MidCap Financial Investment - Earnings Call - Q3 2021
February 4, 2021
Transcript
Speaker 0
Good afternoon and welcome to Apollo Investment Corporation's Earnings Conference Call for the period ended 12/31/2020. 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 speakers' prepared remarks. I will now turn the call over to Elizabeth Fessen, 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 Midra, Chief Executive Officer Tanner Powell, President and Chief Investment Officer and Greg Hunt, Chief Financial Officer. I'd like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available on 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 most recent filings with the SEC for risks that apply to our business and that may adversely affect any forward looking statements we make. We do not undertake to update our forward looking statements or projections unless required by law.
To obtain copies of our SEC filings, please visit our website at www.apolloic.com. I'd also like to remind everyone that we posted a supplemental financial information package on our website which contains information about the portfolio as well as the company's financial performance. At this time, I'd like to turn the call over to our Chief Executive Officer, Howard Widra.
Speaker 2
Thanks, Elizabeth. Good afternoon and thank everyone for joining us today. I'll begin today's call with a review of the progress we've made repositioning our portfolio over the past year, followed by an overview of the December quarter, including a review of our financial results. Following my remarks, Tanner will review our investment activity for the quarter and provide an update on credit quality. Greg will then review our financial results in greater detail and provide an update on our liquidity position.
We will then open up the call to questions. During today's call, we will be referring to some of the slides in our investor presentation, which is posted on website. Said As previously, we have been very focused on improving the quality of our investment portfolio. And despite the challenging environment, we continue to make significant progress towards this objective in calendar year 2020. We continue to reduce our exposure to non core and legacy assets, which are higher on the risk spectrum.
Non core and legacy assets declined from 12% of the portfolio a year ago to 8% at the December on a fair value basis. We continue to improve the quality of our core corporate lending portfolio as evidenced by a higher exposure to first lien loans and improving credit metrics. First lien loans increased from 82% of the corporate lending portfolio a year ago to 86% at the December. Second lien loans decreased from 17% of the corporate lending portfolio to 13% over the same period. The weighted average net leverage of our corporate lending portfolio was December, relatively unchanged year over year despite the more challenging environment.
And the weighted average attachment point declined from 0.9 times a year ago to 0.6 times at the December. As we look ahead to calendar year 2021, we believe our corporate lending portfolio will continue to perform well given these credit quality metrics. We will continue to focus on monetizing our remaining non core assets. Regarding Merx Aviation, our aircraft leasing portfolio company, we believe our Aviation team has the experience to skillfully navigate the unprecedented challenges in the industry due to the coronavirus pandemic. Moving to the quarter specifically, as mentioned on our last call, we entered the quarter with visibility into a meaningful amount of repayments.
As expected, net leverage declined significantly from 1.56 times at the September to 1.43 times at the December, driven by a strong net repayments as well as a slight increase in stockholders' equity. Importantly, repayments during the quarter included investments that we have been seeking to exit including non core assets and second lien investments. Given the reduction in AINV's net leverage, we have begun to shift our focus to new investment activity as we continue to manage our existing portfolio. As a reminder, AI B operates as part of Apollo's broader direct origination business, which has over $30,000,000,000 of commitments under management. So although AI and B has been focused on reducing leverage for the past few quarters, the broader platform has remained active.
The direct origination platform closed more transactions in the month of December than in any month in its history. Shifting to the portfolio, our corporate lending portfolio which consists primarily of first lien floating rate loans to companies in less cyclical businesses continues to hold up relatively well as we continue to recoup some of the losses recorded during the March. Over the past three quarters, our first lien corporate lending portfolio has recovered approximately $32,600,000 or $0.49 representing 62% of losses recorded in the March. We believe the performance of our corporate lending portfolio during this challenging period demonstrates its resiliency and quality. The corporate lending portfolio which represents 79% of the total investment portfolio, is eighty six percent first lien, 100% floating rate and 88% sponsor backed.
We also believe that we are seeing some stabilization in our investment in Merx, our aircraft leasing portfolio company, which recorded a slight net gain during the period. Tanner will discuss Merx in greater detail later during the call. The repayment of one of our renewable investments also resulted in a net gain during the period. Our oil investment our oil and gas investments had a net loss during the period. In aggregate, there was a $4,900,000 net gain on the total portfolio during the quarter.
Slide 16 in our investor presentation shows the gainloss by strategy over the last four quarters. Moving to our financial results. Net investment income for the quarter was $0.43 per share, reflecting a smaller portfolio given our net sales and repayments partially offset by an increase in fee income compared to the prior quarter. In addition, given the total return feature in our incentive fee, no incentive fees were accrued during the quarter. Net asset value per share at the December was $15.59 a $0.15 or 1% increase.
