MidCap Financial Investment - Earnings Call - Q4 2020

Transcript

Speaker 0

Good morning and welcome to the Apollo Investment Corporation's Earnings Conference Call for the period ending 03/31/2020. At this time, all participants are in a listen only mode. The call will be open for questions and answers session following the speakers' prepared remarks. I will now turn the call over to Elizabeth Besson, 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 Tanner Powell, President and Chief Investment Officer and Greg Hunt, Chief Financial Officer. I'd like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release.

I'd also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward looking information. Today's conference call and webcast may include forward looking statements. 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 morning and thank you everyone for joining us today. First and foremost, we'd like to express our deep gratitude to all the healthcare professionals and essential business workers who continue to work tirelessly to serve our communities. We extend our deepest sympathies to all those directly affected by the pandemic. To all of you on the call today, we hope that each of you and your families are healthy and safe during these difficult times.

I'll begin today's call with a discussion about how AINV is positioned during these unprecedented times and will also provide an overview of our results for the quarter. Following my remarks, Tanner will review our investment activity for the quarter and will discuss the impact of the COVID-nineteen pandemic and economic shutdown on our portfolio. Greg will then review our financial results in greater detail and discuss our liquidity position. We will then open the call to questions. During today's call, will be referring to some of the slides investor presentation, which is posted on our website.

Since the onset of the COVID-nineteen pandemic, Apollo has seamlessly transitioned to a remote work environment, while ensuring full business continuity. Our priority has been the health and safety of our employees, while maintaining normal business operations. As a firm, we're well equipped to work remotely from the most senior levels on down. We've been in regular dialogue with our portfolio companies and their respective owners to evaluate the impact of the pandemic on their businesses and liquidity in order to identify and address issues as early as possible. We have long standing relationships with most of the sponsors that own the companies in our portfolio and we are working closely with them to support these companies.

We have found these conversations to be thoughtful and constructive as we collectively manage the economic impacts of the pandemic. To date, we have generally been pleased with how management teams and sponsors have handled these conditions. In the coming months, we expect to see an increase in discussions with borrowers and their sponsors regarding the need for covenant amendments and requests for additional support. And our investment committee is meeting frequently discussed portfolio company developments and how to address each situation. Clearly, are many unknowns regarding the full impact of the pandemic and economic shutdown on each of our companies, but we'd like to provide you with some general observations.

As we all know, the COVID-nineteen pandemic has been an unprecedented shock to the global economy. AINV entered this volatile period with a well diversified senior corporate lending portfolio in less cyclical industries with granular positions, a portfolio which we believe is generally well positioned to withstand economic volatility. 88% of our corporate lending portfolio is sponsor backed. And as I mentioned earlier, we're having constructive dialogues with these sponsors to find solutions for our companies as needed. We believe our portfolio repositioning over the past several years has allowed us to enter this period in a stronger position.

That said, outside of our corporate lending portfolio, we do have exposures to industries that are experiencing a direct impact from the economic shutdown, including aircraft leasing and oil and gas, which Tanner will discuss in his remarks. We have already been reducing our exposure to some of these more impacted areas prior to the pandemic, precisely because of their concentration and inherent susceptibility to volatility. It is during this type of challenging environment where AINV can most benefit from its affiliation with the broader Apollo Global Platform. Apollo has successfully navigated many market cycles, disruptions and periods of heightened volatility. We're able to avail ourselves of the expertise of more than four fifty investment professionals globally to gain insight into the broader economy and on specific industries.

Regarding our liquidity, we believe we have adequate liquidity to meet our commitments. Many of our borrowers did draw on their revolvers during the period. MidCap is the agent for nearly all our revolver and delayed draw term loan commitments and is actively monitoring every commitment. A significant portion of our unfunded commitments are not available to borrowers. Most of our revolver commitments are subject to a borrowing base and many of the companies do not have the requisite collateral.

Delayed draw term loans are typically used to support portfolio company acquisitions and having current covenants and therefore do not expect these facilities to have any material utilization in the current environment. Further, we and our affiliates are extremely well situated to support our existing borrowers with new commitments as needed by virtue of MidCap being a well capitalized co lender on much of the portfolio and given the SEC's recent co investment relief, which allows certain of our other affiliated funds to also provide capital to our existing borrowers, subject to the satisfaction of certain conditions contained in the exemptive order. Greg will discuss our liquidity and unfunded commitment exposure in greater detail during the call. Moving to our financial results. Net investment income for the quarter was $0.59 per share driven by portfolio growth in the December and good fee income including the syndication of a number of loans and the total return feature in our incentive fee structure which resulted in no incentive fee.

Results were negatively impacted by the COVID-nineteen pandemic which has caused severe disruptions in the global economy and negatively impacted the fair value of our investment portfolio. Net asset value per share at the March was $15.7 a 14.1% decline quarter over quarter. The $2.58 decrease is attributable to a $2.81 net loss per share in the portfolio, partially offset by net investment income in excess of the distribution by $0.14 and a $0.10 accretive impact from the stock buybacks below NAV. Slide 16 in our investor presentation shows the net loss for the quarter broken out by strategy. As you can see, our corporate lending portfolio accounted for $0.97 or 35% of the total net loss.

Our investment in MERGs, our aircraft leasing portfolio company accounted for $0.44 or 16% of the net loss and non core and legacy assets accounted for $1.39 or 50% of the net loss, while only representing 10% of the total portfolio. Greg will discuss the drivers of the net loss in greater detail. Due to the net loss on the portfolio and a small amount of net fundings, the company's net leverage rose to 1.71 times at the March. It is our intention to reduce the funds net leverage as new commitment activity has slowed and we expect some amount of repayment activity although below normal levels. Turning to our distribution.

