MidCap Financial Investment - Earnings Call - Q1 2020

Transcript

Speaker 0

Good afternoon, and welcome to the Apollo Investment Corporation's Earnings Conference Call for the period ended June 3039. At this time, all participants have been placed in listen only mode. The call will be opened for a question and answer session following the speakers' prepared remarks. I will now turn the call over to Elizabeth Mason, Investor Relations Manager for Apollo Investment Corporation.

Speaker 1

Thank you, operator, and thank you, everyone, for joining us today. Speaking on today's call are Howard Widra, Chief Executive Officer Tanal 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. Forward looking statements involve risks and uncertainties, including, but not limited to, statements as to our future results, our business prospects and the prospects of our portfolio companies. You should refer to our registration statements and shareholder reports 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 Howard Widroff.

Speaker 2

Thanks, Elizabeth. I will begin today's call by providing a brief overview of our financial results for the quarter, followed by an update on the execution of our investment strategy. I will then discuss a couple of additional business highlights. Following my remarks, Tanner will discuss the market environment, our investment activity for the quarter and also provide an update on credit quality. Greg will then review our financial results in greater detail.

We'll then open the call to questions. Let me begin with an overview of our financial results. Net investment income for the quarter was $0.50 per share, which reflects strong net investment activity, the impact of an investment being restored to accrual status as well as the impact from the total return feature in our incentive fee structure, which resulted in no incentive fee paid for the quarter. Net asset value per share was $19 at the June, down 0.3% quarter over quarter. The slight decrease was due to net loss on the portfolio, partially offset by net investment income in excess of the distribution as well as the accretive impact from stock buybacks.

The net loss in the portfolio was mostly attributable to our non core legacy assets. New commitments for the quarter totaled $451,000,000 We often talk about the importance of scale as a lender, particularly in today's competitive market. I wanted to provide you with a couple of data points, which show that AINV is part of a much broader platform that is able to compete with other major market participants. For the quarter, the Apollo direct origination platform made over $3,500,000,000 of new commitments and currently manages more than $20,000,000,000 in middle market lending commitments across a variety of Apollo managed vehicles and accounts. The scale of the platform allows AINV to participate in larger commitments while maintaining relatively small hold sizes.

Net investment activity was strong during the quarter. Net funding totaled $215,000,000 increasing our net leverage to 1.03x at the end of the quarter. Our current pipeline is healthy, and we currently expect our net leverage ratio to be over 1.1x by the September. I will now highlight some of our portfolio metrics, which we believe demonstrate how we are prudently growing our portfolio with safer, lower yielding loans following our adoption of the lower asset coverage requirement. Our corporate lending portfolio grew by approximately $272,000,000 or 18% quarter over quarter.

Our core portfolio, which includes corporate lending positions and Merx, represented 83% of the total portfolio at the June, 68% in corporate lending and 15% in Merx. 71% of the corporate lending portfolio is in first lien investments, up from 65% last quarter and compared to 46% a year ago. 99% of the corporate lending book is in floating rate debt investments. Although asset spreads for the quarter declined, the portfolio's weighted average net leverage and attachment point continued to improve. We also continue to take advantage of our ability to co invest with other funds and entities managed by Apollo, which allows us to participate in largest deals, which are typically less competitive.

Investments made pursuant to our co investment order increased to 67% of the corporate lending portfolio at the June, up from 63% last quarter and compared to 41% a year ago. We continue to deploy capital in life sciences, asset based lending and lender finance, areas with significant barriers to entry and in which MidCap Financial has expertise. These three niches now represent 14.2% of the portfolio at the June, up from 13.5% last quarter and 8.9% a year ago. We also continue to proactively manage position size and concentration risk. Regarding Merx, as discussed on previous calls, our strategy includes reducing our exposure in Merx to 10% to 15% of the total portfolio.