Dollars $0.08 of the increase was attributable to net gain on the portfolio and $07 was attributable to retained earnings. Excluding the $05 supplemental distribution recorded during the quarter, NAV per share would have increased 1.3% during the quarter. Turning to our distribution, as discussed on our last few calls, in addition to a quarterly base distribution, the company's Board expects to declare a supplemental distribution in an amount to be determined each quarter. For this quarter, the Board has declared a base distribution of $0.31 per share and a supplemental distribution of $05 per share payable on 04/05/2021 to shareholders of record as of 03/19/2021. With that, I'll turn the call over to Tanner to discuss our investment activity and our portfolio.
Speaker 3
Thanks, Howard. Beginning with the market environment, activity picked up during the quarter due to pent up demand as companies rushed to close deals before year end. Despite the increase in activity, the environment remained competitive. Credit document structures and pricing are close to, if not at pre COVID levels. That said, credit continues to be a solution of choice for many borrowers.
Moving to AINV's activity, we were selective investors during the period given our focus on reducing our leverage. New corporate lending commitments for the quarter were $108,000,000 across 13 companies for an average new commitment of $8300000.0.01 100% of these new commitments were first lien floating rate loans, 92% were made pursuant to our co investment order. The weighted average spread on these new commitments was five ninety eight basis points. The weighted average net leverage on new commitments was 4.4 times. Total sales and repayments were relatively strong during the quarter.
Sales were $18,000,000 repayments were $185,000,000 and gross revolver pay downs were $85,000,000 for total exits of $287,000,000 Net repayments for the quarter were 130,000,000 including $33,000,000 of net revolver pay downs. Notable repayments during the quarter included our $39,000,000 first lien position in Wright Medical, our $31,000,000 second lien investment in CT Technologies and a $14,000,000 pay down from AMP Solar Group, a non core renewable energy investment, which resulted in a net gain of approximately $5,600,000 during the quarter. As Howard mentioned, given our current leverage, we have begun to shift our focus to new commitments just as we are seeing a pickup in overall market activity. Looking forward, we will continue to focus on reducing our exposure to non core and second lien investments. Turning to the portfolio composition.
Our investment portfolio had a fair value of $2,480,000,000 at the December across 143 companies and 27 industries. We ended the quarter with core assets representing 92% of the portfolio and non core assets representing 8%. First lien assets represented 86% of the corporate lending portfolio. The weighted average spread on the corporate lending portfolio was six thirty three basis points. The weighted average attachment point was 0.6 times.
And investments made pursuant to our co investment order were 80% of corporate lending portfolio at the end of the quarter. Moving to credit quality, while we continue to see some need for covenant relief within our portfolio, we did see a decline in the number of amendments during the quarter. We placed one new investment on non accrual status during the quarter. Our second lien investment in Ambrosia Beyer or TriMark was placed on non accrual status. The company is a distributor of food service equipment and supplies in North America and has been struggling during the pandemic as its restaurants customers were forced to close.
We continue to receive scheduled cash interest payments from the company, but we'll be applying those proceeds to the amortized cost of our position. At the December, investments on non accrual status represented $155,000,000 or 5.6% of the portfolio cost and $28,000,000 or 1.1% at fair value. In addition, we wrote off several investments that had been on nonaccrual status and which had a total cost of $7,900,000 and zero fair value. Moving to Merx. During the December, the fair value of AINV's investment in Merx increased $1,100,000 or 0.3%.
The slight increase quarter over quarter reflects the lease extension and refinancing of Merx's freighter on attractive terms, reflecting the current strong demand for cargo aircraft in the post COVID market, particularly offset partially offset by a decrease in the fair value of certain of Merx's passenger aircraft, reflective of the ongoing impact of the pandemic is having on passenger air travel. Similar to other industry participants, many of Merx lessees requested rent deferrals and or rent reductions during the pandemic in the first part of the calendar year. Most of Merx lessees have exited their deferral periods and have begun to repay prior rents in line with the amended lease terms. We believe Merx's portfolio compares favorably with other major lessors in terms of asset geography, age, maturity and lessee diversification. Merx's portfolio is skewed towards the most widely used types of aircraft, which means demand for Merx's fleet is anticipated to be resilient.
Merx's fleet consists primarily of narrow body aircraft serving both U. S. And foreign markets. At the December, Merx's own portfolio consisted of 81 aircraft, 10 aircraft types, 40 lessees in 26 countries with an average age of 10.5 years. Merx's fleet includes 78 narrow body aircraft, two wide body aircraft and one freighter.