The Board has approved a $0.45 per share distribution to shareholders of record as of 06/18/2020. We in consultation with our Board will continue to evaluate and monitor the appropriate distribution level in light of the impact of the COVID-nineteen pandemic and economic shutdown in our portfolio companies taking in consideration the yield on the portfolio, its credit performance and resilience and incentive fees. With that, I will turn the call over to Tanner to discuss our investment activity and our portfolio.

Speaker 3

Thanks Howard. First, I want to echo Howard's comments and I hope everyone is healthy and doing well. My remarks today will focus on four topics, the current market environment, our investment activity, a review of our portfolio and our outlook for future activity. Starting with the market environment, the volatility triggered by COVID-nineteen sent massive shockwaves through the broadly syndicated leveraged loan segment. The pandemic has led to an unprecedented disruption in business activity across a broad swath of industries.

Uncertainty over the duration of the crisis has led many companies to enact measures that will ensure that they have ample financial resources to ride out the storm. To that end, companies have been drawing on available capacity on their credit facilities or securing other financing to enhance liquidity. Activity in the middle market remains slow as sponsors and lenders continue to struggle to evaluate how to price risk due to the low visibility surrounding the duration of the pandemic and resulting economic shutdown. Against this backdrop, new corporate lending commitments for the quarter totaled $153,000,000 across 14 companies. 100% of the new debt commitments were first lien floating rate loans.

All of these new commitments were made prior to the market dislocation. Net fundings for the quarter were $8,000,000 including $47,000,000 of net revolver funding. As Howard mentioned, we did see an increase in revolver draw requests during the period but that has since leveled off. I want to take a few minutes to review our oil and gas and aviation investments which were significant contributors to the net loss during the period. Our oil and gas exposure decreased from $117,000,000 or 4% of the portfolio at fair value at the December to $64,000,000 or 2.3% at the March.

The decline was due to a $52,000,000 net loss recorded during the quarter primarily due to the decline in the price of oil and a $1,000,000 repayment. The oil market is experiencing a significant oversupply due to a combination of a demand shock from the pandemic and excess supply as producers were slow to adjust production. Our largest oil and gas exposure, Spotted Hawk, which had a total fair value of $47,200,000 at the March representing 1.7% of the total portfolio or 73% of our oil and gas exposure. Spotted Hawk is an exploration and production company operating in the Bakken Basin with significantly hedged production through the middle of this year. The company has reduced expenses and capital expenditures to necessary maintenance items and temporarily curtailed production to adjust to the lower commodity price environment.

One of our positions in Spotted Hawk was placed on non accrual status during the quarter. Our second largest oil and gas position is Glacier Oil and Gas which had a total fair value of $14,700,000 at the March representing 0.5% of the total portfolio or 23% of our total oil and gas exposure. Glacier is an exploration and production company with Alaska based reserves. Glacier's production is hedged through the 2020. During the quarter, the company repaid its remaining $1,000,000 first lien debt to AI and B and we placed our second lien debt position on nonaccrual status.

Before discussing aviation, let me briefly make comment about our shipping exposure which had total fair value of $138,200,000 and represented 5% of the total portfolio at the March. As I mentioned, the oil market is experiencing significant oversupply. The oversupply is being put into various types of storage which is driving up prices for that storage. As a result, there's significant increase in demand for tankers to simply store oil which is driving up tanker rates. And we have seen a modest increase in charter rates for our product tankers consequently.

Moving to aviation, as you are aware, the coronavirus has had a significant adverse impact on the global economy with direct implications for the aviation sector. Aviation is considered to be part of the critical infrastructure of the global economy. Our aircraft leasing portfolio company, Merx Aviation continues to closely monitor the situation and proactively maintain dialogue with its airline clients globally. Across Merck and PK Air Finance, was recently acquired by Apollo Global, Apollo's aviation platform has 45 professionals dedicated solely to aviation, located throughout North America, Europe and Asia providing expert in house support to the platform's various aviation strategies. The aviation team has the experience to skillfully navigate this period of market stress and the requisite capabilities to mitigate potential adverse outcomes.

In addition, the Apollo Aviation platform will seek to opportunistically deploy capital in the face of the widespread uncertainty and market disruption. To be clear, Merx is focused on its existing portfolio and is not seeking new investment opportunities. However, growth in the overall Apollo aviation platform will unnerge the benefit of Merx as the exclusive servicer for aircraft owned by other Apollo funds. Increased pressure on airline finances has resulted in airline specific outcomes ranging from rent deferral requests to insolvency. As certain airlines dissolve and aircraft are returned, updated lease rates and residual values will gradually make their way into the market.

We continue to witness regional governments providing assistance where possible to avoid insolvencies given the nature of the situation. In addition, lower fuel prices provide a slight offset to the coronavirus' impact on airline costs that have not otherwise been hedged. We believe that Merck's portfolio compares favorably with other major lessors in terms of asset, geography, age, maturity and lessee diversification. At the March, the portfolio consisted of 81 aircraft, 10 aircraft types, 40 lessees in 27 countries. 78 of its aircraft are narrow body.

Like most lessors, Merx has received rent deferral requests from most of its lessees. To date, Merx has received requests for rent deferral from 36 out of its 40 lessees for 70 of its 81 aircraft. We are evaluating each request on a case by case basis. First, in all cases, Merx is working with its aircraft customers to provide the necessary flexibility during these unprecedented times. Second, our investment in Merx reflects the underlying aircraft collateral.

