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.