MidCap Financial Investment - Earnings Call - Q4 2021

Transcript

Speaker 0

Good afternoon, and welcome to Apollo Investment Corporation's Earnings Conference Call for the period ended 03/31/2021. At this time, all participants have been placed in a listen only mode. The call will be opened for a question and answer session following the speakers' prepared remarks. I'll now turn the call over to Elizabeth Bessem, 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 Widro, 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 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 Wintra.

Speaker 2

Thanks, Elizabeth. Good afternoon. Thank you everybody for joining today. I'll begin today's call with a few thoughts about how AINV has performed throughout the pandemic, followed by an overview of our results for the quarter. Following my remarks, Tanner will discuss the market environment, 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'll then open the call to questions. During today's call, we will be referring to some of the slides in our investor presentation, is posted on our website. Given that it's been a little over a year since the initial volatility from the pandemic, I'd like to begin today's call with a few thoughts about how AINV has successfully navigated this challenging period. First, our corporate lending portfolio continues to perform well and has recovered the vast majority of the unrealized losses recording during the March.

Given the stable credit metrics of our portfolio companies, we believe there is potential for some additional recovery in our corporate lending portfolio. We believe this strong performance validates our investment strategy and our ability to underwrite as well as improve market conditions. Second, we significantly reduced AINV's net leverage from its high year ago without being forced to sell as assets or issue dilutive equity. By being patient and with normal course repayments, AINV's net leverage is now slightly below its target range. As we look ahead, we are confident in our ability to grow our portfolio and operate within our target leverage range, given the tremendous need for creative and flexible private capital and the unique and robust nature of the Apollo and MidCap platform.

With that said, as Tanner will discuss later, the current market environment is competitive, and we will remain disciplined in our credit selection process. Moving to our financial results, we delivered solid results for the quarter. Net investment income for the March was 39¢, which reflects no incentive fee being accrued during the quarter, given the total return hurdle in our fee structure. Net investment income exceeded the base and supplemental distribution recorded during the period. We ended the quarter with net asset value per share of $15.88 up $0.29 or 1.9% quarter over quarter.

The increase was driven by net gains across the portfolio, including the continued recovery of our corporate lending portfolio due to a combination of improved portfolio company performance as well as spread tightening. We also saw continued stabilization in our investment in Merx, our aircraft portfolio company, which had a slight net unrealized gain, and we also had a net unrealized gain on our noncore portfolio during the period. Moving to investment activity. Originations returned to more normal level for a seasonally low quarter. As expected, we saw strong repayment activity, which resulted in negative portfolio growth during the period.

Net leverage declined to 1.36 times at the March, below our target range of 1.4 to 1.6 times. We remain committed to our disciplined approach to invest in and expect to steadily return to our target leverage range, but may operate below the target range in the near term. Looking ahead to fiscal year twenty twenty two, we will continue to seek to optimize and derisk our portfolio and rotate out of our remaining noncore and second lien assets and into core assets. Turning to our distribution. For the quarter, the board has declared a base distribution of $0.31 per share and a supplemental distribution of $05 per share.

Both distributions are payable on 07/07/2021 to shareholders of record as of 06/17/2021. With that, I'll turn the call over to Tanner to discuss the market environment and our investment activity.

Speaker 3

Thanks, Howard. Beginning with the market environment, The U. S. Economy continues to strengthen due to the significant fiscal and monetary relief and the continued rollout of the vaccine. Specific to the direct lending market, given the improved economic backdrop, we are seeing a pickup in sponsor activity.

With that said, competition for attractive new investments remains elevated due to robust repayment activity and a strong syndicated loan market, which is offering borrowers including the upper end of the middle market attractive financing. As a result, pricing leverage in terms of generally returned to pre pandemic levels, particularly for companies with little to no impact from the COVID-nineteen pandemic. Moving to AINV's investment activity, new corporate lending commitments for the quarter were $106,000,000 across 11 companies for an average new commitment of $9,600,000 Consistent with our strategy, all of these new commitments were first lien floating rate loans with a weighted average spread of six ninety basis points and a weighted average net leverage of 4.2 times. All of these new commitments include LIBOR floors and 91% were made pursuant to our co investment order. Gross fundings for the quarter totaled $116,000,000 excluding revolvers and Merx.