Merx's portfolio is skewed towards the most widely used types of aircraft which means demand for Merx's fleet should be somewhat more resilient. And lastly, as we've mentioned on prior calls over the last few years, Merx has diversified its revenue beyond aircraft leasing. Merx has built a best in class servicing platform which generates income from aircraft managed on behalf of other Apollo affiliated capital. Shifting back to our overall portfolio, as Howard mentioned, we are having ongoing discussions with our portfolio companies and their financial sponsors regarding how to address the impact from the coronavirus related shutdowns. I'd like to make some high level observations about our portfolio.

Prior to the onset of the pandemic, our corporate lending portfolio companies were generally performing well meaning they entered this period in relatively good position. Although we have received some data from our companies, we expect to get a much better idea of the financial impact in the coming months. We believe most of the corporate lending portfolio has been relatively resilient during the economic shutdown. Our corporate lending portfolio is generally invested in less cyclical industries such as healthcare and pharmaceuticals, business services and high-tech industries and is underweight to the more impacted industries such as travel, restaurants, hospitality, dental and retail. Investments on nonaccrual status rose as six new positions across five companies were placed on nonaccrual status during the quarter, including our second lien investment in Glacier Oil and Gas, a first lien tranche in Spotted Hawk, our first lien investment in Soliplicity, our first lien investments in ZPower and a small first lien position in Garden Fresh.

At the March, 12 positions in eight different companies were on non accrual status. In total, investments on non accrual status represented 159,000,000 or 5,100,000.0 of the portfolio at cost at the March, up from 2% at the December and $49,000,000 or 1.7% at fair value at the March, up from 0.7 at the December. For reference, the new investments placed on non accrual status during the March contribute approximately $03 per share on a quarterly basis. Looking ahead, we expect to see significant increase in the number of amendments and restructurings in our portfolio. We believe these amendments will provide our portfolio companies with the flexibility needed to operate in this economic downturn and may include things like waiving covenants, converting the cash interest to PIK and delaying amortization payments.

We can use such amendments to reprice our risk, tighten loan documentation, add covenants and secure additional equity capital. With that, I will now turn the call over to Greg who will discuss the financial performance for the quarter.

Speaker 4

Thank you, Tanner, and good morning, everyone. Beginning with the income statement, total investment income was $71,600,000 for the quarter, up $3,100,000 or 4.6% from the prior quarter. The increase was attributable to higher interest income and fee income partially offset by lower dividend income. Interest income rose due to a higher average portfolio partially offset by a decline in the yield of the portfolio due to the decline in LIBOR and a lower yield on new investments compared to sales and repayments. The weighted average yield on our corporate lending portfolio declined to 8.5% down from 9% last quarter.

Quarter over quarter, one month LIBOR declined 77 basis points from 1.76% to one percent and three month LIBOR declined 46 basis points from 1.91 to 1.45. Fee income was $3,300,000 for the quarter, up from $1,200,000 last quarter. Prepayment income was $2,500,000 down slightly from the prior quarter. Dividend income was $2,400,000 down from $3,200,000 last quarter. Approximately 97% of contractual interest payments for the quarter were collected and we received a similar percentage for the payments that were due on May 1.

Expenses for the quarter were slightly up due to higher interest expense given the increase in the average portfolio. Due to the net loss, no incentive fee was accrued or paid during the quarter. Interest expenses rose $800,000 quarter over quarter due to higher average debt balance, partially offset by a decline in the weighted average funding cost due to the decline in LIBOR. The quarterly weighted average interest cost on our portfolio declined approximately 26 basis points from 4.2% to 3.93. Net investment income per share for the quarter was $0.59 compared to $0.54 for the December quarter.

As Tanner mentioned, new investments placed on nonaccrual status impacted net investment income by $03 Net leverage at the March was 1.71 times compared to 1.43 times at the December. The net loss on the portfolio for the quarter totaled $186,000,000 or $2.81 per share. On page 16 of the earnings supplement, we've broken out the net loss by strategy. Our corporate lending portfolio accounted for $0.97 or 35% of the net loss. Merx accounted for $0.44 or 16% of the net loss.

And non core and legacy assets accounted for $1.39 or 50% of the net loss. The net loss on non core portfolio was primarily driven by oil and gas investments due to the significant decline in the price of oil. The net loss on our investment in Merx was attributable to the impact of rent deferral that Tanner mentioned earlier and higher discount rates due to weaker conditions in the industry. Approximately $0.77 per share or 79% of the net loss on the corporate lending portfolio was driven by the impact of credit spreads widening on the valuations of the company's investments. The vast majority of our corporate lending portfolio is valued using a yield approach.

Changes in market spreads are incorporated into the quarterly valuation of our investment in addition to looking at the weighted average life or duration of a loan, LIBOR floors, industry characteristic and specific issuer factors. NAV per share at the March was $15.7 a 14% decline quarter over quarter. Moving to liquidity. Our capital and liquidity at the March, we had $1,790,000,000 of debt outstanding, up slightly $9,000,000 from the prior quarter. As a reminder, we have no term debt maturities until 2025.

During the quarter and prior to the volatility caused by the pandemic, we worked with our lenders to improve our revolving credit facility and liquidity. We greatly appreciate the support from our banks. We amended our credit facility to remove the 200% borrower asset coverage covenant. In addition, we increased commitments to our facility by $100,000,000 increasing the total size of the facility to one point from $1,700,000,000 to $1,800,000,000 At the March, we had $224,000,000 of immediate availability in liquidity and $131,000,000 of additional capacity under the credit facility. Moving to unfunded commitments.

