Apollo Investment Corporation

Welcome to the earnings conference call for the period ended June 30, 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 that time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, please 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 Widra, Executive Chairman, Tanner Powell, Chief Executive Officer, and Greg Hunt, Chief Financial Officer. Additional members of the management team are on the call 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 that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our press releases. I'd also like to call your attention to the customary Safe Harbor disclosure in our press releases 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. In connection with today's announcements, we will be launching a new website next week, which you will be able to find at www.midcapfinancialic.com. We have posted 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'd like to turn the call over to our Executive Chairman, Howard Widra.

Howard Widra Thanks, Elizabeth. Good morning, everyone. Earlier today, we issued two press releases, our quarterly earnings press release and a second press release which details several important strategic announcements which we believe greatly enhance 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. Tanner will then 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'll then open the call to questions. Let me begin with today's announcement, which underscores Apollo Global Management's commitment to investor alignment, product innovation, and being at the forefront of the democratization of finance. These announcements reinforce the BDC's position as a pure play senior secured middle market BDC, providing public shareholder access to institutional quality private credit at a best-in-class fee structure among listed BDCs. The BDCs will continue to invest almost exclusively in senior secured loans sourced by MidCap Financial, one of the world's leading middle market lenders. As you know, over the last several years, we have shifted the BDC's portfolio into first lien corporate loans primarily sourced by MidCap Financial. and away from junior capital and non-core positions. At the end of June, investments made pursuant to our co-investment order, which are primarily loans originated by MidCap Financial, represented approximately 85% of our corporate lending portfolio at fair value. Let me take a minute to remind everyone about MidCap Financial, which I co-founded in 2008. MidCap Financial is privately held by institutional investors and managed by Apollo Global. Over the last 12 months through the end of June, MidCap Financial originated over $21 billion in new commitments, including $4.7 billion in the June quarter. MidCap is headquartered in Bethesda, Maryland, has 12 offices globally with approximately 250 employees. The company is 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 to be in a unique position to have access to loans sourced by MidCap Financial, given the strategic relationship between MidCap Financial and Apollo Global. Historically, MidCap Financial and Apollo as its manager have predominantly originated assets on behalf of U.S. pensions and other global institutional investors. To support the senior secured investment strategy, our board and investment advisor have established what we consider to be the industry-leading fee structure among listed BDCs. The new fee structure reduces management fees by approximately 50% to the lowest rate among listed BDCs. In addition, the base management fee will now be calculated on equity 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. Mid-cap financial originates a significant amount of senior first lien loans that were previously below the BDC's target yield, which will now make sense for the BDC given its lower cost of capital. Specifically, the BDC's base management fee has been permanently reduced to 1.75% on equity, down from the equivalent of approximately 3.4% on equity. In other words, the base management fee expressed in terms of gross assets has been reduced from approximately 1.4% on assets to the equivalent of approximately 75 basis points on assets. The incentive fee on 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 or catch-up provision. The incentive fee on capital gains has also been permanently reduced from 20% to 17.5%. The changes to the fee structure will be effective for the period beginning January 1, 2023. Moving on, we're pleased to announce that MidCap Financial has made a $30 million primary aligning equity investment in the BDC at net asset value, representing a significant premium to the current trading price. The BDC will issue approximately 1.93 million shares in connection with this transaction, which will be subject to a minimum two-year hold period. This investment serves to, first, validate the value of the BDC senior investment strategy. Second, provide the BDC with dry powder to invest in loans sourced by MidCap Financial. And third, create a strong alignment of interest between MidCap Financial and the BDC's performance. Pro forma for this investment is, MidCap Financial will own approximately 3% of the BDC's common stock. In connection with today's changes, the BDC has elected to change its name from Apollo Investment Corporation to MidCap Financial Investment Corporation, which reflects the BDC's investment strategy of 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 today's call, in order to avoid confusion, We will refer to the BDC as either the BDC or as MFIC, and we will use MidCap Financial to refer the lender headquartered in Bethesda. The BDC's ticker will be changing to MFIC. The name and ticker changes will be effective on or around August 12th. Moving on to senior leadership promotions, I'm pleased to announce that Tanner Powell, who has served as president of the BDC since 2018, has been promoted to chief executive officer, taking my place in that role. I have been named executive chairman of the board. John Hannon, who has served as chairman since 2006, will now serve as vice chairman. I will continue to serve as Apollo's global head of the direct origination and will remain involved in the day-to-day management of MFIC. Ted McNulty, who is 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 of experience 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's chief legal officer since 2011, was promoted to a new role as partner in Apollo's United States Financial Institutions Group. These promotions recognize the valuable contributions