Apollo Investment F4Q09 (Qtr End 3/31/09) Earnings Call Transcript

Jun. 2.09 | About: Apollo Investment (AINV)

Apollo Investment Corp. (NASDAQ:AINV)

F4Q09 Earnings Call

June 2, 2009 11:00 am ET

Executives

Richard L. Peteka - Chief Financial Officer, Treasurer

James C. Zelter - Chief Executive Officer, Director

Patrick J. Dalton - President, Chief Operating Officer

Analysts

Sanjay Sakhrani - Keefe, Bruyette & Woods

Matthew Howlett - Fox Pitt Kelton

Jim Shanahan - Wachovia

Chris Harris - Wachovia

Faye Elliott - Banc of America Merrill Lynch

Bob Nicholson - Pine Cobble Capital

Sam Martini - ECI

Walter Keating - UBS

Operator

Good morning and welcome to Apollo Investment Corporation’s fourth quarter and fiscal year-end 2009 earnings conference call. (Operator Instructions) It is now my pleasure to turn the call over to Mr. Jim Zelter, Chief Executive Officer of Apollo Investment Corporation. Mr. Zelter, you may begin your conference.

James C. Zelter

Thank you and good morning. I am joined today by Patrick Dalton, Apollo Investment Corporation’s President and Chief Operating Officer; and Richard Peteka, our Chief Financial Officer. Rich, before we begin, would you start off by disclosing some general conference call information and include the comments about forward-looking statements?

Richard L. Peteka

Thank you, Jim. I would like to remind 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 would 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 and projections and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these statements and projections.

We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.apolloic.com, or call us at 212-515-3450.

At this time, I would like to turn our call back to our Chief Executive Officer, Jim Zelter.

James C. Zelter

Thank you, Rich. The world is a very different place today than it was a year ago, or even a quarter ago. I mention this to remind everyone that we will discuss our last fiscal quarter and year-end results through March 31, 2009 on this call and while we will touch upon current developments, we’ll generally leave that discussion for the Q&A portion of the call.

Thinking all the way back to our business plan pre-IPO, we were committed to creating a long-term business plan that would stand the test of time. We wanted to be extremely thoughtful, understand and learn from history, think about where others may have stumbled and respect cycles and to the extent possible, always be prepared for them.

In addition, we wanted to consider an appropriate asset liability matching investment strategy, given the regulatory structure and ensure our strategy included a liquidity ladder. Again, thinking back to early ’04, we like most in the financial industry, did not forecast a recession this severe or one that would be as prolonged as this one may be. That said, we have been relatively pleased with how our business plan has endured so far.

The quarter ending March 31, 2009 saw our nation’s second consecutive quarterly 6% economic decline, and it was broad-based. Top line revenues remain stressed for many businesses as their managements continue their prudent and serious efforts to operate much leaner. Accordingly, companies continued to reduce spending and cut costs, including making additional rounds of staff reductions and working aggressively to reduce inventories. In addition, consumers remain highly sensitive to spending as their anxiety over future employment grew, spurred on by increasing monthly unemployment reports.

At the same time, government policies to keep interest rates low has unfortunately not had its usual immediate positive impact, as households have looked to save, not borrow and spend during these economic times.

During the March quarter, we continued our focus on monitoring the capital markets and the prolonged and seemingly unprecedented asset volatility that we witnessed during the fourth calendar quarter of 2008. We also remain focused on our liquidity and our asset coverage requirements and also spent time on our portfolio optimization strategy.

Accordingly, we opportunistically delevered further by raising approximately $82 million during the quarter. This ultimately deleveraged our balance sheet from 0.83 to 1 debt to equity to 0.76 to 1 debt to equity.

However, the broad economic stimulus put forth by the U.S. government seems to have finally stabilized the banking and overall financial system. More recently, we have seen a technical rally in the capital markets which we believe is a net benefit to many of our portfolio companies as access to capital at lower rates becomes more readily available.

Before I turn our call back to Rich Peteka, our CFO, let me say that we expect innovation and other value creation to drive the next full market cycle not leverage, and therefore we believe it will be slow to develop in time.

In addition, banks that survive are likely to be smaller and more highly regulated, making them generally more conservative lenders. Accordingly, we believe that there will be substantial opportunities for providers of capital, such as Apollo Investment Corporation over the next few years.

Lastly, we continue to be pleased with our business strategy with respect to portfolio construction, leverage, and our dividend policy. Accordingly, we remain in a relatively good position to continue to weather this current environment and to capitalize on future opportunities for years to come.

With that, I will pass it along to Rich.