Page 18 in our earnings supplement shows our outstanding commitments at the March. During the month of March, we experienced increased draws requests on revolving credit facilities that we provide to our portfolio companies as many of them sought to solidify their liquidity. We have seen draw requests drop off significantly in April and May. Of the $270,000,000 of unfunded revolver and bridge loan commitments outstanding at the March, 132,000,000 are not available to borrowers and $138,000,000 are available. Availability is based on borrowing based limitations and other covenants.

Since the March, we've had modest net repayments from revolvers. There was no significant draw on delayed draw term loan commitments during the quarter, which are generally used to support portfolio company acquisitions and having current covenants. Turning to the portfolio composition. Our investment portfolio had a fair value of $2,790,000,000 at the March and was distributed across 152 companies in 28 industries. We ended the quarter with core assets representing 90% of the portfolio, up from 88% at the December.

Non core assets decreased to 10% of the portfolio, down from 12%. First lien assets increased to 85% of the corporate lending portfolio, up from 82% last quarter. The weighted average attachment point remained at 0.9 times. Investments made pursuant to our co investment order were 76% at the end of the quarter. Lastly, during the quarter, we repurchased approximately 1,300,000.0 shares of our stock at an average price of $11.62 for a total cost of $15,000,000 leaving $27,000,000 available for future stock purchases.

This concludes our prepared remarks. Operator, please open the call to questions.

Speaker 1

Thank you.

Speaker 0

Your first question comes from the line of Finian O'Shea with Wells Fargo Securities.

Speaker 5

Hi, good morning. I hope everyone is doing well. First question for Howard. You guys filed a new shelf yesterday updated from just a few months ago. Can you tell us what's changed, what you're applying for and how we should think about it?

Speaker 2

Greg, do you want to answer that?

Speaker 6

Answer that, sorry.

Speaker 4

What was that again, Fin?

Speaker 5

Was asking about the change in your new shelf application filed yesterday.

Speaker 4

Oh yes. We filed it just to be up to date relative to current standards and all of that. We had filed it and updated it in January and we needed to do several other kind of tweaks to it. It's just to have it current.

Speaker 3

Okay.

Speaker 5

I'll move on to Merck's. Tanner, you provided some very good color there, appreciate it. Can you as you go through these potential rent deferrals or contracts renegotiations as outlined, you touched on being in those discussions. Can you give us some color on what kind of impact those would have on the triggers or say Merx's securitization debt or other term debt?

Speaker 3

What level

Speaker 5

of asset coverage is ample there for that to remain performing?

Speaker 3

Yes, sure. And hey, Fin, hope you're doing well. First as a generic comment or perhaps getting a little bit more granular on the lease deferrals themselves. You know, this is obviously a pretty unique situation in which airlines across the globe and lessors by extension are all grappling with the same situation at the same time. And generally speaking, the deferrals while every negotiation is somewhat situation dependent have generally speaking been like a three month deferral, in some cases longer.

But then paid back six to nine months thereafter. As it relates to the meat of your question there, Finn, I think you highlighted in some ways one of the attributes that is a good fact in terms of our funding in that just over two thirds of our exposure fin is actually in securitizations. And relatively speaking, you know, provide for more flexibility for the management and relate to payment of senior interest, as the trigger. And we feel, you know, while it is as you could probably imagine, difficult to speculate given you know, how dire the situation is at the very moment in time and will have a lot to do with the duration of the pandemic. Feel good about you know, where we stand with respect to the securitization structures.

I would also add, you know, we do have, in addition to the liquidity that, you know, Greg outlined at the AIND level, there is cash at Merck's and then there is cash within the securitization structures as well to help defray any of those potential needs.

Speaker 5

Sure, very helpful. And then one final one for me, jump back in. I think Greg or Howard mentioned a bit of deleveraging through repayments. Can you give us any color on sort of what level or what level of leverage or portfolio that you're thinking given the current environment?

Speaker 2

Yes. I mean, our goal is to sort of operate at a steady state at the range we talked about before. So say, 1.4 to 1.6, right? And so we're at 1.7 now. Obviously, there's another part of that to see if there's further pressure on NAV in the coming quarters depending on sort of how sort of the global economy works.

But putting that aside, the net pay downs we would need to get down to the ballpark of the level we would want is a couple $100,000,000. And so we're sort of focused on that with regard to which borrowers have liquidity options. There are although in the normal market people are repaying all the time, this is not a normal market. But that said, there are almost every borrower is looking at sort of their capital structure going forward. And there are many who have opportunities to refinance or have other alternatives, which we encourage you to take.

So our hope would be to over the next few months or quarters to sort of be able to sort of hit that deleveraging. But it should be a straight line down. It just depends on the slope of that line depending on how successful we are. But we have a list of transactions that we expect to have some liquidity. For example, there's a few that have sale processes or really sales contracts signed up.

We know they're getting taken out. There are other ones that are asset based that clearly have other financing options. So we're pretty focused on that. And so that's the size we're talking about, a couple of $100,000,000 over the next three, four months or so.

Speaker 5

Okay. Thanks so much everyone.

Speaker 0

Your next question comes from the line of Kenneth Lee with RBC Capital.

Speaker 6

Hi, good morning and thanks for taking my question. I think you touched upon this in the prepared remarks, but wondering if you could just further elaborate on the potential benefit from the SEC's recent relief on co investment restrictions. Thanks.

Speaker 2

Sure. One of the constraints prior to that relief was any affiliate of AINV, which was not a lender in the transaction when AINV entered, couldn't step into the transaction and lend as well. And so that meant that if there was an add on to a company or sort of another lending opportunity, that pool of capital was not available, needed to come from a third party or one of the other Apollo entities that were already in the deal. In AIB's case, as you know, a lot of the deals already have mid cap in them and so there's an opportunity. But now there's also this relief now changes that rule as I described and said, affiliates can invest subject to certain conditions even if they were not in it at the outset.