made by Tanner, Ted, and Kristen over the years. We are very excited about today's announcements, which will allow us to capitalize on the benefit of MidCap Financial's leading middle market direct lending platform, and which we expect will generate attractive risk-adjusted returns for shareholders. Next, moving to a summary of our results, net investment income for the June quarter was $0.37 per share, which reflects lower fee and prepayment income, partially offset by 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 $0.28 per share, on the portfolio during the quarter. We ended the quarter with net asset value per share of $15.52, down 27%, or 1.7% quarter over quarter. We repurchased some stock during the period below NAB, which had a $0.01 per share accreted impact. Let me now switch our focus to our distribution. Given the progress we have made repositioning the portfolio, combined with the Combined with the forthcoming reduction in our fee structure, we are raising our quarterly base dividend from 31 cents to 32 cents per share payable to shareholders of record as of September 20th, 2022. 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 over to Tanner 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 a 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 of execution 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 were $100 million in leverage lending, approximately $80 million in life science lending, and the remaining $15 million in 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 4.9 times. 97% of new commitments were made pursuant to our co-investment order. Excluding revolvers, gross fundings for the quarter totaled $165 million, and 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 1.58 times. Adjusting for net paydowns post-quarter end, including a $15 million cash paydown from Merckx, 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 1.45 times. As discussed on our last conference call, we intend to accelerate the reduction of our investment in Merckx by selling aircraft and de-emphasizing its servicing business. As you know, Merckx 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, AI&V's investment in Merckx had a fair value of $284 million, representing 11% of the total portfolio. During the June quarter, Merckx sold three aircraft, reducing the number of planes in the fleet from 65 to 62. We expect our investment in Merckx, as well as the income we receive from Merckx, to decline each quarter going forward. At the end of June, two additional aircraft were under purchase agreement, including the freighter and 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 planes owned by Merckx. Turning to the overall portfolio, our investment portfolio had a fair value of $2.55 billion at the end of June across 140 companies and 27 industries. Corporate lending and other represented 89% of the portfolio, and Merck's represented 11% of the portfolio at fair value. 94% of the corporate lending portfolio was first lien. The weighted average spread on corporate lending was 611 basis points as of the end of June. Our portfolio companies generally continue to experience strong fundamental performance. While not immune from the impact of inflation, we believe our companies are generally able to pass through most, although not all, of higher input costs they are seeing. We believe our portfolio is generally weighted towards industry that are less impacted by inflation and supply chain issues. Moving to credit quality, our credit metrics remain very favorable. At the end of June, the weighted average net leverage of our corporate lending portfolio was 5.45 times, a slight increase quarter over quarter due to the repayment of lower leveraged assets and the impact of funding delay draw term loans. The weighted average attachment point was 0.2 times, and the weighted average net leverage Weighted average interest coverage ratio was 2.8 times. No investments were placed on non-accrual status during the quarter, and our investment in Glacier Oil and Gas was restored to accrual status and also repaid $4.5 million to the BDC during the quarter. Glacier continues to generate strong cash flow to support the small loan balance, which is now less than $4 million. At the end of June, investments on non-accrual status totaled $9 million, or 0.3% of total portfolio 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 AINB's statement of operations, total investment income was $53.4 million for the quarter, down 2.4 percent quarter over quarter. Recurring interest income rose due to the impact of higher base rates, along with returning Glacier Oil to accrual status. Free payment income was $1.9 million. down from $3.8 million last quarter to the lower quarterly prepayments. Correspondingly, fee income was approximately $500,000, 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 7.7% at the end of March. The increase in the yield was primarily due to higher base rates as the weighted average spread on the portfolio remained at 611 basis points. 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 interest rate. As a reminder, AI&V's incentive fee on income includes a total return hurdle with a rolling a 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 per share was $0.37. During the quarter, we recorded a net loss of $17.8 million or $0.28 per share on our portfolio. The vast 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 by strategy over the past five quarters. NAV per share at the end of June was $15.52, a 1.7% decrease quarter over quarter. The decrease is primarily attributed to the net loss in the portfolio, partially offset by 1 cents from investment income relative to the district. Moving on, we were pleased that Kroll affirmed our investment grade rating and stable outlook in July. Our liquidity position remains strong with undrung revolver capacity, well in excess of unfunded commitments to borrowers. Consistent with our historical cadence, we expect to amend our revolving credit facility in the fall. We are well-positioned to benefit from rising interest rates. Based on quarter-end rates, we estimate that 100 basis points and a 200 basis point increase in reference rate will result in annual incremental earnings of approximately 12 cents and 25 cents, respectfully. Regarding stock buybacks, during the quarter, we repurchased approximately $1.6 million worth of stock, which leaves $29.2 million available authorization under for future stock repurchases. This concludes our prepared remarks operator and please open the call.