Merx is focused on remarketing aircraft that are due to come off lease in 2021, either via extensions with existing lessees or releasing to other airlines on long term leases. At the December, eight aircraft were scheduled to come off lease in 2021. Extensions for two of the eight aircraft have already been executed. Four aircraft are currently under negotiation or for extension or sale. Merx is actively remarketing the remaining two aircraft.
As Howard mentioned, our aviation team has the experience to skillfully navigate this period of market stress and the requisite capabilities to mitigate potential adverse outcomes. Additionally, the Apollo Aviation platform will continue to seek to opportunistically deploy capital in the face of widespread uncertainty and market disruption. To be clear, Merx is focused on its existing portfolio and not seeking to materially grow its balance sheet portfolio. However, growth in the overall Apollo aviation platform will inert the benefit of Merx as the exclusive servicer for aircraft owned by the other Apollo funds. As discussed on prior calls, Merx has built a best in class servicing platform and acts as a servicer technical advisor for aviation assets across the broader Apollo platform.
With that, I'll turn the call over to Greg, who will discuss the financial performance for the quarter.
Speaker 4
Thank you, Tanner, and good afternoon, everyone. Beginning with the statement of operations, total investment income was 54,400,000.0 for the quarter reflecting lower interest income due to a smaller investment portfolio partially offset by an increase in fee income and a slight increase with prepayments. Fee income increased to 1,200,000.0 compared to $200,000 last quarter. Prepayment income was up slightly to 2,400,000.0 compared to 2,000,000 last quarter. Dividend income was 1,100,000.0 essentially flat quarter over quarter.
The weighted average yield at cost on the corporate lending portfolio was 7.8%, essentially unchanged quarter over quarter. Expenses for the quarter were 26,100,000.0, down approximately $1,000,000 quarter over quarter primarily due to lower interest expense and lower management fees. Interest expense declined due to net sales and repayments within the portfolio. The weighted average interest cost increased slightly quarter over quarter due to the decreased utilization of the credit facility given our deleveraging. Management fees declined due to the decline in the average portfolio and there was no incentive paid during the quarter.
Net investment income for the quarter was 43¢. As Howard mentioned, net leverage at the December was 1.43 times, down from 1.56 times at the September due to $130,000,000 of net sales and repayments during the quarter. The increase in net assets was driven by 4,900,000.0 or 8¢ per share of net gain on the portfolio. And 4,800,000.0 or 7¢ per share of retained earnings as net income was in excess of the distribution recorded during the period. Within our supplement on page 16, we've broken out the net gain or loss by strategy.
Our corporate lending portfolio had a net gain of 11,000,000 or 17¢ during the quarter. Merx had a gain of 1,100,000.0 or 2¢. Non core and legacy assets had a loss of 7,000,000 or 11¢ during the quarter. NAV per share at the December was $15.59, a 1% increase quarter over quarter. As previously announced, during the quarter, we extended the final maturity of our $1,800,000,000 senior secured revolving credit facility by two years to end in December 2025.
There were no changes to pricing or advance rates in connection with this extension. We greatly appreciate the support from our lending syndicate with this extension. Moving to liquidity. As the pandemic began, many of our portfolio companies drew on their revolvers during the March to shore up liquidity. Many of these drawdowns were repaid in the June and repayments continued in the December and December quarters.
MidCap is the agent for nearly all of our revolvers and delayed draw term loan commitments and is actively monitoring every commitment. For context, at mid cap, leverage loan revolvers were 23% utilized pre pandemic. Revolver utilization peaked at 70% in mid April and has since declined to approximately 27% today. Given the reduction in NIMV's net leverage and improved quality of our investment portfolio, our liquidity position continues to strengthen. At the end of the quarter, we had 1,500,000,000 of total debt outstanding, a decrease of 88,000,000 quarter over quarter, and a decrease of $289,000,000 since the March.
At the December, we had $330,000,000 of immediately available liquidity, up 62,000,000 quarter over quarter and 107,000,000 since the March. Also at the December, we had $313,000,000 of additional capacity under the facility, up 26,000,000 quarter over quarter and 182,000,000 since the March. Moving to unfunded commitments, which we disclose on page 18 of our earnings supplement. Our outstanding commitments at the December totaled $310,000,000 of unfunded revolver and bridge commitments outstanding. Two twelve were available to borrowers and 99,000,000 of the three ten were not available to borrowers.
Availability is based on borrowing base limitations and other covenants. There were no stock repurchases made during the quarter, but we will continue to evaluate repurchasing our securities as appropriate. This concludes our prepared remarks, and please open the call to questions.
Speaker 0
Your first question is from Kyle Joseph with Jefferies.
Speaker 5
Just
Speaker 1
wanted to get a sense,
Speaker 5
you know, given the the delevering you guys have done a a a good job doing, are are you guys kind of back in back in investment mode? Or are there still some some assets you're looking to rotate on on your balance sheet?