During the quarter, Merx repaid AINV approximately $46,000,000 on a net basis, reducing AINV's investment in Merx from $425,000,000 to $381,000,000 or from 17.7% of the total portfolio to 14.5 percent within our target range, and we expect to continue to further reduce our exposure. Additionally, we continue to make progress reducing our exposure to noncore and legacy assets. During the quarter, we received a small pay down from both Pelican and Glacier, two of our oil and gas investments. We remain focused on prudently exiting our remaining noncore positions. Noncore and legacy assets represented 17% of the portfolio at the June, down from 19% at the March.

Moving on, the equity market did present us to what we believe was an attractive opportunity to repurchase our stock. We consider stock buybacks below NAV to be a component of our plan to deliver value to our shareholders. We typically repurchase shares during both open window periods and we generally allocate a portion of our authorization to a 10b5 plan, which allows us to repurchase stock during blackout periods. Since the inception of our share purchase program and through the June, we have repurchased $186,000,000 or 13.9% of initial shares outstanding, which has added approximately $0.62 in the average share. Since the end of the June, we have continued to repurchase stock.

The company currently has approximately $61,800,000 available for stock repurchase under the current authorization. We continue we intend to continue to repurchase our stock should it continue to trade at a meaningful discount to NAV. Turning to our distribution, the Board has approved a $0.45 per share distribution to shareholders of record as of September 2039. Lastly, the company held its Annual Shareholders Meeting earlier today. We greatly appreciate the support of our shareholders.

With that, I will turn the call over to Tanner to discuss the market environment and our investment activity for the quarter.

Speaker 3

Thanks, Howard. Beginning with the market environment, the volatility at the 2018 impacted syndicated loan issuance activity for much of the 2019, and consequently, more borrowers sought private debt solutions, particularly given the significant amount of capital. The private debt market saw a pickup in deal flow during the quarter compared to the first quarter but was still slow by historical standards. As always, the environment remains competitive as direct lending funds continue to raise capital. In the secondary market, loan funds continue to experience outflows due to the expectations about interest rate cuts.

During the quarter, our investment activity focused on first lien floating rate corporate loans sourced by the Apollo direct origination platform. New investment commitments and fundings were $451,000,000 and $312,000,000 respectively. New commitments were comprised almost entirely of first lien floating rate loans. These new commitments were across 25 companies for an average commitment size of $18,000,000 The weighted average spread over LIBOR of new commitments was five fifty two basis points, within our target range of 500 to 700 basis points for incremental assets. The weighted average net leverage for new commitments was 4.7x, within our target range of four to 5.5 times.

Lastly, 96% of new commitments were made pursuant to our co investment order. Sales totaled $10,000,000 and repayments totaled $67,000,000 for total exits of $76,000,000 resulting in net funded investment activity of $236,000,000 excluding Merx and revolver activity. As Howard mentioned, we received modest repayments from a few non core and legacy investments, including a $1,000,000 repayment from Square two, a $2,000,000 repayment from Glacier Oil and Gas and a $900,000 repayment from Pelican Energy. In addition, net fundings on revolvers totaled $25,000,000 and we received a net repayment of $46,000,000 from Merx. Net fundings totaled $215,000,000 including Merx and revolver activity.

Now let me spend a few minutes discussing overall credit quality. As previously mentioned, our second lien investment in Sprint Industrials was restored to accrual status during the quarter. Sprint is a rental provider of liquid and solid storage tanks and safety equipment to refinery, petrochemical and industrial customers along The U. S. Gulf Coast.

Sprint primarily serves downstream and midstream customers. The company commenced the sale process earlier this year and recently sold one of its two businesses and is under contract to sell the remaining business this quarter. As a result of the sale process, we expect to receive a full recovery of interest and principal on our investments. Moving on, our first lien debt investments in KL Outdoor were placed on nonaccrual status during the quarter. KL Outdoor is a designer and manufacturer of recreational outdoor products, including kayaks, canoes, pedal boats, fishing boats, paddleboards and fishing blinds.

The company has underperformed due to lower customer demand, consolidation challenges and higher costs. At the June, investments on nonaccrual status represented 1.7% of the portfolio at fair value, down from 2.4% last quarter and 2.5% at cost, down from 2.9% last quarter. Moving on to our credit metrics. The weighted average asset spread on the corporate lending portfolio decreased 27 basis points to 6.86%, down from 7.13% last quarter compared to five fifty two basis points for new commitments. The weighted average net leverage of our investments decreased from 5.54 times to 5.43 times and compared to 4.7 times for our new commitments.