Certainly not this time. If you would like to ask a question, please press star one on your touch tone phone. You may withdraw your question at any time by pressing the pound key. Once again to ask a question that is star and one and we will take our first question from Kenneth Lee with RBC capitals. Please go ahead. Your line is open.

Hi, good morning, and thanks for taking my question. In terms of the announcement on the strategic investment as well as a potentially shifting investment strategy, what are your expectations for future ROE or expected targeted returns based on the new secret secured loan investments? Thanks.

Yeah, so first I'd say, like, it's not really a shifted investment strategy. It's really sort of, you know, a – a demarcation point where we think the investment strategy is sort of the, you know, really the story going forward as we exit out of non-core and sort of we're moving away from Merck. So the investment strategy is the same. It's just there's a broader set of loans that may meet our criteria. You know, the ROE, I would say, you know, if you just took an apples-to-apples approach and said, you know, the lowering of the fees and everything else stays neutral, you'd have an increase of the ROE of like 2%. So if you assume some, you know, reduction in yield and some reduction in leverage from where we were now, you're talking about an increase of the ROE from, you know, the low 8s to the low 9s, you know, 10% increase in ROE, sort of like as a base case. Obviously, there's moving parts right now, including, you know, rising interest rates, which should raise everything. But just on an apples-to-apples basis, it should be around a 10% increase in the ROE. Gotcha.

Gotcha. Very helpful there. And one follow-up, if I may. You talked about having some visibility in your term paydown. Just wondering if you could just give a little bit more details behind that. Thanks.

Yeah, I think, you know, Kenneth, thanks for the question. I would point you to the Guidance we gave in terms of the, you know, approximately 1.45 leverage, we had a number of things slip. And then also, as we alluded to, knowledge of the mid-cap strategic investment, aligning equity investment being made, you know, were a little bit higher at the end of the quarter. But use that 1.45 as guidance there. Great. Very helpful.

Thanks again.

And we'll take our next question from Kyle Joseph with Jefferies. Please go ahead. Your line is open.

Hey, good morning. Thanks for taking my questions. A lot going on, so apologies if I ask anything you guys covered. Just focusing on repayment activity, obviously that came down, impacted fee income. Can you give us a sense for, and I know you talked about near-term repayments there, but just for the kind of the remainder of the year, you know, is that really a function of rates or volatility, recognizing those go hand in hand, and 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, is objectively M&A volume activity is down, and that, you know, certainly affects us in terms of level repayments, and so All things being equal, would expect more muted activity in the back half of the year, absent some, you know, some of the prepayments that we alluded to in our prepared remarks.

Got it. And obviously, credit remains sound right now. You know, what's the outlook here in terms of, you know, with inflation? How are companies adapting to rising rates and kind of what are your expectations for credit for the remainder of the year and then for the market more broadly into 23?