Speaker 2
Yes. To both. We are open to business. As we said, there's we're doing a lot of volume across the platform. So we're now sort of selecting the assets that fit our strategy in doing those.
And we continue first of all, we've always we've been in a rotation anyway from the second lien and the non core. But in addition, there's reasonable sort of velocity across the portfolio of things paying off either opportunistically or strategically. So the ability to originate relatively regularly given where our leverage is, both a result of where our leverage came down to and also the fact that we continue to sort of have, pay downs across the portfolio.
Speaker 5
Got it. And then one follow-up for me. In terms of credit performance, it sounds like some puts and takes in terms of non accruals. But in the corporate lending portfolio, can you give us a sense for, a revenue and EBITDA growth trends you're seeing in the fourth quarter and how that compared to the third quarter? And then just discuss how amendment activity trended to close out the end of the year?
Speaker 3
Yes, sure. So in terms of Q3 versus Q4, definitely an acceleration. There has been, Kyle, as will not come as any surprise, there is the delineation of those that are affected and those that aren't. And obviously the differing fortunes as a result. In terms of amendment activity, there was a decline.
We do quote numbers that are based on total amendments and we try not impugn kind of what is actually really we include everything in that number. But if you look at the amendments that are indicative of stress, that has gone down, which it should in any event because likely those companies that had required an amendment have already undertaken one. But certainly a decline is a good sign in that no further less further stress is materializing. Got it. That's it
Speaker 5
for me. Thanks for answering my questions.
Speaker 0
Your next question is from Casey Alexander with Compass Point.
Speaker 6
Hi, good afternoon and thanks for taking my questions. I have two questions. One, if you're back in investment mode, does that also mean that the company may be back into a position where it can start to become active on the share repurchase program again?
Speaker 2
Yeah. Okay. I'm sorry. Was going to ask both ones. The answer is yes, that stock repurchase plan is open.
Obviously, as we said before, it sort of depends on a combination of things, which is sort of our the amount of liquidity we have at a given amount of time and really where the stock's trading at. But it continues to be, and I think we've been through this on the call before, obviously, a good return on the stock. There were So there were a number of things obviously working through at the end of the year in terms of wanting to get our bank facility done and getting our our leverage down. But, yes, I mean, we have a stock repurchase plan that is approved and open, and we will continue to take advantage of it and use it appropriately going forward.
Speaker 6
All right. And secondly, and this question may sound harsh, but I think it's a fair question for investors to ask. And if I look at Page 16 of your schedule, and look at the losses that took place in the March and what the gains and losses have been since then, Apollo is one of the very few BDCs where NAV is lower than where it was at the end of the first quarter, whereas the vast majority of the universe has had at least some sort of bounce back, if not a substantial bounce back. And so to what extent are some of the losses that have been taken over the last twelve months, which as your schedule shows is $3 a share, would you say are still recoverable at this point in time?
Speaker 2
So there's, I agree, totally fair question. So feel free to ask, you know, they're more fun anyway. You know, there's three categories of sort of the write downs during the tour. One was the corporate portfolio, we regained back. I think we said 62% of the losses attributable to that, and we think the vast majority of that is still recoverable.
You would see those loans on nonperforming or watch lists if not. And their particular names that make up sort of the bulk of still that gap that we feel pretty good about. It's Merx, you know, which is responsible for a reasonable amount of that. And Merx, we also believe that we have hit a pretty conservative level of valuation how we're running it. I'm more tentative on that just because the pandemic's not over and how airlines are gonna do going forward is not set.
But assuming a recovery over time, over this next amount of time without picking a date, we think that our plane most of the airlines we work with have worked through stuff. We have things back on lease. We have a sense of where sort of the cash flows are gonna go and we think that that's positioned for some of that recovery. The last thing that drove a bunch of it was the oil and gas was written down quite a bit, or the commodity ones, the oil and gas and carbon free, which is commodity driven. Those both had the idiosyncratic issues about them and also commodity exposure and its long term commodity prices.
And so those are I think people have historically, and certainly you, Casey, have viewed those as not worth much anyway regardless of where they're valued. And we hope we think we value them as best we can given the inputs we've had. But our view has always been exiting those as best we can will give more clarity and you won't have to ask that question because you wouldn't have the volatility. So if I can just return back to your initial question, I think if you corporate book, we would compare very the corporate business would compare very similarly to our competitors. Does that All
Speaker 7
right. Sound you for taking
Speaker 6
No, I understand that. The last twelve months in the corporate book is $0.35 a share out of $3 So I'm just trying to figure out how much of of the rest may be realizable. And and look, I understand oil and gas is a commodity. Oil in the ground is still oil in the ground. I actually have more concern about about Merx Aviation because planes on the ground become older planes on the ground, and and they depreciate.