And the weighted average attachment point of the portfolio declined from 1.9x to 1.7x. The average interest coverage remained at 2.4x. We view this trade off of yield for credit quality as a positive at this point in the credit cycle. With that, I will now turn the call over to Greg, who will discuss the financial performance for the quarter.

Speaker 2

Thank you, Tanner. Beginning with the income statement. Total investment income was $66,500,000 up from $61,400,000 for the March, an increase of $5,100,000 or 8.3%. The increase was due to higher interest income and prepayment income, partially offset by lower dividend and fee income. Interest income rose $8,800,000 quarter over quarter due to our investment in Sprint Industrial being restored to accrual status and higher recurring interest income due to the portfolio growth.

Interest income includes $3,300,000 of catch up interest from Sprint. Expenses for the quarter were $32,000,000 up from $28,900,000 in the prior quarter due to higher interest expense and management fees given the growth in the portfolio. No incentive fees were accrued during the quarter given the total return provision in our fee structure. Net income was $0.50 per share for the quarter compared to $0.47 per share for the March. Net leverage at the March was 1.03x compared to 0.83x at the March.

Average leverage during the quarter was 0.93x, up from 0.78x during the March. The net loss on the portfolio for the quarter totaled $10,700,000 or $0.16 per share. The net loss was primarily attributable to our noncore and legacy assets, including our oil and gas shipping and carbon free chemicals investment, one of our legacy names. Positive contributors included our investment in Sprint, Merx and Square two. During the quarter, we received $1,000,000 of escrowed funds associated with the sale of our investment in Square two Financial, which occurred in 2017.

NAV per share was $19 at the June compared to $19.06 at the March. The $06 decrease was attributable to the $0.16 loss on the portfolio offset by net investment income of $05 greater than our distribution as well as a $04 accretive impact from the stock buyback during the quarter. The average corporate lending portfolio yielded for the quarter or yield for the quarter was 9.9%, down 40 basis points quarter over quarter. The quarterly change was due to a combination of a decrease in the average loan spread given the lower spread on new investments and a decline in LIBOR. On the liability side of our balance sheet, we had $1,350,000,000 of debt outstanding at the end of the quarter.

Regarding our funding, we continue to evaluate various alternative sources of capital with a particular emphasis on diversifying our funding sources. In July, we announced we will be redeeming all of our $150000000.6.5 unsecured notes due in 2043 in mid August. We will recognize a loss of approximately $4,400,000 on the extinguishment of these notes in the September due to the acceleration of the associated unamortized debt issuance costs. We will initially replace these notes using our revolving credit facility. However, it is our current intention to issue lower cost unsecured debt to replace these notes long term.

The timing of our of any future debt issuance will be subject to market conditions. We currently estimate that there is an approximately one year payback period given that the redemption of these notes will result in an interest expense savings. Our weighted average interest rate on our average debt for the quarter was 5.15%, down from 5.4% last quarter. Excluding the 2,043 notes, the weighted average annualized interest cost would be approximately 4.9% for the period. Regarding our credit facility, a new lender committed $70,000,000 during the quarter for our facility, increasing total commitments to 1,700,000,000 We are pleased also to announce that Kroll Bond Rating Agency recently affirmed our investment grade credit rating.

Lastly, regarding stock buybacks, during the quarter, we repurchased 950,000 shares at an average price of $15.92 for a total cost of $15,000,000 during the quarter. And since quarter end and through yesterday, we have repurchased an additional 136,000 shares at an average price of $16.11 for a total cost of 2,200,000.0 Since the inception of the share repurchase program, which began in 2015, we have repurchased 11,000,000 shares or 14% of our shares outstanding for a total cost of $188,000,000 The company now has approximately $62,000,000 of availability for stock repurchases. This concludes our prepared remarks. Operator, please open the call for questions.