Yeah, sure. And as we endeavor to do each and every quarter, you know, we look across all our portfolio companies, both at MSIC and MidCap more broadly. And in the most recent quarter, when we take a composite of the roughly 90 companies that we have in our leveraged loan book, it was showing us low double-digit revenue growth and kind of mid-single-digit EBDA growth, indicating what we saw in the last quarter as well, supply chain challenges and labor costs and resident costs going up. have affected our companies. We would note, obviously, in a lot of cases, there's a lag to recover. And then also the data, Kyle, as you know, relates more to the March quarter and so would expect those challenges to continue. That said, in aggregate, do feel, in terms of our underwriting, our detachment on where we're financing these companies, and the equity cushion that we have from the sponsor investment behind us that credit will hold up and that we've created the credit risk at a good place to weather any continued or more pronounced volatility going forward. Got it. Thanks very much for answering my questions.

And we'll take our next question from Melissa Weddle with JP Morgan. Please go ahead. Your line is open.

Thank you. Appreciate you taking my questions today. A few of them have already been asked, but I was hoping that we could walk through, elaborate more perhaps on how you're thinking about leverage in the context of an increasing shift to, you know, the first lean strategy that might have a bit of a lower yield. it sounds like you're not changing your target range on leverage. But I'm wondering if, I guess one, is that the case? And then two, do you have, is there any shift in your thinking around where you'd like to run within that range in the context of the current environment and more alignment with the mid-cap strategy?

Yeah, look, I mean, so a couple things. Like the Our leverage, as we talked about, I think, repeatedly over the last few years, we felt like was not particularly as aggressive as perceived because of the first lean focus of our book and the attachment point. Obviously, we expect to even go further in that direction given our cost of capital. That said, I think, you know, feedback we've gotten from all the constituencies is that that is not, you know, is sort of not a complete agreement with that. And so I think, you know, whether we're moving our range or not, you know, I would say either you can look at it as moving our range down some or expecting to operate like in the 135 to 15 range as opposed to what we articulated before is 14 to, you know, 16. And so, you know, our expectation is to operate around that 1.4, 1.4.5 range, which is, you know, what Tanner said before. So I would say that we are, you know, leaning towards lower, even though the profile of our book will get more conservative. And, you know, look, we've made a lot of changes here with a goal towards this being, you know, a – hopefully a relatively unique investment for individual investment available amongst BDCs. And one of the keys to that, obviously, is to have a, you know, 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.

Yeah, and the other point of emphasis there would be that, you know, with our new cost structure, which is, on our management piece on equity, you know, we think that also enhances the alignment. But Howard's points about, you know, taking the feedback from all constituencies are well understood and also go to our thinking as we approach leverage going forward.

Okay. I appreciate that. Thank you. And I guess as a follow-up, It would be helpful to understand if there's any real change in the way that your team will interact or engage with the mid-cap folks. Could we dig a little bit deeper there? Is this just additionally leveraging more opportunities from that platform? Are there some sort of inside baseball changes in terms of the team vetting, selection, things like that?

No, no inside baseball changes to the way things will operate. And just to sort of understand how it operates, Apollo is the manager of MidCap and is the manager of MFIC. And I am the primary portfolio manager for MidCap and have been since inception. And You know, Tanner is effectively the primary portfolio manager for AINV or MFIC and will continue to be. Obviously, like Ted, will take a larger, broader role, but he's already had a pretty important and broad role before. And the only inside baseball sort of there is is Tanner moved to Bethesda about 18 months ago, 12 months ago, 18 months ago. And so his day-to-day connection to everything we do at MidCap has been more since then, but that has nothing to do with these changes.

Thanks, Howard.

And we'll go next to Ryan Lynch with KBW. Please go ahead. Your line is open.

Hey, good morning. The first question I had was, you know, I would just love to hear, because I know you work closely with MidCap in the past. I would just love to hear kind of a ballpark of what percentage of deals historically at AINV could participate in kind of the MidCap deal flow, because I knew there were some lower-yielding loans that wouldn't necessarily fit into AINV. So what sort of deal flow percentage, rough ballpark, could you guys participate in historically with mid-cap? And then with the new fee structure, what sort of change would you expect from more access from deals from mid-cap?