Repayments totaled 172,000,000 excluding revolvers and Merx. Net fundings for revolvers totaled $13,000,000 and Merx repaid $9,500,000 to AI and V on a net basis. Repayments included our $22,000,000 second lien position in Hayward. Net repayments were $53,000,000 in total. I will now provide an update of our post quarter investment activity.

From April 1 to May 18, we made new commitments of approximately $193,000,000 all of which were first lien corporate loans. Gross fundings have totaled $157,000,000 Sales and repayments have totaled $149,000,000 including $57,000,000 of second lien corporate lending positions. Moving to Mercs, While there are still many challenges facing the aviation industry, we continue to see a slow but steady recovery in air traffic in many regions. We are optimistic that demand for air travel will continue to grow with the ongoing rollout of the vaccine restrictions. Notwithstanding the current challenges, we believe the aircraft leasing market will continue to be an important and growing percentage of the world fleet as airlines increasingly look at third party balance sheets to finance their operating assets.

Merx has remarketed most of its aircraft that are due to have come off lease in 2021, either via extensions with existing lessees or releasing to other airlines on long term leases. Of the seven aircraft leases that are maturing in 2021, extensions for four have already been executed. One is in the process of being finalized and one is currently under negotiation for extension or sale. Merx is actively remarketing the remaining one aircraft. In addition, during the quarter, one aircraft in Merx's own fleet was sold above its carrying value.

During the period Merx paid $14,300,000 to AI and B consisting of $4,800,000 in interest payment and a $9,500,000 return of capital. Additionally, we had a net gain of approximately $500,000 on our investment in Merx which reflects the stabilization of the business. We believe Merx's fleet compares favorably with other major lessors in terms of asset, geography, age, maturity and lessee diversification. Merx's fleet 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 primarily consists of narrow body aircraft serving both U.

S. And foreign markets. Turning to the overall AI and D portfolio, our investment portfolio had a fair value of $2,450,000,000 at the March across 135 companies and 25 industries. We ended the quarter with core assets representing 92% of the portfolio and non core assets representing 8%. First lien assets represented 87% of the corporate lending portfolio.

The weighted average spread on the corporate lending portfolio was six twenty eight basis points. As a reminder, the weighted average LIBOR floor on our floating rate investments is approximately 1%, well above today's current LIBOR. The weighted average net leverage was 5.3 times and the weighted average attachment point was 0.6 times. And investments made pursuant to our co investment order represented 80% of corporate lending portfolio at the end of the quarter. Amendment activity remained modest this quarter with no material amendments.

No investments were placed on or removed from nonaccrual status during the quarter. At the March, investments on nonaccrual status represented $34,000,000 or 1.4% of the portfolio at fair value. 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 afternoon, everyone. Before I begin, I'd like to remind everyone that Merck's financial statements are included as an exhibit to our 10 k that we filed today. Beginning with on AIMD's statement of operations, total investment income was $50,800,000 for the quarter, reflecting lower interest income, lower dividend income, and lower fee income, partially offset by greater prepayment income. The sequential decline in the interest income was attributable somewhat to certain nonrecurring items in the December quarter as well as a smaller average portfolio due to deleveraging. Fee income declined to approximately 700,000 for the quarter, down from 1,200,000.0.

Prepayment income was $3,300,000 compared to $2,400,000 last quarter. Dividend income was $300,000 compared to $1,100,000 last quarter. The weighted average yield at cost on the corporate lending portfolio was 7.8%, unchanged quarter over quarter. Expenses for the quarter were 25,200,000.0, down 900,000 quarter over quarter due to lower g and a, lower management fees, and interest expense. This was there was no incentive paid during the quarter.