So what that just means, it just gives you another sort of tool to use if there's capital needs or liquidity needs at companies beyond AINV's balance sheet. And we're just underlining that because it's important to be able to support our companies both defensively and offensively. At the same time, it's really important that we hit that delevering mark we want to hit. And so that SEC relief just provides sort of the full array of Apollo capital available for opportunities that make sense.

Speaker 6

Great, very helpful. And just one follow-up, if I may. You mentioned in the prepared remarks seeing a drop off in revolver requests from portfolio companies in the April to May timeframe. Wonder if you could just share with us any particular details on what could be causing that drop off and whether you expect requests to pick up in the near term? Thanks.

Speaker 2

Sure, they're sort of twofold. One, let's talk about the one that is sort of most, it's across the whole BDC industry, which is the non ABL ones, the leveraged loan revolvers. Really what happened is everybody, or not everybody, the vast majority of borrowers at the March sort of knee jerk drew on their revolvers if they thought they may have a liquidity deed. So not everyone, but a lot. And so the peak revolver draws came really right at the end of the quarter.

As the first few weeks of April came on, that sort of abated, but everyone sort of sat on their capital to figure out what's going on. Since that time, probably over the last three weeks, there have been pay downs, net pay downs because effectively people now realize they won't need that capital. Projected out what they need and they don't want to sit on cash and pay interest on it. And so we are seeing each week a modest amount of repayments as people pay down and very little draws, if any. And I don't think that experience on the revolver level is any different than the vast majority of our competitors who do leverage lending.

So in other words, revolver utilization is down in sort of I would say the single digits as a percentage basis on a leveraged loan just because of the dynamic of the way the market works. That's one. Obviously, as we work through amendments with people, we also try to address some of that and get repayments. So if people want covenant relief, we want cash back, we shrink revolvers and things like that. And so you would expect that will also provide some sort of downward pressure utilization as well.

Separately, we have ABL commitments. And so ABL commitments, their utilization could go up or down depending on their collateral. But because we have a few healthcare deals and there's been a lot of stimulus money for these healthcare companies, they have been relatively flush since the end of the quarter and that has also provided some downward pressure on ABL utilization.

Speaker 6

Great. Very helpful. Thanks again and hope everyone stays safe.

Speaker 0

Your next question comes from the line of Casey Alexander with Compass Point.

Speaker 7

Hi, good morning. A lot of good questions already. Let me ask a couple here. First of all, in relying on the exemptive order for co invest, does that preclude AINV from making new investments or participating in structuring and origination fees? Or does that or does those restrictions only apply to the BDC if you sell additional senior securities?

Speaker 2

It can be more it could be even more technical than that. But first of all, the exemptive orders generally are sort of skewed to protect the BDC. So generally, I'll give sort of two answers to that or where the BDC is protected. One is, if there is an opportunity to lend going forward, the BDC has its option to take as much as it wants to take, or as much to take its portion of that origination. So it has the option to come in or come out, one.

Two, generally when there's new lending coming in, it requires an amendment to the existing facility. And so as sort of one of sort of the required lenders, AID also needs to approve the new funds coming in. So generally what would happen is that they wouldn't necessarily get the origination fees if they put in the new capital, but generally there would be fees to the existing capital for allowing capital structure to expand. So put another way, AINV should benefit from the perspective of one, it can always invest the money if it's particularly appealing. And it certainly won't get disadvantaged in that it'll be higher priority or be disproportionately higher yield.

Because it also sort of make sure that the economics go to the whole to where the risk is being taken across the board. Does that answer the question?

Speaker 7

I think so. Maybe I'll try to follow-up with Greg on that one afterwards. Okay. Because it is pretty technical. Let me ask a different question here.

Your leverage ratio kind of presupposes that you need to do some deleveraging, which you discussed about a couple of $100,000,000. And as you say, that's likely to come from repayments and repayments of healthy interest earning investments. At the same point in time, you mentioned that there's an increase in discussions with borrowers that kind of suggests that it is likely that there are more non accruals on the way, which would hamper your interest earning investments. How does the Board think about maintaining the dividend at $0.45 and not again, reset that dividend at a level that's more sustainable for the long term against this interest rate environment and allow for some NAV accretion as you over earn that dividend?

Speaker 2

Yes. So without obviously I don't speak for the board, I'm on the board, but I speak for the board. I think the intent of the board is to set a dividend policy that is long term sort of achieves the goals you just talked about. Putting aside the specifics of all the pressures you're talking about, like I don't know if sort of the for example, if the corporate discussions will necessarily give rise to significantly more nonaccruals. But that said, a shrinking book obviously loses interest income as well as sort of less velocity of transactions means less transaction fees.

So that's another source of pressure and potentially less dividend income at Merx. All things put pressure on our earnings. And I think the intent of the board will be to set a dividend policy that's sustainable in the long term. And so the dividend paid this quarter obviously was well covered by the earnings this past quarter. And if you look forward to where our portfolio is right now, also assuming no incentive fee, in the ballpark of our earnings power for next quarter.

But that said, we would expect that the Board will look at setting a dividend that is in the ballpark of what most BDCs pay against their NAV in order to achieve the goals you're talking about. So I think the shorter answer is we want to have a clearer picture as we work through this next quarter in terms of how some things will play out both with Merck's cash flow and portfolio cash flows and give the Board a clearer picture with regard to how to think about that for the longer term.

Speaker 7

Okay. That's a very fair answer. Thank you. Lastly, on lease deferrals on the aircraft, since they're deferrals, do you still accrue that income from a book standpoint? And then if the lessor files for bankruptcy down the road, that has to be reversed?