So, you know, I I that that's where, I'm wondering, you know, kind of what's recoverable there.
Speaker 2
Yeah. So so and we and Tanner could spend some time on that, and I do think it's it's relevant to spend a little time on it because I agree, obviously, that's something that people need to focus on value where aviation is. The expected depreciation of these planes goes into the valuation. And if time passes by, they depreciate, and that's built into the valuation at relatively meaningful discount rates. That gets so there's two portions of the valuation, what the planes are worth down the road, which go down over time, and what our cash flows are off the planes.
And if those cash flows change because our leases change, those things change. The stability of that value is driven by a, like, a bunch of things. Like, ultimately, what what what do you what are these planes going to be worth at the end of the day? And the fact that we have sort of narrow body planes that consistently stay in place, helps that, and you've even seen those values stay up even throughout this crisis. The diversity of our lessors, as well as our ongoing relationships across the Apollo platform with those lessors to continue to deliver value to them and have those strong relationships.
And then in addition, just the pure structure of Mercs, which is that everything is not, they are in separate pools of value. There's lots of them. There's cargo jets. There's some we own completely. There's some in securitizations in servicing platform.
And so the diversity of those pools of value basically lessen the volatility or the worst case scenarios as you work through it. But there's no question that we continue to need to see more visibility to the recovery for people to get complete comfort with that value there. We feel like are positioned to recover from where we are today, but that could be wrong. Time will tell.
Speaker 6
Alright. Great. Thank you for taking my questions. I appreciate it.
Speaker 0
Your next question is from Finan O'Shea with Wells Fargo Securities.
Speaker 8
Hi, everyone. Good afternoon. I'll actually ask to continue on Merck's just a small question. I think and, Tanner, appreciate the color you've been giving. It it sounded like the change this quarter was you know, continues to be stable, and there's a lot of good things about the the value the residual value and such.
But some of the, I think you said passenger category caused a decline or maybe took away what would have been a bigger gain. Can you expand a bit on that just given, since you last talked, the Pfizer vaccine came out and the world looks a lot better. Did something happen to passenger aircraft broadly or was this a more isolated incident in the portfolio?
Speaker 3
Yes, sure. Happy to, Fin. And so I would answer that question by saying, yes, the Pfizer vaccine amongst others is one thing that the market has been looking through to. When we look at that when we look at when we value the asset, we're looking at a number of things, including near term cash flows. And while things have broadly been in line with expectations, there have been some puts and takes.
I did mention that we're very pleased that many of our lessee customers came back online after the initial deferral period. Certain others didn't. And taking into account of that, to your point, offset some of the gain that we saw from the extension that we were able to get done with the freighter. So some negativity there, which in some ways does not comport with maybe broader markets and their faith in the vaccine. I think from here, I would call upon Howard's comment as well.
I think we're positioned to the extent that the vaccine does start to pick up pace. That will be a very good thing, to state the obvious. And then also, we'd harp upon from a valuation standpoint, the lever we have with respect to incremental transactions that the Apollo platform does as providing incremental revenue opportunity with no stress to the balance sheet of AI and V and Merx from the servicing revenues that we get that could help to buoy that valuation in the coming quarters and coming years.
Speaker 8
Okay, that's helpful. Thank you. And just one more higher level question on the net runoff this quarter you know, in the context of, you know, you you Howard said the the platform origination was very robust, but a little less so on the BDC. It it felt like last quarter that that that you were okay or or more confident in your ability to deploy, given the the progress and leverage you made to at that point. Obviously, now you made more progress.
But but was there, if if you agree, was there any change in in leverage posture this quarter? You know, give my impression was was last quarter that you were more more willing and able to engage in the market? Just any commentary there?
Speaker 3
Yes, sure. Good question, Fin. And no, there's no change in the posture. For instance, I'll just give an example. As we are within our target now, and we did mention last quarter that we wanted to get back into the market.
For instance, one of the events that happened this quarter was we had a second lien investment that got taken out by a broadly syndicated loan. And the deployment is always is not necessarily on the screw. There's a lead time to it. And so it was, I think, the management of cash and the sometimes idiosyncratic nature of repayments. So you're right to ask the question, but you should not interpret it as a change in posture with respect to our leverage guidance or comfort level.
Speaker 8
Okay. That's all for me. Very well. Thank you.
Speaker 0
Your next question is from Melissa Wedel with JPMorgan.
Speaker 9
Good afternoon. Wanted to follow-up on the repayment activity. Certainly, was elevated in the last quarter. I'm wondering if you have any visibility into whether you expect that to continue in the quarter ahead or several quarters ahead?