Net investment income per share for the quarter was 39¢. Net leverage at the March was 1.36 times, down from 1.43 times at the December due to $53,000,000 of net sales repayments during the quarter. The increase in net assets was driven by 16,800,000.0 or $0.26 of net gain on the portfolio and 2,100,000.0 or $03 a share of retained earnings as net investment income was in excess of the distribution recorded during the period. On page 16 in the earnings supplement, we have broken out the net gain or loss by strategy over the past five quarters. As Howard mentioned, our corporate lending portfolio has recovered vast majority of the unrealized losses recorded during the year ago quarter.

During the quarter ended 03/31/2021, our corporate lending book had a gain of 12,400,000.0 or $0.19 per share, and Merck had a gain of 500,000 or 1¢ per share. Non core and legacy assets had a gain of 3,900,000.0 or 6¢ per share from our oil and gas and renewable investments. NAV per share at the March was 15.88, a 1.9% increase quarter over quarter. Moving to liquidity. Given the reduction in AI and B's net leverage and improved quality of our investment portfolio, our liquidity position continues to strengthen.

At the end of the quarter, we had $1,470,000,000 of debt outstanding, a decrease of $47,000,000 quarter over quarter. At the March, we had $360,000,000 of immediately available liquidity and $330,000,000 of additional capacity under the facility. Our liquidity position provides us with strong coverage of our unfunded commitments. As you can see on page 18 in the earnings supplement, of the 264,000,000 of unfunded revolver and bridge loan commitments outstanding at the end of the quarter, 151,000,000 were available to borrowers, and a 113,000,000 were not available to borrowers. Availability is based upon borrowing base limitations and other covenants.

There were no stock repurchases during the quarter, but we continue to evaluate repurchasing securities over time. Earnings outlook. Before opening the call to questions, we wanted to briefly discuss the outlook for our earnings and distribution. Given the total hurdle feature in our fee structure and the net losses recorded during the look back period, we have not paid an incentive fee since the quarter ended December 2019. Given the significant recovery in the portfolio over the past several quarters, we wanted to make sure everyone is aware that we may begin paying a partial incentive fee in the quarter ending September 2021.

The exact timing and amount may vary based upon future gains and losses as well as the level of net investment income. As you may recall on the conference call last August, we said that we believe a 31¢ based distribution reflects a conservative estimate of the long term earnings power of our core portfolio, and that the supplemental distribution would be a function of the redeployment of nonearning and lower yielding assets from noncore and legacy assets as well as an increase in yield we received from our Merx investment. We remain constructive on each of these drivers, although we expect some of the benefits of these drivers will occur after we start accruing incentives. As a result, net investment income may fluctuate over the next few quarters as we continue to reposition out of non core and legacy assets and grow the portfolio to within our target leverage range. That said, we currently intend to declare a quarterly distribution of $0.31 and a quarterly supplemental distribution of $05 for the next four quarters.

This concludes our remarks today. And operator, please open the call to questions.

Speaker 0

Your first question is from Kyle Joseph with Jefferies.

Speaker 5

Good afternoon, and thanks for having me on. First question, I think, Greg, you talked about dividend income and, was a little light. Any any onetime issues there? Is that a a fair run rate going forward?

Speaker 4

Yeah. That'll I think the run rate is is between there and a million. It's a function of, you know, our shipping investments at this point and just the cash flow that's coming out of those. So I would say, you know, the run rate will be closer to, you know, a million going forward.

Speaker 5

Got it. Helpful. Thanks. And then for Tanner, on on portfolio performance, obviously, non accruals were stable in the quarter. Just give us a sense for revenue and EBITDA growth and how that's been trending, particularly as we start to comp against COVID impacted months?

Speaker 3

Yes. Absolutely, Kyle. So first of all, so going forward, what's in the LTM so to speak does not have those easy comps yet. And then one caveat is not surprisingly given the focus on acquisitions and roll ups within the sponsor community comparisons are somewhat difficult. But whether looking at what we're seeing real time as well as also what we experienced in kind of fourth quarter numbers, which are form the basis for the valuations as of threethirty one, the outlook has been very encouraging.

On an organic basis, in the mid single digits very, very easily, Haven't started seeing much effect on the margin side, which has certainly gotten a lot of press. And even more impactfully, you look at and I think this has also been broadcast more broadly is confidence, CEO confidence, management team confidence and willingness to spend has seen a noticeable uptick in recent months. I think that will bear out in continued outperformance from an operating standpoint.