Or does that sort of go on like an internal nonaccrual versus that lease and hopefully recaptured down the road?

Speaker 2

Any of us could answer that. Guess, Greg, do want to take a shot?

Speaker 4

Yes, I'll answer it. Yes, I mean, our Merck's financials, were filed today along with our 10 ks, we apply GAAP standards. And as I'm sure you're very familiar with, you do accrue income within Merck's, okay, not at the AI and V level. And then we also provide reserves against those receivables to the extent that there's short term impairment. So we evaluate that every month.

So hopefully that answers your question.

Speaker 7

Okay. I think it definitely gives me an idea. I'll step back in the queue and open it up for other questions now. Thank you very

Speaker 0

Your next question comes from the line of Kyle Joseph with Jefferies.

Speaker 8

Hey, good morning guys. Thanks for taking my questions and hope everyone is doing well. I just wanted to step back and go more high level question given the current environment where your leverage is. Just talk about how you envision capital allocation priorities over the coming months in terms of debt pay downs, investing in new companies, investing in existing companies or even share repurchases?

Speaker 2

Sure. I guess in terms first for the first priority is our portfolio companies, both because those are the companies we know the best, so we can get a sense of those opportunities the best and they're in front of us and also because they support both who our existing clients are and our existing investments. To the extent that there's capital needs there, we expect to be able to support them. Again, almost all of them have mid cap involved in them. So the amount that AINV will choose to do will just depend on sort of how appealing we think it is, how much paydown activity we've had in that quarter, etcetera.

But we will lean towards letting out other balance sheets put in the extra capital, especially if sort of the whole facility gets stronger, if you will, economically and from a credit perspective. In terms of new opportunities, I think the whole market for new opportunities is an interesting one because a lot of people are talking about they have dry powder and they're ready to invest, but there has not been a whole lot actually executed in the market and the market is still finding its footing. We wouldn't expect, obviously, as we're shrinking the portfolio to be to doing a significant amount of new business. That said, under our exemptive order, in order to basically invest in companies down the road, we need to be part of facilities day one. And so there's a reasonable chance we'll take nominal amounts of new origination in order to basically have a foothold in those facilities.

So in other words, you may see a bunch of names being added at very small numbers in order to enable us to sort of continue to be involved in those names going forward as there's opportunities. Lastly, with regard to share buybacks, our position has always been that if it is an appealing investment and value created for our shareholders, it's going to be part of what we will consider doing When we're trading at a significant discount to NAV, the math of those buybacks are almost in all cases better than new origination. So we would expect it to be depending on how the world goes part of what we do. But our first priority right now is delevering. So that's gonna go further down on the list until there's more liquidity in the company or there is sort of such overwhelming value that it sort of has to be done.

Does that cover it all?

Speaker 8

Yep, yep, that's very helpful. Thank you. And then just one follow-up from me. In your discussions with sponsors and tracking your portfolio companies, I know it's early, but have you seen any sort of positive signs since the economy kind of started to reopen slowly?

Speaker 2

Yes. Positive signs, I guess, would say less negative signs. The first pro formas you've gotten from people and from sponsors, especially as they start to think about how they want to plan out the next three quarters were relatively negative projections. And now we're starting to see sort of real time results that are better than those negative projections because things are opening up sooner. Like a lot of people had cases where revenue doesn't start until June 1 and now revenue has started sooner.

And so that's pretty meaningful because that means people are sitting more cash than they expected, which means they may need less capital and they will pay down the revolvers, all of those things. So I wouldn't necessarily call that positive as opposed to less negative, but you are seeing that. You're seeing effectively numbers come in real time that are above sort of people sort of base cases they set at the March, which is positive because obviously when you're a first lien lender, have a bunch of cushion. And these companies because of their revolvers or because of just the position they were in had reasonable liquidity. So like that type of improvement in sort of revenue and cash coming in, not really cash flow, but cash coming in really actually extends the runway, but also just sort of changes the band of outcomes for companies in terms of capital they need.

And so we are seeing that, but I wouldn't it's not enough to sort of write home about.

Speaker 8

Got it. Well, thanks very much for answering my questions. Less negative is definitely a positive in this environment. Thanks, guys.

Speaker 0

Thank you. And your last caller question is from Aaron Zygrenovich with Citi.

Speaker 4

Thanks. I just was wondering, you mentioned kind of wanting to get it back down to the leverage level of 1.4 to 1.6. Is this really the right level of leverage you should be targeting? Should it be lower? I think that you know, seeing that companies that have started in, you know, one five ish type of leverage heading into this are, you know, forced to raise capital or forced to delever.

You don't have much free dry powder to work as we get out of this. Is that something that you might want to reconsider as to the appropriate amount of leverage you need for the vehicle?

Speaker 2

Well, obviously, environment like this should make you consider everything in terms of what your strategy is. But I would say our strategy has always been that we can operate at the higher range of leverage versus other BDCs because we are putting together the most granular and highest up the balance sheet of portfolios. And so one thing I would say is, as we do our forensics on what happened here over the next few quarters, the appropriate answer to that question will be let's see how that corporate book performed and how volatile it was and how much it moved leverage versus what happened to some other people and see if then that's appropriate conclusion. I'm not sure it will be. We feel pretty good about the volatility on that corporate book.

And to be fair, I'm not sure it won't be either. But I do think in looking at our relative the relative performance of that book versus other assets we have, that you wouldn't necessarily reach the conclusion you just said, if it was only that book, which was sort most of our goal to get to. So certainly for sure I think there needs to be a sort of, as everybody works through this, a rearticulation of where your strategy falls. We haven't yet seen anything that suggests what our strategy was, wasn't sort of the safest of all the strategies we could have chosen. Unfortunately, we weren't all the way through getting to where that portfolio should have been.