Speaker 0

And your first question comes from the line of Terry Ma with Barclays.

Speaker 4

Hey, good afternoon. On the decrease in yield for your corporate lending portfolio, can you kind of disaggregate how much of the 40 bps was driven by LIBOR versus the other pieces?

Speaker 2

Yes. I mean it was about onethree LIBOR, about twothree the portfolio mix, especially because there was so much growth in the first lien.

Speaker 4

Got it. And how do you think about, I guess, dividend coverage going forward, given there's at least one more rate cut baked in, maybe a couple more for the downline? I think your sensitivity table shows something like a 6% decline in income for 100 bps.

Speaker 2

Yes. So 25 right, I mean, that's 6%, right. I mean, dollars 3,000,000 of net income annually per 25 basis point cut of net income. At leverage levels in the 1.3% to 1.4 range, we feel comfortable with our ability cover our dividend, assuming sort of a normal rate cut cycle. Obviously, at some point, it eats in enough, but at some point also our leverage leverage would be one, four, five.

So it's hard to know exactly where we hit it. But if you we have continually sort of articulated that at a 10% yield and leverage between like one one and one two five, we sort of cover our dividend and or over our dividend. As we fall below 10, even over our overall portfolio, so we're at 10.1 right now, either because of the mix of our portfolio or because of LIBOR, obviously, that 1,100,000,000.0 to 1,250,000,000.00 moves up, right, to 1,200,000,000

Speaker 5

to 1,350,000,000.00

Speaker 2

But there's enough room to absorb what sort of any near term significant movements in this risk.

Speaker 4

Okay. That's helpful. And then just on Merx, what drove the decrease in the dividend this quarter? And how should we think about that going forward?

Speaker 2

Yes. I think for Merck's and also in our shipping investments, we decided to leave capital down in both of those businesses due to their recycling of certain assets within there or in the shipping. For instance, there was some dry dock expenses that was using that capital.

Speaker 4

Okay. And then for modeling purposes, how should we think about the dividend in future quarters?

Speaker 2

I think we've historically been between $1,000,000 and 1,000,000 point dollars on as we reduce our investment size in Merx, I would bring it down over time. We are pulling out 12% on the note that's there. So over time, we model it in at 1% to 1.5 but I think depending upon asset sales within Merx, it may decline in the longer side. But just if you looked at it over historically, the 1,000,000 to $1.5 which is 4,000,000 to $6,000,000 a year on our sort of equity account right now is about 12%, both on the equity and that's what it yields on the debt. And so it's just a little lumpier on the equity side than the debt side.

So like 12% across the whole investment is around how we generally think about it.

Speaker 0

Your next question is from Rick Shane with JPMorgan.

Speaker 5

Hey, guys. Thanks for taking my question. Curious in further intrigued by Greg's comments about the interest rate sensitivity. Greg, you said $3,000,000 for 25 down 25 basis points. When I look at your interest rate sensitivity chart on Page 13, it's

Speaker 6

one of

Speaker 5

the more interesting ones that I've seen in that it's very linear up or down a 100 basis points. And then after that, it really starts to flow excuse me, flatten out down 200 basis points. I assume that has to do with floors or some sort of caps that you guys have in place. But I'm curious, to make sure we understand this because what this would suggest to me is that for the next 50 basis points, we would expect to see about $6,000,006,500,000 of pressure. And then as we move past that, the pressure starts to abate.

Really understanding that, Kirk, because that looks like it's going to be sort of the sweet spot is going to be really important.

Speaker 3

I think your assessment is fair. And I think one of the things that we've been able to hold on to within the middle market origination is while floors have started leaving the syndicated market is we have been able to keep that as a feature within our agreements. And so your characterization is broadly correct. And it's the existence of floors that moderates that detriment one past 100 basis points.

Speaker 5

And is it real it looks to me, based on this plus what Greg had said, that the majority of their floors are probably down about 75 bps from here?

Speaker 3

The majority of the floors would be, so Most of them are at 1%, but we have a number of of names that are are are one and a half, and in some cases, even even higher than that. So broad broadly speaking, correct.