Speaker 5

Got it. Very helpful. Thanks for answering my questions.

Speaker 0

Your next question is from Casey Alexander with Compass Point.

Speaker 6

Hi. Good afternoon.

Speaker 7

I have a couple of questions. One is in relation to this is a couple of questions in relation to Merx. How many of the planes, if any, are currently off lease? And how many lease expirations do you have in 2021? And how does the market look for releasing of those assets?

And then secondly, the acquisition of Fly Leasing during this last quarter, how did that improve in any way the price discovery of the market for commercial aircraft or inform you as to the demand for commercial aircraft?

Speaker 3

Yes, sure. I'll take a first stab at that. And apologies if I went pretty quickly in my prepared remarks. We tried to give some of that detail. And let me try to go back to it.

And then Casey, of course, please correct me if I haven't hit everything that you asked there. In terms of 2021 and the lease expirations, that news is good. And we have of the seven that were maturing in 2021, we've already executed four extensions. One's in the process, one's in negotiation and then we're actively remarketing the one other. In terms of strictly off lease, we have two planes that are off lease and then we have a handful that are in a bankruptcy proceeding or are currently affected by broader restructuring.

But what I would say on that account is and again going back to the prepared remarks to a certain extent, we've definitely seen stabilization in our ability to deal with those lease maturities as reflective of kind of growing confidence and improving conditions the market environment. And then the second part of your question, Casey, is fly leasing, broadly speaking, when you see things transact that usually is a good thing in terms of people's outlook on the future and liquidity in the market. Your fly leasing and our portfolio, there are limited comparisons available. Obviously, Fly Leasing was a public company and the multiple is tough to get at from the outside without the benefit of what was exactly in book value. The Flight Leasing also skewed even though it's a similar size to Merx in terms of total planes, It skews a little bit more heavily to wide body, which we've talked a lot about.

We think that Merx outperforms peers in as much as much lower wide body concentration. So I think it's good that you're starting to see things transact even more so than the fly leasing transaction. The ability for the sale leaseback market to get up and running and then the hard data with TSA hitting highs in terms of passenger volumes as well as the vaccine rollout as corroborating an improving marketplace. And so sorry, Keith. I'm going make sure I hit

Speaker 4

oh, go ahead. No.

Speaker 3

You got them.

Speaker 7

A, you got them all. And B, we would agree with you that it's extremely difficult to evaluate commercial aircraft looking at it from the outside because that's what we're trying to do as analysts. My next question is, Greg, thank you for the update on the partial resumption of the incentive fee because it looks like that's moved up a quarter with this quarter's gains. I'm just kind of and sort of your statement that you're going to maintain the $0.31 per share and the $05 per share for the next four quarters is interesting in that the math of it suggests that when you fully resume the incentive fee, your net investment income based upon the weighted average yield of the portfolio would be somewhat below $0.36 a share. And so is your statement about the distribution plus the supplemental, how do you come about covering that?

Is it by getting back up into the target leverage ratio? Is it some asset mix shift? I'm just curious because currently, looking at the math, it's not quite there.

Speaker 2

So yeah. Casey, I'll I'll I'll I'll take a shot at that. So, basically, you know, the the our our our our our model and goal for the business, is to be in our target leverage range, which a portfolio that that is, you know, vastly in the assets that we targeted, you know, with maybe just occasional exceptions, little sort of equity tag alongs we do or some, you know, other opportunistic, you know, things we think are are are are accretive. But, you know, having a portfolio in our target leverage range produces enough money to cover, you know, both the dividend and the supplemental if we are you know, if over time we deploy you know, we we are able to sort of recover, the cash from our noncore assets, and and frankly, even you you you know, because right now, the noncore assets are generating about a, four or 5% return. So as we generate cash off those assets and redeploy them into our current yield and we get Merx back to a level of producing income, not to where it was before, but to sort of a new moderated level, we can generate, enough income after the incentive fee to to cover that dividend.