Speaker 2
We do. Maybe not exactly at this level, but there's still meaningful activity in the portfolio. As you would expect in the normal course, the corporate portfolio, the first lien portfolio should generally have an average life of three years. So that corp corporate portfolio in a normal environment should be paying off one or something like that per quarter. And, you know, and we and And I don't know, maybe it was like 01/2025, something like that.
The market's starting to come back to that normalized behavior. We do see whether it's exactly that amount in a given quarter, who But there is certainly some significant loans either set up to be repaid in the near future through sort of normal transactions. As well as obviously as we've continued to say, trying to monetize our non core investments as best we can to get repayments there as well. But yes, I mean, I don't think the amount of repayment activity if you went through all of the quarters over the past three years for, you know, against the corporate portfolio was such an outlier. It was just a robust quarter of activity.
So there's more repayments and we do expect to continue to see, you know, reasonable velocity.
Speaker 9
Okay. So following up on that, you you are within leverage is down, but also sort of within range. How do you think about balancing the trade off of ramping new investments as you said you're interested in doing versus, holding back, you know, holding some dry powder, for dislocations or sort of opportunistic investments?
Speaker 2
Yeah, so one thing that I think is really important for us and sort of what we're trying to lay out, we have two sort of crosswinds. One is a corporate portfolio that's very predictable and understandable for everybody and we think has a history based on MidCap's origination and our history with the corporate portfolio, very solid and predictable. And then we have these other assets, Merx and these non core assets, which have more volatility to them, which is one of the challenges for investors. On the corporate side, one of the best things that we can do is have as many names as possible. So generally, if we see a transaction we'd like to be into, we are more likely to toggle the amount we do than we are to decide whether to do it or not.
And then that can be more of a real time decision based on sort of where we see actual repayments coming in in the next forty five days versus what new originations we have. And so I you know, we feel pretty confident about our ability to keep leverage within sort of the range of I was gonna say, like, if it's if it's with the if the if we can keep the portfolio within the range of a $100,000,000 or so, that's between $1.04 and $1.05. And we feel like we have pretty good control of that. Because remember, like, these deals are generally bigger. They're originated by the platform.
AIV can choose how much it wants to take, and it can really choose real time up to closing how much it wants to take. So we have a pretty good capability. So, that's how we basically choose. We wanna continue to sort of diversify the portfolio, choose the ones that fit best based on the yield profile we want going forward and the credit risk we want going forward. And we think we can we can continue to sort of balance all of that, you know, even even as opportunities, you know, even as the market fluctuates.
It does feel like, and I think you've heard this probably from other people, and we'll hear that more during the course of this quarter, that the market is returning to pre COVID levels. And so the a disconnect in the market obviously could come, but it's not where it's trending right now in the short term.
Speaker 1
Thanks for taking my question.
Speaker 0
Your next question is from Ryan Lynch with KBW.
Speaker 10
Hey, good afternoon and thanks for taking my questions. The first one I had was just around your guys' targeted leverage range that you guys set. When I look at that and compare that to your pre COVID, target range, I mean, I think the upper end is the same or a little bit higher and the bottom end is also a little bit higher. So it's a little bit more of an aggressive leverage range today than you have pre COVID. And of course, hindsight is always twentytwenty.
But in your prepared remarks, you talked about now beginning to given that you've reduced leverage now, beginning to shift focus to making new investments in this environment. At the same time, you also talked about the environment of investments today really returning to pre COVID levels. And so because your leverage level was so high coming into the downturn, you guys, you know, had to really pause and and and were net, you know, sellers and active investments when the investment opportunity was the most attractive. And now that the market, has kind of returned to pre COVID levels from terms and structures, this is now the time when you guys are deploying capital again. So and part of that might have been you guys having too high of a leverage target and operating with too high of leverage coming into the downturn.
So I wonder what your thoughts were on that thought process and how do you guys consider keeping kind of the lever trends that's even more aggressive today than it was pre COVID when it kind of kept you on your heels during the last downturn?
Speaker 2
Well, so I don't know if I would agree with some of those characterizations, but let let me sort of go through them. This was, you know, this was around the leverage range we said. I mean, I I know there was somewhere one three to one five, and then we said one four to one six. But we were always right around the one four to one five range being sort of the sweet spot. And that still is sort of where we are.
I would say, certainly, right, COVID caused stress for people, But I would underline that we did not do a rights offering. We had no liquidity issues. And we were able to manage our portfolio well through all this despite what people's perception would be. And I think that is largely because of the type of portfolio we had. It all paid.