Well, so generally overall, like mid-cap originates through a variety of assets, some which are, you know, don't fit BDC mandate anyway, like real estate. You know, so a percentage of the overall mid-cap deals, but so let me just sort of, you know, narrow the field a little bit and say the percentage of deals related to, you know, the products, which is a lot of them, but the products that mid-cap originates that fit. So let's say leverage loan, life sciences, asset-based lending, you know, and effectively, you know, and there's in the ballpark of 100 or 120 deals a year that close in those categories. And so we can slice it and dice it in a bunch of ways, but it about doubles the amount of deals available in those categories that are sort of now available. And so really almost everything mid cap does in those categories is available. The ones that don't end up being sort of relevant are the smaller ones. Because there's some asset-based loans that are too cheap, but for the most part, it's just smaller deals. Once they're divided up the allocations based on sort of the size of the, you know, the relative balance sheets is small that it doesn't, it doesn't make sense from like a cost valuation, all that perspective, but it's the vast majority of what mid cap does 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 is yield or spread, because obviously the industry rate is, is it's been accelerating higher, but, Is there a meaningful change of what you guys are expecting or willing to put on the books going forward or when this new fee structure goes into effect from a yield or spread standpoint versus what you've done historically, just because obviously this gives you more flexibility from a spread or yield on new loans than you have done historically. So I'd just love to hear if there's what sort of changes we should expect from that standpoint.

So as we started first penciling this out, I guess what I would say is, and I'll caveat this afterwards, is that, you know, having the overall spread to our book go down about 35 basis points would have, meaning like from 610 today to 575 or something like that, would have basically split the difference between the shareholders and the lower spread. And that seemed to make sense. And so that's average spread on the portfolio. That said, we don't expect that to happen right now because spreads are widening. lot you know and so forget it forget the base rate going up that's a separate issue but spreads are widening and and and if we go into a recession or even like a contraction we would expect rates to continue or spreads to continue to be higher especially because there'll be more asset-based loans with higher yields and we'll have an opportunity to grow that category so I 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 by our reduction, if you will. But we had originally been comfortable with about thinking that the book would sort of average down 25, 35 basis points.

So it could have went down 25, 35 basis points, but just for spreads are going at that probably won't happen in the near term.

Right.

Um, and then just lastly, and it doesn't sound like this, this changes much, but I'd love to just hear maybe mid caps, um, positioning, obviously, you know, the upper middle market has been, uh, has been, you know, a really growing space, uh, w w with, you know, BDC is participating in that marketplace. Um, you know, obviously, broader Apollo has Apollo debt solutions, which participates in that area a lot. Does this change the BDC's ability or willingness to participate in that upper middle market space and co-invest with Apollo debt solutions, or is that something that we don't expect to change? Is that something that MidCap is not really interested in?

No, I don't think you'll see a change. I mean, I think There is overlap, synergy, something, whatever you want to call, in deals between $50 and $125 million of cash flow. The origination into the sponsor channel is combined between sort of Apollo's focus on the very largest sponsors and sort of the mid-cap team on almost all the rest of the sponsors. And so when there's execution in the middle of those ranges to spending on those sponsors, you know, there can be shared underwriting, there's certainly the option for each BDC to participate in the deals that, you know, that the others might do. So, for example, at ADS, you know, if there is a company with $70 million of EBITDA on the deals five times, so it's a $350 million deal, and that's being done by MidCap and AINV and a bunch of our managed accounts, there's a very good chance ADS will be part of that. By the same token, if there's a sponsor we have a strong relationship with, especially if it came through our channel and it's got $100 million done at six times, or I don't know, say $125 to $750 million deal, that is more core to ADS's strategy. We could potentially do a portion of that at AI Envy as well. But we will tend not to. Not for any reason other than it's not sort of core strategy. And lastly, I'll say there are always loans, very many, that grow, that are in mid-cap and AID and then grow to the size that get bigger and bigger and get refied, and we will always continue to grow with the companies we know well because those are sort of profitable and sort of generally, you know, you know the credit. So nothing has changed. There is communication and sort of overlap, the Venn diagrams overlap, but for the most part, they'll be separate. And I think you'll see, I'm totally making this up right now out of school, but maybe 10% overlap of assets. Okay.

All right. I appreciate you taking my questions and also very much appreciate the reduction in the fees and the overall just better alignment with the shareholders to execute the strategy. Thanks.

And we'll take our next question from Robert Dodd with Raymond James. Please go ahead. Your line is open.