And so the reason why we wanted to clarify this thirty one and five over the next four quarters is that the timing of that redeployment, whether it's getting to our target leverage, we which have more control over, or it's, you know, getting some of continuing to get some of that redeployment done, or or, you know, starting to generate that, you know, the equity returns off marks that we did historically, may not match to the time of the incentive fee. So I think you're right. It doesn't show that it works, but it isn't product mix. It isn't all of a sudden going to a barbell approach and, you know, doing higher yielding stuff. It's just the the, you know, continuing continuing all these drivers that are incrementally get us to the level that we can we can you know, we the model works.

Does that make sense?

Speaker 7

Yes. It does. And and just to clarify, when I was talking about changing the asset mix, I was thinking more of out of equity into interest earning assets than thinking about moving, you know, into greater risk investments.

Speaker 2

Well, that that is right. So then you are right because, you know, the equity we have are these Right? Like, other than little cats and dogs, the big equity positions are the non core assets that aren't producing something. So that's correct.

Speaker 6

All right. Great. Thank you.

Speaker 7

Thank you, Howard. Thank you very much for taking my questions. I appreciate it.

Speaker 0

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

Speaker 3

Hi, everyone. Good

Speaker 8

afternoon. For, I guess, a couple of follow ons there. Tanner, first, with the the lease renegotiations that you're going through, I think you said there's seven or so, and they're going well. How do the rates that you are negotiating compare to the the portfolio and your newly constructed return from Merx?

Speaker 3

So a couple of things there. So when you're undertaking a lease negotiation, there's a number of different factors other than just headline rate. And then furthermore, when we are releasing there is in all cases a reduction from what that initial rate would otherwise be. Think of it in terms of when a lease is first signed, when a plant is brand new, it's not the lease rate that it will command at first lease maturity ten years hence. And so if I understood your question, what we're able to realize now is in line with our modified expectations within our valuation, but clearly at a level lower than what we would have otherwise seen if we had all been so fortunate as to never have seen COVID.

Speaker 2

Let me just try to jump in for a second. So first of all, Fin, like, of the seven that we talked about, four are already released and two are sort of in advanced negotiations. So it's not that seven. So so they have been released, so we have a sense of it. And so what Tanner was saying, like, when we when, you know, the value of each of the assets is based on both the lease they have in place and the value of the plane when the lease is over.

And so when, you know, when you release that plane, obviously, as as Tanner said, it's not it's it doesn't get leased for as much as it did, you know, five years before when the when the other lease was signed. But when you sign a new lease, you know, you that has value. That cash flow stream has value. You're pushing off the residual off to the to the end. And so what Tanner is saying is that these releasings that we have done have have basically supported the value that we've had on those planes post sort of, like, you know, the correction we had in March when when there was, like, you know, an overall write down of Merx.

In other words, like, it's supporting that value, which is why, you know and then so so so that's the answer on the valuation. And then the other part of it is is the cash flow. You know, the cash flow off of Merx in in, you know, historical years over the three, four, five years prior to the COVID was, you know, was in something like the 10 to $12,000,000 a quarter range. Right now, from an income perspective, we had return of capital. It's in about the $5,000,000 quarter range.

In order for us to sort of have our earnings model work, we need it to be in between those two numbers in terms of earning going forward. So we we don't need it to get back to the levels it was previously. We need it to get back to, you know, the levels that we expect to get to when these leases are effectively, producing cash. They're paying now, but they're they're paying down debt in our securitization. So, so the answer is that the valuation as of now, the leases that we have resigned, support the valuations that we had, you know, when we sort of, like, took into account the the, you know, the correction that occurred.

Yeah. That could always change, obviously, but so far. Does that Tanner, did I say anything incorrect there?

Speaker 3

Nope. No. No. Nope.

Speaker 8

Yep. No. Thank you. That and that was the that was the the question. So appreciate that.

And then just a follow on the the legacy. I think in your prepared remarks, Howard, did you say expected rotation or or hopeful rotation was was by 2022 or sometime in 2022? And then can you just expand on on that that time frame where you are in the process and and any helpful information you could provide us around around that legacy rotation? Thank you.