And so we're absorbing that hit and that may be a pretty that may have substantial impact on it. So hopefully that sort of addresses it. So I don't I think operating with a pure first lien granular book at the 1.4, 1.5 leverage range would be especially without an SBIC where you have hidden leverage or a JV down below where you have hidden leverage is not is probably less volatile than a 1.1, 1.2 book with a lot of second lien exposure and sort of hidden subordinate certificate exposure, those type of things.

Speaker 4

Okay. And then I guess looking at the SOI, is a chemicals company that got marked down pretty dramatically, but it's not on non accrual. Is there anything you can comment about that particular investment?

Speaker 2

Yes. That's a legacy. That's one of those legacy investments, carbon free. Tanner, do you want to spend time on it?

Speaker 3

Yes, sure. So this is a petrochemical plant in Texas referred to as carbon free with a technology. Think of it as a greener alternative to carbon capture. And has experienced historical issues in terms of ramp of the facility. Has attracted significant equity capital over its life.

It produces three separate outputs. One of which is hydrochloric acid which itself is used heavily in fracking of wells. And the prices for that have also have obviously gone down significantly in the current market environment. Offset to a certain extent by the other output or the other two outputs and in particular bleach and caustic soda. Bleach being something that has seen demand relatively resilient and pricing relatively resilient.

And so the and then this is also an investment in which we undertook a restructuring whereby we would have a greater deal of our value with the value of the IP which we do believe to be valuable and the company's go forward strategy is to find a partner for use of that IP. And if you kind of think about in the context of the broader concerns and motivations and mandates to make more green such processes. We're hopeful that that will drive some value. So that's that investment.

Speaker 4

Thank you.

Speaker 0

You do have several more questions. The next question is from Rick Shane with JPMorgan.

Speaker 9

Hey guys, thanks for taking my questions and I hope everybody is doing well. I wanted to talk a little bit about the aircraft portfolio. I'm curious within the fleet what the mix between classics and next gen planes are. And I'm curious particularly how that impacts your ability to re lease the planes and what the collateral value is. And the reason I ask is we've seen jet fuel prices basically back to twenty year lows.

And historically, when that happens, the price discrepancy between Classics and next gen planes converges because fuel efficiency is much less of an issue. So I'm curious how you guys look at your portfolio and what the actual impacts are?

Speaker 3

Yes, sure. Thanks, Rick. I'll take a stab at this. So if you think about I'll kind of put it in three different categories and sometimes the nomenclature can be a little bit confusing. The classics would be the July and previous on the July.

And then what's called next gen is what has been produced over the kind of last ten to fifteen years. And then the next gen, next gen would be the neo and the max. And right now and your comment was very astute and correct. And you may recall we had actually previously been invested in some classics and some other assets such as the MD80 which itself were older equipment. And with the downdraft in oil prices.

The last time in the fifteen, sixteen period saw significant excess value to end of life assets that would have otherwise been retired but owing to the fact that fuel prices were less, they continue to operate. Our current fleet has very little classics by this point in time. There's not as many classics out there and most of those have approached their twenty to twenty five year, life cycle and they're very few, in operation. Our, fleet would be very much in that middle category. We have very little exposure to the most recent technology be it the NEO and the MAX.

Obviously good as it relates to the MAX given some of the issues there. But also less opportunity. And so while not as pronounced and I'll draw a distinction here, Rick. While not as pronounced as a benefit, you know, relative to the classics for instance in terms of oil price and fuel efficiency that, you know, the seven thirty seven-eight 100, the three twenty-two 100 versus the NEO and the MAX do have some of that fuel benefit. And that's one thing that we think could help, you know, some of the resiliency in the period.

I would also note that, you know, our as I mentioned in my prepared remarks, we're disproportionately narrow body which itself as an asset class or a broader asset class would expect to be more resilient not just because of the likelihood that domestic flying in various countries probably picks up sooner and is more robust relative to Transatlantic. But so too also the max I referenced and that, you know, we're entering this period of time with less of an imbalance. So a lot there. Very good question, Rick. I would say there is some benefit not as pronounced as we saw in 2016 with the classics that we had in the MD-80s.

But some modest benefit and we do take some modicum of comfort in that our portfolio is almost exclusively narrow body at this point.

Speaker 9

Got it. That's a very helpful answer. And I do appreciate the clarification or the strong point on the narrow bodies in terms of how we could imagine air travel starting to pick back up domestically first. Thank you, guys.

Speaker 0

Your next question comes from the line of Robert Dodd with Raymond James.

Speaker 10

Guys. Glad that everybody is okay. I've got

Speaker 11

a few questions. I'll try

Speaker 10

to be quick. Quick, on the oil and gas that's part of the bulk and glacier with the throughout the hedges coming off essentially over the course of this year. Obviously, they can generate some cash flow in the near term by monetizing those hedges. But a longer to again, depending on how long oil prices stay low, whether oil and gas is a sector you've been trying to reduce exposure. But what's your appetite for putting potentially putting in more capital into those businesses as hedges roll off to protect a potential eventual recovery?

I mean, that a segment that we could see grow again in the near term?

Speaker 2

No. How's that?

Speaker 11

That's fair enough. Just one.

Speaker 2

I mean, look, Glacier is mostly near term. It's most of its value is being either sort of will be monetized with the hedges or pumping. Spotted Hawk, lot of the valuation is staying in the ground. And so its valuation will sort of stay there. So it's just like if prices stay down, it's just its value stays down for longer, but it's more it's a lot of option value to its valuation anyway because it's not currently.

