrel oil and or a distillate or refined product, they're trying to sell anywhere they can, owing to what the current prices are. And so that's just one example of a dynamic that creates the ebb and flow in those markets. And then And then the last point there to emphasize is the mark levels that we have on our shifts reflect where we are intending to transact and move the exposure.
spk15: Understood. I appreciate the time this morning. Thank you.
spk14: Thank you.
spk02: We have no further questions in the queue at this time, so I would like to turn the call back over to our speakers for any additional or closing remarks.
spk00: Thank you, operator. Thank you, everyone, for listening to today's call. On behalf of the team, we thank you for your time today. Please feel free to reach out to any of us if you have any other questions. Have a good weekend.
spk02: 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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