Speaker 2

I don't think I I put in I think I'd reference the 2022, you know, fiscal year because that's current, you know, for us since, you know Ah, okay. So I I don't think I put a date on that, you know, because we've always said as soon as possible. That said, you know, there's really, you know, effectively three significant sort of buckets. One is the the the the the two shipping investments we have, and we are, you know, actively looking, you know, appropriately to divest parts of the you know, parts of those investments. So individual ships as we can, and and, you know, we expect to have progress even, you know, this quarter, next quarter for for some amount of that.

So we're making progress. The oil and gas investment is really spot at hawk is the one of size. And and, you know, we we are sort of now that, you know, oil prices have picked up and there's some sense of there's some visibility is too strong a word. There's some possibility of sort of, constructive transactions. We're gonna be as aggressive as we can there to sort of exit that, but we don't have anything.

And then the last is carbon free, which is, you know, which has some really good developments there. And, you know, that that is that's an all equity, you know, debt investment that have been converted to equity. But that's all equity and is is, you know, you know, a a carbon efficient business that has a lot of demand, you know, obviously, where the world's going right now. And so we hope that one over the next year could have some real significant positive things happen to it. It's too early to, you know, to certainly, put put that money in the bank.

But, so it's those three. So it's gonna it's it's lumpy. So, unfortunately, we can't put timing on it. We've continued to wanna be, you know, you you know, not not do anything on a fire sale basis. And and but I we would hope at least one of those buckets would have a significant movement, you know, in the in the next, you know, during this time period we're talking about it.

You know, we shoot for all of them, but certainly at least one of them. And it it does that really moves the needle from an earnings perspective, if any of them that get moved.

Speaker 8

Okay. Great. Thank you.

Speaker 0

Your next question is from Melissa Wedel with JPMorgan. Good afternoon, everyone. I appreciate you taking my question today. I'm curious about some of the positive net funding activity that you saw on revolvers during the March. I'm wondering if there's anything you can share with us about, sort of common themes in terms of the use of funds maybe across portfolio companies that are drawing down.

Speaker 2

So just let me I'll I'll I'm gonna give that to Tanner on this stuff. But, you know, our revolver draw numbers, you know, look higher than, you know, than they might be in a leverage loan only portfolio because we have a bunch of asset based revolvers. So those fund up and fund down, you know, in the in the normal course because they're you know, they effectively money sweeps to us. So I don't you know, I think on the leverage loan basis, there there were not significant revolver draws. I don't know, Tanner, if you have those numbers on the on the cash flow side.

Speaker 3

Yes. Sorry. I don't have the specific number. But conceptually, you're spot on, Howard. Our number is a little bit different owing to those revolvers that Howard alluded to.

But conceptually, you definitely have a dynamic wherein understandably companies

Speaker 0

kind

Speaker 3

of manage down inventory in the last year. And that on the margin now to as business picks up, we are seeing a need for liquidity in the near term, which is the good kind of need. It's less cash flow problems and more investment in working capital. And I think that would rhyme with or corroborate the statements we made about broader confidence fundamentals picking up.

Speaker 0

Okay. Great. Thank you. Your next question is from Robert Dodd with Raymond James.

Speaker 6

Hi, guys. One quick housekeeping one, if I can, Greg. On the maintaining the $05 per quarter for the next four quarters, does that include the one that you announced today? So it's three after this or it's four into the future?

Speaker 4

No. It's four it's four it's four including the one that we announced today.

Speaker 6

Okay. Fair enough. Got it. Then just on on to Merck's again, but but not Lisa, if I can. I mean, looking looking at the the financials for Merck's, I mean, it seems like, you know, revenue was barely down year over year.

So so the expenses That's mainly noncash. Right? I mean, it was asset impairment and and allowance for credit losses. So would it yeah.

How do you on the asset value side, everything you said, let's speak Phil, you're pretty comfortable with the asset values, within that portfolio now. And presumably, the credit impairment has has been taken. So would it be fair to say that you don't expect those items certainly at at the level they did to to recur at any kind of that scale? And if that doesn't happen, Merck's looks like they're gonna be profitable very soon, and cash flow doesn't seem to be a problem. So could we expect dividends sooner rather than later?