So but we don't want to invest more capital there. Obviously, there's something defensive we have to do and to ensure downside value, we'll do that. But other than that, no. Got Got it.

Speaker 10

On Merx, in in the prepared remarks and then in the form, you mentioned, obviously, they've got cash there. There's cash in this realizations. What level of of lease deferrals could Merx handle from from a from a near term cash flow impact perspective and still service the debt to you. I mean, is there a risk that we could see Merx maybe pick the interest in the second or third quarter or even go and not approve? Or is the the cash level sufficient to to maintain cash pay on the debt to AI NV?

Speaker 2

Don't, you know, Tanner, Greg, do you want to answer that, Greg?

Speaker 4

Yes. I think at this point, Robert, I mean, we're assessing it and we continue to assess considering if you think of the debt as in the entire investment there as our equity sitting in the structure, we'll look to combined our debt and our dividend and look at the appropriate level. One to support leaving capital in like we did this quarter. And but it really will be a function of what happens as we look into July when most of the deferrals are completed, then let's see how the industry opens up. So I think as Howard mentioned, we look at the distribution, you know, we're gonna look at all the components of income to determine, you know, what level, you know, that they can, you know, pay going forward.

Speaker 11

Got it. I I I appreciate that. Yeah. Things are really hard to project right now. One last one, if I can, real quick.

Speaker 10

On on in the prepared remarks, Howard, you said one four to one six leverage in response to one of the questions you took about one four to one five. I mean, is it fair to say that the the target for near medium term would be to get down towards the lower end of your target leverage range?

Speaker 2

Yes. I mean, it's hard to be that precise because you have revolvers that fluctuate a little bit. I think the answer is we don't want to be at 1.59 because we want to have some room to sort of to take on new opportunities as things pay off and things like that. So we'll assess that when we get there, but we're not I would say, it's probably the right target is the middle of that is probably 1.5 if I just had to choose one because we feel like from a risk perspective, if it's a corporate portfolio, we can operate well there. From the perspective of sort of new investments and liquidity and choices and things like that, obviously, the less leverage you have, the more new things you can do.

So that comes into the mix. But I would say we're targeting to get into that range and probably sort of hover around the middle of that range.

Speaker 10

Got it. Thank you.

Speaker 0

Your last question comes from the line of Ryan Lynch with KBW.

Speaker 11

Hey, good afternoon guys and hope all is well. I wanted to follow back up with the leverage and the liquidity discussion. So obviously leverage increased a decent amount as was expected for you and most BDCs. As I look at your limited amount of capacity under your credit facility which is obviously subject to change via how your borrowing base moves. I know a lot of investors coming into this quarter was looking at Apollo potentially needing to do some sort of equity raise to be able to manage through this downturn.

You kind of mentioned that your next plan is just to use repayments from your current portfolio to delever and manage through this. So as you sit here today as you try to look through forecast out the outlook going forward, which I know is very hard to do, do you anticipate and do you think that there will potentially be the need to raise additional equity capital to manage through this downturn?

Speaker 2

So a couple things. Obviously, it's a board decision and obviously like anything's possible, right? There's all sorts of disclaimers I need to put on anything I say with regard to sort of predicting what's gonna happen. Our goal is to, as it has been since we all started working together is to sort of navigate through what we're doing to do the things that are most value creative given the handwork we've been dealt for our existing shareholders and doing sort of an equity raise that dilutive is not usually the highest thing on that list. So as we laid out what we did here, we have a plan that isn't you know, so, a plan that has room in it to execute without doing that.

So hopefully that sort of answers the question. Like I don't wanna take any choices away from our board in terms of what they may choose to do or think that's appropriate. But we think we have a workable plan with a good amount of flexibility to work through this and have our metrics start getting better without doing dilutive equity.

Speaker 11

Okay, fair enough. I know it's a difficult murky time to try to evaluate what the outlook looks like, but appreciate the comments. And then just one other one, just on your Merck's valuation of the equity interest, how exactly is the valuation for the equity interest done? Is that based on some sort of yield and discount rate that you guys use on the income that it generates or expected to generate in the future? Or is it a burn down type of analysis, liquidation analysis of what those underlying assets worth?

I just know because reason I ask is when you look at the financials that Merck's filed today for twenty twenty fiscal year, it had a pretty substantial net loss for that year. So just wanted to get a little more color on how the equity portion of your BERC investment is valued.

Speaker 2

Greg, do you want

Speaker 6

to Yes.

Speaker 2

Or is that Tanner?

Speaker 6

Yeah, I'll work. Yeah, I'm happy to take

Speaker 4

Or go ahead Tanner.

Speaker 3

Yeah, sure. So first off, with all our illiquid positions, we get third party to value, give us actual valuations. But in what you described, it touches a number of those aspects but is really a discounted cash flow into the future and at a discount rate which is determined based on market comps And then the cash flow forecast of course representing our best estimate of future which itself would also naturally involve an assumption around ultimate residual value. And so it's built up there. It's not a yield analysis and it's not a straight collateral, you know, point in time what's the value of the assets.

It's a discount in cash flow which, you know, again, sorry, at the risk of being redundant has, you know, a residual assumption embedded in it at the end of the lease or projected hold period.

Speaker 11

Okay, got it. Those are all my questions. I appreciate the time today.

Speaker 2

Okay. Thank you everybody for listening to today's call. On behalf of all of us, we thank you for your support as we navigate this time period. Obviously, reach out to any of us if you have any questions, and we hope everybody stays healthy and safe.

Speaker 1

Thank you. This does conclude today's conference