Hi, thanks, and good morning. And Ryan just asked the vast bulk of my questions. So I do have another one. On the supplemental dividend program that you did have in place, obviously you've increased the base dividend this quarter, looking at expanding our LOE, which if you're already covering the base dividend, I think you're going to have excess earnings. I mean, can you give us any color? Obviously, no supplemental declared this quarter. The 32 is is appropriate at this point. The new fee structure doesn't kick in until January. But, you know, any color on what the plan would be with any excess earnings above the base dividend under the new fee structure versus you had kind of previously the supplemental program. Is that likely to be reinstituted or any color there?

Yeah. So, you know, previously we had said we will declare a supplemental, you know, pretty much equal to the amount above our base dividend each quarter. You know, with these changes, as well as the interest rate changes, we have significant room to both, you know, to over on the core dividend and really sort of over time. And so we think Over time, as Merck's plays through and these changes go through, we have the ability to raise the base dividend over time, and that's our goal, to continually do that. And we also think there will be substantial supplemental dividends, whether they're declared once a year and paid over four quarters or declared over each quarter will sort of really depend on both where our spillover is, of which we have a substantial amount right now, and where the earnings were. So the answer really is yes, we expect there to be meaningful supplemental dividends paid because we're covering, we're not going to pay the excise taxes, we're going to distribute to stay in compliance. So you're right, there's quite a bit of room, but we just effectively what we did is we raised the base dividend and we got rid of sort of the you know, our standing promise that we will distribute at least five cents 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.

And once again, as a reminder to ask a question today, that is star and one. And we'll go next to Derek Hewitt 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. So based on the forward curve and kind of given the comments on the overall, I think you had mentioned the mid-cap portfolio EBITDA growth, could you comment on interest coverage and how high benchmark rates would need to rise before debt service coverage increases? or I guess interest coverage would trend closer to one times versus the 2.8 times today?

Yeah, sure. I might need to follow up with the specifics, but as we said in our prepared remarks, we're at 2.8 times. And then that test, when we run it through our portfolio companies, we're actually using actual interest expense historically. And As you probably know, the LIBOR contracts are set, you know, kind of especially in a rising environment, rising rate environment like we've seen, you know, they're set, you know, in advance of the particular period. And so, you know, right now we're at 2.8 times, and that reflects, you know, kind of, you know, probably on average three months ago LIBOR, which was as opposed to the 2.8 that we see today. something more like, you know, sub two or kind of in the mid ones. And so it would have to be, you know, in excess of 100, 150 basis points, but we can do that math and revert. But a lot of cushion there, 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, you know, we are you know, deploying into lower levered enterprises and thus, you know, better equipped to deal with the increase in interest rates.

Okay. Thank you for that. And then just in terms of, I might have missed this earlier, but in terms of portfolio, the BDC portfolio overlap, excluding Merck's, what portion of the BDC portfolio is also kind of co-invested with MidCap?

Yeah, 97%, 98%. Okay. Got it. Darn near 100, yep.

Okay, great. Thank you.

And we'll take our next question from Finian O'Shea with Wells Fargo. Please go ahead.

Hi, everyone. First, a follow on Melissa's earlier question. I think you said, there's no changes on the inside. But can you bridge us to 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?

Sure. I mean, MidCap has, you know, a economic relationship with Apollo as its manager. And so as part of that, you know, as part of that aligning investment, you know, we take into account the overall economic relationship with Apollo, which is sort of adjusted all the time. As an example, you know, we have taken great pains to ensure that all origination that's done anywhere at Apollo, including MidCap, AINV or, you know, MFIC now gets full economics on those deals, despite the fact that there have been, you know, other BDCs that have kept profits at the manager. The way that has been trued up before is that Apollo has paid for some of that origination, you know, paid mid-cap at the manager, right? It's like something that would be irrelevant effectively to the AINV shareholders other than they're getting full economics. And so, you know, we are, you know, the sort of the strategic and economics relationship with MidCap and Apollo was sort of broad and complicated. And this is an important strategic investment for MidCap because the growth of AINV is really important to growing MidCap's footprint and Apollo's footprint across the whole middle market. And so our goal is really for AINV to grow. And so it's sort of like it it makes sense strategically, but there's also sort of lots of economics that are unrelated to, you know, this investment between the two parties.