Speaker 3

Yeah. I'm happy to take a take a stab at part of that and then and then and then open up to to Greg's comment as well. So you you first first in terms of thinking about valuations and at the risk of stating the obvious, these are not bonds and our return and principal is not written on a piece of paper. And so where we've written the metal down to is to a level that we're comfortable with in terms of our discounted cash flow analysis wherein we do assume a residual in the future. But it's not you can't think about it the same way that you would where you've marked down a security but you still have a par claim.

We do feel better about those as I mentioned with some of the stabilization that we're seeing in the market that's giving us more confidence. But we are owners of that asset and the volatility and ultimate asset prices are going to be borne by us as the equity holders of those particular assets.

Speaker 4

And I don't know if, Greg, you wanted to make another comment more broadly about the asset impairment. Yeah. I that you're right to ask the question, right? Because you can only provide dividends, you know, to the extent that you have earnings. And Right.

When you do look at the results, you know, for this year, you know, you had $80,000,000 worth of asset impairment and $32,000,000 worth of allowance for credit losses. We don't expect, you know, that type of impairment and credit losses going forward as, you know, the aviation sector has stabilized, our portfolio has stabilized. But I think you're absolutely right. But I think just a couple other, you know, notes when you do go through Merck's financial statements. You know, Merck's for the year, you know, paid down, you know, inclusive of our joint ventures, over a $140,000,000 worth of debt year over year.

So I think that's a really important factor. We, you know, impaired the assets by 79. If you look at our external value, we were we were you know, externally, we wrote down the metal by over 25%, which is another you know, which which is very close to the gap write down even though they're not they're apples and oranges. So, you know, there's some real good, you know, that has, you know, kind of settled down at Merx, and I and I think we're in a good position today going forward.

Speaker 2

Yep. You can go ahead.

Speaker 4

I sorry.

Speaker 6

If I can butt in for one sec. Mean, that's that's kind of my point. I I think that the numbers and, obviously, I'm just seeing the the financials. You see you sound more hesitant in the comments, in the prepared remarks, etcetera, than the numbers look to me. It looks like it's in better shape, maybe.

I mean, you

Speaker 2

know, it

Speaker 6

paid down debt. The cash flow was up.

Speaker 2

So, Robert, I'll get let me I I think I can bridge that gap. So the reason, you know, the reason why there's more hesitancy is because, you know, the the the cash flows, you know, the revenue that you're seeing that are coming through are currently being used to continue to pay down debt until the securitizations are caught up. And so from a from a a a gap basis, you know, the or, you know, there is a, you know, there is real income there, and it's making the equity more valuable, if you will, by paying down the debt. But it's not cash that's available to be paid. And so we you know, the equity dividends that Merx may decide to declare may lag its earnings power.

But but you're right in that it it it it it is if if we if we are right about sort of our valuation and it is stable, it is producing enough income to begin play paying dividends in the near future. Whether it's producing that cash or that drags it a little bit or it's paying down excessive debt remains to be seen. It's just in terms of timing depending on, you know, when people catch up payments when leases happen. And so that's why there's a little hesitancy with regard to the exact timing of, you know, when the dividends pick up. But, again, it goes back to what we're talking to Casey about is that we feel like there's more earnings power than you're seeing at the moment.

Mhmm. And that will run through the dividend line. The timing of that will depend, you know, somewhat on the cash flow, as opposed to the earnings as we may be paying down more debt than than, you know, you would have otherwise thought we would, which again is why we wanna give sort of people some some you know, the timing of that is sort of irrelevant to the long term value of the of of Merx. It's just but but it is relevant to the, you know, the quarterly predictability for investors.

Speaker 6

Understood. I appreciate that. Thank you, guys.

Speaker 0

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

Speaker 2

All right. Thank you, operator, and thank you, everybody, for listening and your questions. On behalf of the whole team, we thank you for the time today. And obviously, feel free to reach out with any questions you have. Have a good day.

Speaker 6

K.

Speaker 0

This concludes today's conference call.

Speaker 1

Thank you

Speaker 0

for participating. You may now disconnect.