Speaker 5

Got it. Great. That's it for me. Thank you very much.

Speaker 0

Your next question is from Kyle Joseph with Jefferies.

Speaker 7

Hey, good afternoon, guys. Thanks for taking my questions. Following up on Rick's, talking about the impact of rates and the and you guys retiring your relatively high cost piece of debt. Can you

Speaker 8

give us a sense for

Speaker 7

your outlook for cost of funds? I know you talked about turning out some debt eventually depending on market conditions, but just how you anticipate your cost of funds trending over the near term?

Speaker 2

I mean, I think based upon what we said, we're taking the if you pro form a just taking out the 6.5%, we're down without the LIBOR adjustment on a cost of funds down to about 4.9%. And I think that that's where we're obviously focused on that. And so I think given where we are, given where the interest rates are headed, I think that's a good barometer at this point.

Speaker 7

Got it. That makes sense. And apologies if I missed it, but it looks like PIK income ticked up in the quarter. Was that, related to Sprint or or anything onetime there?

Speaker 2

No. It's just related to Sprint. Think that that's and we collected the majority of that post quarter end.

Speaker 7

Got it. And then stepping back a little bit, given what, you know, what's going on with the rate environment, what's going on with, leverage in the BDC space, can you give us any any changes to the competitive environment you've seen over the past few months?

Speaker 2

I wouldn't say so much over the past few months. I mean, I think the trends are the same. There has been and continues to be a reasonable amount of capital formation, so there continues to be sort of a good amount of competition. There continues to be a premium available I don't know, call it premium, but there seems to be some competitive advantage available for people who have scale both because they have more origination and they can do bigger deals and also because they have existing relationships of which to sort of grow from. And then also product diversity, those are the places those are the teams we've been beating all the time.

So and sort of we see that. So I wouldn't say there's anything markedly different. It remains quite competitive, and we have seen nothing that alleviates that.

Speaker 7

Got it. That's it for me. Thanks very much for answering my questions.

Speaker 0

Your next question is from Finian O'Shea with Wells Fargo Securities.

Speaker 9

Hi, guys. Good afternoon. First question for Greg on the 2,043 notes. Could you give a little more color as to the why on turning those over? I think you noted that you know, you'd waited for a little more opportune time to replace it with unsecured, meaning that, you know, right now is not the best.

But, you know, after having gone through years of holding them, and I know you've taken some criticism on the call for it, you know, they seem more attractive than ever, you know, given they'll probably carry us through a recession. So, you know, if you with with all that said, you know, how would you answer those claims and just kind of expand on why take those out now?

Speaker 2

Well, I think, first of all, if you just look at our cost of funds, if you look at we're taking it out with our credit facility, which has been upsized substantially in the last year. That's one reason. But I think if you look at our funding going forward, and I think as I indicated, we're going to continue to look at potentially down the road putting some more unsecured debt out. Also look at our asset base and look at what we're putting on our balance sheet. There are a number of ways to finance those even beyond our credit facility.

So we feel very comfortable that we're not shut out of the market at all from both looking at unsecured and secured financings going forward. So we're very comfortable kind of building our portfolio up, leveraging the portfolio up to 1.4x with our capital structure and accessing the markets when appropriate to avail ourselves of very favorable cost of capital.

Speaker 9

All right. Sure. And then another for anybody, Howard or Tanner. With the shipping assets, those are a large component of noncore. Now can you kind of give an overview on the challenge of moving these?

Are they hard to clear? Are your specific underlying ships hard to clear? Are you going prices today? Or are there other investors that don't want to sell? Just any color as to the challenge of those shipping assets?

Speaker 2

Sure. I mean, they're illiquid assets, so they're hard to clear regardless, right, just because they're just they're pretty unique. That said, the prices that we think are available for them are now in the ballpark of where we would be happy with and we would expect to be able to sort of transact some of them soon. It'll be in a piecemeal basis as opposed to sort of a whole portfolio sale, but we would expect to be able to some soon. So the prices are sort of meeting sense of the value now.