Great. That's really helpful. And then just expanding on somewhat you said there, I was going to ask about future growth potential and, you know, in the event this and, and future better performance might drive you above net asset value. Can you talk about what you're, capital formation or raising plans would look like. There are a lot of models out there on periodic secondaries, on private to public, or sorry, yeah, private to publics. And some keep their shareholder bases very tight, just sort of where you would fall on the spectrum. Any sort of initial thoughts?

Yeah, I mean, I think, you know, we think the opportunity to invest in assets of this quality is much larger than AI&B's capital base right now. So we think that there is an opportunity for people to drive good returns for the capital that would invest at NAV or well above NAV, meaning we're confident in our dividend and our ability to sort of cover that well and grow it and pay supplementals as we've talked about before. You know, obviously we're also conscious, though, of our current shareholders and being able to sort of, you know, drive upside for them as well. The interesting thing is for us, those things don't conflict right now, and that's because, you know, we still have a little bit of a drag on our earnings, you know, of sort of some of the old 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 accretive in and of itself, even to the existing shareholders. So the answer is we would expect to, you know, grow our capital if we traded, you know, enough above NAV to sort of, you know, to support that because we just think that, you know, the opportunity is there. As you can see from the amount of origination coming through mid-cap and now the amount that the pie has increased.

Sure. Very helpful. Thanks for taking the questions and Appreciate all the progressive moves you all made.

And our last question will come from Sid Dev with Red Deer Investments. Please go ahead.

Hi, thanks for the questions, and congrats on the overall positioning reset. So two questions, first on leverage, and second, kind of following up on that broader fit within the Apollo ecosystem and growth goals. Is 1.35 to 1.5 versus 1.4 to 1.6 really just splitting hairs given, you know, how MidCap levers its own loan portfolio at a very different 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. And then second, given the dependency you mentioned on trading at or above NAV to raise equity capital, Is this the best vehicle to sort of give access to middle market loans to third-party investors given, for example, ADS has raised, I think, somewhere around $2 billion within six months in the non-traded REIT channel? And how is your thinking around that limitation of always having to trade at or above NAV to grow and align with doubling yield over time for Apollo?

Yeah, well, so the first question with regard to leverage is that, you know, our discussion with regard to risk related to leverage is that 1.5 times, 1.6 times, 1.4 times, it is all splitting hairs. It's all based on leverage, you know, within the AAA or AA of the CLOs of this pool of loans, if we CLOed it. And right, a mid cap is leveraged higher. And so from a risk perspective, we always felt like, you know, that's very safe. The issue is we can't lever you know, 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 move and things get marked. And so that's where we're talking about outside constituencies like the rating agencies. And, you know, and the analyst investors are comfortable with, you know, with more room. So from that perspective, it isn't splitting hairs because our, you know, our discussion is fine. You know, 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 so we don't have, like, the concentration risk of those type of marks so we can be at the high end of the range that people are comfortable with for BDCs. So moving that range down I think is meaningful because it shows that we want to be at the point where everybody's 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 have liquidity but less liquidity. They raise money at the NAV as it's marked at each quarter with fees. You know, they have different fee structures, which are better in some ways and not better in others. And so this is, I would say, you know, it's a real focus of Apollo overall, you know, this theme of democratization of finance and making the assets available as broadly as possible. And these changes make this an investment, I think, for individual investors who want access to these type of assets. Given the pros and cons, you know, the daily liquidity, you know, it gives people another option, which is actually fairly good. You know, because you're compared to the private BDCs, but if you compare it to, like, investing in mid-cap, individuals can invest in mid-cap, period. You know, individuals actually can't invest in sort of, you know, either commingled or SMAs that take those assets. You know, you need large checks and you need to be institutional. So 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, you know, 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 ten years, it's to grow assets there. and grow assets, obviously, asset managers want to grow assets, but grow assets in a way that, you know, allows the broadest set of people to access them. And this is a really sort of, you know, good way, we think. So hopefully that answers the question.

Yeah, perfect. Thank you so much, and thanks for the good work as the CEO over the past five years.

There are no further questions at this time. I'll turn the call back over to the management for any closing remarks.

Thanks, and thank you, everybody, for listening to today's call. On behalf of the team, thank you for your time today. Feel free to reach out if you have any questions.