There weren't concentrations in that corporate portfolio. And we were able to sort of get liquidity off that portfolio when we needed it. Then I will also add, do agree with you. Obviously, you get to a higher leverage and you have to stop investing, you can lose an opportunity. I don't believe we ended up losing that much of an opportunity during this crisis because you didn't see any of our competitors, even the ones that are underlevered, originate very much in the second or third quarter.
So the market was sort of paused because of uncertainty. So in this case, and I think part of the reason we have been active this past quarter, is that the opportunity is still there versus pre COVID, but it's just compressing, you know, from where it was before. So I don't think it it may be through some, you know, fortuity, but I don't think this was navigate I I I don't think the way this navigated through was, necessarily like an indictment on where we were before. So there is a question with regard to what should our strategy be. Should we be at 1.25 so we always have dry pattern, we always can take advantage of a disconnect?
We have said over and over that our approach is we will have the highest quality, most senior, most diverse, I think most close to that, corporate portfolio by the time everything is cleared out, that the predictability of that and and the and the stability of that at one four times will match, you know, by a long shot what many of our competitors do. Obviously, there's lots of people do really good job and do niche things and and do them well. And and so we think running at that level, will you know, gives us plenty of flexibility, and and delivers sort of a value proposition to the investors, good dividend return on their money, you know, with with real predictability. And it's consistent with what is effectively one of the few biggest origination platforms in the country. There's just lots of deal flow coming in as ability to cherry pick that of portfolio.
So that's sort of our strategy. I don't think this particular crisis hit us poorly on that strategy, because I don't know if I've seen any other BDCs do the flip side of what you just said, you know, yet. Gotcha.
Speaker 10
Yep. Yep. I understand. Those are those are some fair points with that. Kind of pivoting a little bit and returning back to Merx.
I know you said you're not going to be super active as far as expanding Merx's balance sheet, but obviously, you guys are looking at potentially expanding the benefiting from the servicing business you get managing other funds and airplanes across the Apollo platform. Were there any meaningful transactions or movements, regarding the servicing side in the calendar fourth quarter? And what is specifically the what is your kind of, as you said, today outlook on the potential to kind of expand that part of the business, call it, 2021, calendar twenty twenty one?
Speaker 3
So yes, sure. I'll take this one. Have amongst other opportunities, we have a dedicated co mingled fund that we are in the process of investing. There have been some additional deployment as well as exits, And you can think about exits as, in certain cases, as pulling forward some of those future servicing revenues that you would otherwise get. And so as it relates to outlook, we value what we have like in the ground today.
And we have significant unused capacity both in the fund is Merx is the dedicated servicer of, that's the aircraft leasing fund, as well as also a significant opportunity to do things across the broader platform. So with just investing the capital that we have available to us, additional opportunity to earn revenue, to your question.
Speaker 10
Okay. Thanks for that. And then, Greg, I just have one last one for you. These are two consecutive quarters gains in the portfolio. You guys obviously still aren't aren't earning any incentive fee.
You know, if if we would hold the portfolio constant today, no gains or losses, you know, going forward? Do you have any estimate of when you think your guys' incentive fees would would turn back on?
Speaker 4
Yeah. If if, you know you know, when we kind of look at it, should we be looking at the December you know, the December '21. That's when it would turn back on. Part of it. I don't think all of it would come back at that point.
You know, kind of fall back starting in '22.
Speaker 8
Okay.
Speaker 10
That's all my questions. I appreciate the time this afternoon.
Speaker 4
Okay, thanks a lot.
Speaker 0
Your final question is from Robert Dodd with Raymond James.
Speaker 7
Two questions, if I can. The first one, the risk of beating a dead horse is about Merx. Can you give us any color on I mean, the way the average lease left is is 3.9. I mean, how but but how much meantime is there available on the aircraft and the engines? I mean, basically, is there enough cash flow within the portfolio that that Merx can fund and fund fund the shop visits to to to refresh the engines, or is there the risk depending on on how many, how long this the lower passenger demand, etcetera, etcetera drags out that there could be additional capital needs at Merck's just to keep the equipment fresh and pliable?
Speaker 3
Yes, sure. Hey, Robert, I'll take a stab at that. There are a couple of things there, so I'll try to remember each aspect of your question, but please follow-up if I don't hit it. So in terms of let's talk about useful life, right? You've got you rightly pointed out we have about four years left in terms of lease term, right?
But then you can also think about it in the context of our average age of plane is in around ten years and the average life of a passenger airline passenger airplane is twenty years. So you've got a lot of useful life embedded in that asset. As it relates what needs to be done in terms of maintenance maintenance overhauls to the planes, we're oftentimes receiving payments alongside the lease payments to defray those costs from our lessees. And in many of the instances, we've had those amounts reserved, which gives us the ability. And then the other thing I'd say there is that when you take a when you invest in a plane, when you do the maintenance overhaul and you take the number of remaining cycles up, that is something that is liquid that you do generally get that value back.