And there's also some strategic opportunities with the whole fleets to sort of bring that together with sort of other larger platforms. So you're right, it has been hard to move. The value of these ships, we've actually been pretty consistent on. People's the market's ability to pay for these illiquid assets changes a little bit and it's now sort of hit the point where we think there's some real ability to transact.

Speaker 9

Got it. Thanks. And one more. Does the adviser for Apollo receive any of the upfront economics before allocating to the BDC and other funds?

Speaker 2

No.

Speaker 0

Your next question is from Ryan Lynch with KBW.

Speaker 8

Hey, good afternoon. First question, I know originations can be lumpy quarter to quarter, but over the previous four quarters, you guys were kind of originating anywhere from two twenty five million to $300,000,000 This quarter, that bumped up to $450,000,000 So can you just talk about what really drove the big spike this quarter?

Speaker 2

Yes. I mean, we can talk in a little in some detail. But I mean, really, over the past two or three quarters is when as our ability to go up above the one:one leverage mark in April occurred, sort of the funnel widened, if you will, because we originated sort of the full array of assets that made sense for us that fit between L500 and L700. And so we have sort of said, I think over the past year, would expect sort of around this level of origination. So this may be a little bit high and runoff is a little bit low.

So the net fundings were a little bit higher. But we have sort of, I think, given some guidance of about $100,000,000 of growth, which we said would be 3,000,000 to $350,000,000 of origination. And so this was a little bit higher than that, but I think it's just indicative of where our platform is and how much flow we're seeing.

Speaker 8

Okay. Makes sense. And then I wanted to ask a question on the dividend. If I look at this quarter's kind of core operating earnings, about $0.50 you guys had about a $3,300,000 catch up from Sprint, and then you guys had no incentive fee, which is can be around $7,000,000 or so. If I take those two kind of onetime factors into account for $10,000,000 that added about $0.15 per share to your earnings this quarter.

So if you ex those out, earnings would have been around $0.35 running at 1.05x leverage. So can you just kind of walk me through, were there any onetime items in this quarter's earnings that kind of part of onetime that kind of hurt earnings lower and your confidence in your ability to kind of get earnings back up in line with the dividend?

Speaker 2

Yes. There was no dividend income from Merx and Ships, which we had discussed before. There was a little bit higher expense level in the normal course related to a few, you know, minor onetime items but but are relevant. And then, you know, the the other so so that, you know, not exact numbers, but that takes us into the low forties, And then the growth in the portfolio takes us up to the level that we're comfortable. I mean, there is one other slight number, which is our average fees each quarter over the past six to eight quarters has been between 4,000,000 and $4,500,000 That was a little below that this quarter as well.

And so all of those things add up. You sort of look through our model and you look at a 1.25x levered portfolio yielding around 10% with long term averages of fees and dividends off of Merx and the ships, we cover the dividend. And so we're focused on that. That 1,250,000,000.00 is relevant, but that's but we closed the quarter at $1,030,000,000 The bridge from 1,030,000,000.00 to 1.25 has been that the incentive fee hasn't been paid these last few quarters. But as the incentive fee kicks back in, getting to that 1.25 leverage will cover the dividend with the incentive fee being paid.

Speaker 3

And then I'd also note that the management fee above one:one assets goes from 1.5 to 1%, which also helps and is embedded in Howard's guidance as it relates to dividend coverage and our target leverage.

Speaker 2

Right. And as I said, obviously, I'm using sort of shorthand math. It's accurate, but shorthand. So like if yield is 9.9, as I said, it's an earlier question as opposed to 10, that means 1.3 leverage as opposed to 1.25. And so there's some variations in there.

The answer is, I mean, you're looking what you said is accurate about those one time items. But there were some one time items the other way combined with sort of the significant growth in the portfolio, which doesn't really kick into this quarter because it happened during the course of the quarter, sort of bridges the gap.

Speaker 8

Okay. That's helpful color. And then your guys' investment in Bumblebee, I think that, that company is about to file for bankruptcy or may have just been announced that they're going to file for bankruptcy. Just wanted to know, does your $6.30 fair value mark you guys have it about marked about 95% of cost? Is that mark inclusive of the state you have to run through bankruptcy?

Speaker 3

Yes. So what I'd say there is that, that is an LCD article that came out this today or yesterday. Our valuations are a point in time. The company has had has experienced issues not only related to tariffs, but also related to historical issues with price fixing and consequent litigation expenses. We are a participant in a broader facility and are working with the borrower to deal with the issues and move things forward.

But in terms of the specifics, our valuation is a point in time with the information available to us at the time as of quarter end.

Speaker 8

Okay. And then one last one. You guys, meaning the Power Platform, has been on the forefront of working with the SEC to get the AFFE corrected. I was just hoping that you guys could give us an update on where that stands in the process and any sort of outlook over the next several months of where you expect that bill to go?

Speaker 2

Yes. There's been since last quarter, there's been continued dialogue. There's been dialogue with the SEC. We are filing an amended letter with them based on our approach. I think they've been very positive relative to it.

But I wouldn't you know, I don't think anything's gonna transact in the in the near future. But there's good correspondence there asking good questions and we're responding appropriately.

Speaker 8

Okay. That's helpful. That's all

Speaker 2

for me. I appreciate the time.

Speaker 0

Your next question comes from Robert Dodd with Raymond James.

Speaker 6

Hi, guys. Some really great ones. And then, Greg, could you tell me the debt extinguishment cost again for next quarter? I didn't get that one down.

Speaker 2

4,400,000.0 approximately. Dollars 4,400,000.0.

Speaker 6

Thank you. Then looking I mean, Todd, you mentioned lower fees. I mean, I look at other income, I mean, it was $900,000 across all portfolio. It's been two years since we've seen a number that long. Is there anything that's changed structurally in the portfolio where we should expect a lower other income kind of contribution going forward?

Or is it just I mean, obviously, it's volatile quarter to quarter, but is it going to be systematically lower? Or is this just kind of a one off set of factors that resulted in it this quarter?

Speaker 8

Yes, one off set of factors,

Speaker 2

I mean, related mostly to not that much runoff.

Speaker 6

Right. Got it. Going Got back to Merck's, if I can. Obviously, lost money in the quarter. Can you tell us if is that related to them rotating their portfolio?

Or was that onetime costs? The obvious question is if they're in a position where in the near term they're losing the money, they're probably not going to pay a dividend. So while I can appreciate your point that Merck's the return you get on that capital should come up to kind of 12% run rate at some point. Is it should we expect that to happen next quarter? Or is it going to be a longer term process?

Speaker 2

So first of all, Merck has retained earnings, okay? So the retained earnings section be dividended up. The quarter specific for the answer for this quarter, okay, it's a GAAP basis, so that's what you're reporting. We took we had some legal costs related to the securitization that ran through and also that were not capitalized. And we also had some additional bad debt expense that we put on the reserve against based on our reserving policy.

And so that's what really occurred during the quarter, but nothing outside of the normal course.

Speaker 6

Got it. Got it. Actually, those were my questions. I appreciate it. Thank you.

Speaker 0

Your next question is from Casey Alexander with Compass Point.

Speaker 5

Hi. Good afternoon. Just if you could educate me, based upon the net losses that resulted in this quarter, will there be any reduction in the incentive fee next quarter? And if so, can you estimate how much?

Speaker 2

No. We've essentially caught up with the look back period.

Speaker 5

That's my only question. Thank you.

Speaker 0

Your next question is from Rick Shane with JPMorgan.

Speaker 5

Hey, guys. Actually, my question was on the look back as well. I was trying to figure out, given the loss in the December, if you would sort of lap that in the December this year. It sounds like we should assume a normal incentive fee starting in the September?

Speaker 2

Yes. Yes. And

Speaker 0

there are no further questions at this time. We'll turn it back to management for any closing remarks.

Speaker 2

Thank you. On behalf of our team, we want to thank you for your time today and your continued support. Please feel free to call any of us with any questions. Have a good evening.

Speaker 0

Thank you. And this does conclude today's conference call. You may now disconnect.