That can be whether it's in the form of an engine where you can repurpose it somewhere else or move the plane. And so in addition to having that capital already reserved in certain cases, so too also when you do invest that money, it is typically can get the it is liquid and you can repurpose the plane. And then I think the final sorry, Ed, I think you had one more question there. I'm trying to sort through all
Speaker 7
of That's very helpful. Mean, my only question there is obviously you talk about reserves. Reserves aren't necessarily cash. Right? So, I mean, talking about the cash flow, but I'm I'm sure you account for it correctly with reserves, etcetera, etcetera.
But is there the cash flow to do that, or would there be additional cash needs rather than reserves, etcetera? Because it you're correct. I mean, when when you when you overhaul one of these things, you get something with value back, that you have to lease out again, but it takes, you know, actual cash flow to to to kind of fund that process.
Speaker 3
Yes, cool. Excellent, sorry. And so in the reserves, the answer is in certain cases we do actually have the cash in hand to undertake that. And then the other part of your question sorry, now I'm remembering. You asked the question about passenger levels.
And the way to think about it, I think if you look more broadly, you can look at aircraft leasing as having been certainly more resilient than the performance of the under airlines, to state the obvious. And so while certainly the ultimate value of these planes and residual value in particular as well as also in the interim in certain instances, the ability for airlines to make these payments is obviously compromised. And in the case of residual, values could go down as it relates to where passenger levels get to. But it is more resilient, right? In terms of yes, if you go out of business and it liquidates, but so long as those planes are flying, you do have some modicum of increased resiliency relative to the airlines that is important to understand in that context.
Speaker 7
Got got it. I I appreciate. Oh, I can't. Thank you. Second one, if if I can, not to do with Merck's.
And, obviously, I mean, so your your your leverage is in your target range. I mean, what what's your view the unsecured markets for for BDCs have been, to to say the least, open this year in terms of availability, capital, and and some of the lowest all in costs on unsecured we've ever seen in the space. You you have relatively not very, very low, but but only 20% of your your your debt stack is is unsecured. What's the the interest appetite, if you will, for for taking that up, or are you happy with that mix where it is right now?
Speaker 2
Greg, you wanna I'll
Speaker 4
answer that, Robert. I mean, I I think if you know, one, we were able to, you know, move out the maturity of our senior credit facility Mhmm. With a 100% support from our banks. So that that was very important Today we're running at a cost of, the combined cost of debt of 3%.
And we're very conscious about that, where we are today. But also, if you think we still have a March 25 maturity on our unsecured notes. So we are taking that. You know, we know kind of within the next two years we need to take advantage, you know, of kind of refinancing part of that. We we today have enough liquidity under our credit facility, but that's not really where we wanna put it.
We do wanna have a 25, 30% of our capital other than equity in unsecured debt. So we will look to take advantage of that. I think what we've wanted to do is to right size the portfolio, get it to a point, get our dividend set, and manage the funds so that we can say as we look forward, what is the best way to as Merx comes back on, as, you know, some of our if you look at our nonrecurring, you know, assets, we have a $194,000,000 of fair market value assets, and they're earning us 4%. So I think as we look at our going forward, we're measuring all those things and the impact of taking on higher cost debt. But we will have to do some of that.
And we've talked to our banks about it. The market is open for us. And we're just balancing when we should do it based upon you know, a lot of different factors in in our earning capacity within our portfolio. Does that make sense?
Speaker 7
It does. Thank you. It makes a lot of sense. I understand.
Speaker 4
And, Robert, I think the other thing that Tanner, you know, talking about Merx a little bit, and I don't mean to but we have, you know, and and we've disclosed this even, you know, every year we disclose the Merx financial statements, we have reserved cash of over $60,000,000 for our plans. And that's where those are maintenance reserves that are in cash that we have. So those are you know, they're trapped in securitizations, but they're there to support the maintenance of those planes. So there is cash inside, you know, Mercs, so for, you know, to to your question. Yeah.
Speaker 7
I and I I appreciate that. It's just we only get the Mercs financials once a year. So, you know,
Speaker 4
always just for the program. The last time you saw it was 90, so it went down a little bit.
Speaker 7
Got it. Thank you. Okay.
Speaker 0
There are no further questions in queue at this time. I'll turn the call back over to management for any closing remarks.
Speaker 2
Thank you. And thanks everybody On behalf of our team, we thank everybody for their time and their continued support as we continue to navigate through, this challenging environment. Please feel free to reach out to any of us if you have any other questions. Hope everybody stays healthy and safe.
Have a good day.
Speaker 0
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.