Richard L. Peteka

Thank you, Jim. Let me briefly go through some balance sheet highlights. We closed our quarter and fiscal year-end on March 31, 2009, with an investment portfolio of $2.45 billion. That’s down from $2.54 billion at December 31st. Our net assets totaled $1.4 billion at March 31st, with a net asset value of $9.82 per share. This compares to net assets of $1.4 billion at December 31, 2008 and a net asset value per share of $9.87 per share. The slight decrease in NAV was primarily driven by unrealized depreciation on our equity portfolio, including our equity investment in [GS Prismean], whose value on the Milan Stock Exchange fell by more than 32% during the quarter. Since March 31st, and through the end of May, that stock has appreciated by more than 35%.

Next I’ll discuss Apollo Investment Corporation’s outstanding debt and leverage ratio. As a reminder, we maintain a $1.7 billion multi-currency revolving credit facility with a syndicate of banks. It matures in April 2011. Borrowing terms continue at LIBOR plus 100 basis points. As of March 31, 2009, we had $1.06 billion outstanding and $642 million of un-used capacity.

In addition, our debt-to-equity ratio measured at fair value dropped from 0.83 to 1 debt-to-equity at December 31st to 0.76 to 1 at March 31st, as Jim mentioned earlier. Importantly, for the quarter ended March and to date, we continue to be in compliance with all credit facility covenants.

As for operating results, gross investment income for the quarter totaled $85.3 million. This total reflects a few notable items. One, we’ve placed our investments in Euro fresh and our bond on non-accrual status for the quarter. In addition, we received approximately $5 million of dividend income for the quarter from our investment in AIC credit opportunities fund.

Such periodically recurring dividend income is really derived from the funds, that’s AIC credit opportunities funds, underlying investments in debt, the largest of which is a semi-annual cash payer first data corporation. Accordingly, you should expect larger cash dividends paid to us from AIC credit opportunities fund in the quarters ending March and September.

For more detailed information on AIC credit opportunities fund, please see note six within our financial statements.

And for the comparable March 2008 quarter a year earlier, gross investment income totaled 90 versus the 85.3 this year.

Net operating expenses for the quarter ended March 31st totaled $34.5 million. This compared to $46.3 million for the comparable quarter a year earlier. Accordingly, net investment income totaled $50.7 million, or $0.36 per share, as compared to $43.7 million or $0.37 per share for the comparable quarter a year earlier.

At March 31st, our portfolio of 72 companies now has three investments on non-accrual status -- Latham International, Euro Fresh, and [Arban]. They represent 5.48% of our portfolio measured on a cost basis, and 1.26% measured at fair value.

As Jim noted earlier, the company exited select portfolio company investments during the quarter, raising $82 million. Net realized losses totaled $20.4 million. This reversed out $20 million of previously recognized unrealized losses. Accordingly, it had no impact to EPS for the quarter. And for the March quarter a year earlier realized losses totaled $4.6 million on $103 million of sales.

In addition, the company recognized only $0.6 million -- that’s $600,000 roughly -- of net unrealized depreciation for the quarter ended March 31, 2009. This compared to recognizing net unrealized depreciation of $201.5 million for the comparable March 2008 quarter a year earlier.

In total, our quarterly operating results increased net assets by $29.8 million, or $0.21 per share, versus a decrease of $162.4 million, or $1.36 per share for the quarter ended March 31, 2008.

Now let me turn the call over to our President and Chief Operating Officer, Patrick Dalton.

Patrick J. Dalton

Thanks, Rich. As we noted earlier in the call, the economy continued to contract significantly during the quarter ended March 31, 2009. Banks and other financial companies continued to delever and we expect this broad-based deleveraging to continue for some time, albeit at a much lower pace than we have seen over the last year. It does now appear, however, that there is less financial systematic risk due to active governmental policies and support. Also, the velocity of the broad and steep economic declines appear to have slowed.

There has been a certain amount of encouraging news and emerging positive trends noted since the quarter end. For example, we believe that many of the technical pressures that we have witnessed over the last 24 months have waned. As a result, there has been significant increase in capital in-flows into the credit markets, which has triggered a rally in many credit assets, resulting in meaningfully tighter credit spreads. However, at Apollo, we are predominantly a hold-to-maturity fundamental investor and thus we focus more on the important real economic drivers to ultimately lead us out of this cycle.

During the quarter ended March 31st, job losses continued near record levels, which significantly affected business and consumer confidence in spending, so we remain cautious and will continue running our business plan.

At this time, we still expect the fundamental pressures to remain for at least the near-term. Accordingly, we believe that we will only see a sustained recovery once job losses abate and businesses and consumers ultimately gain more confidence.

Until then, we believe that many businesses will continue to see some top line pressures, and we do expect the more defensive companies and sectors to continue to outperform less defensive ones. We understand and want to convey the message again, that what we own is much more important than what we don’t own and therefore we continue working with and advising financial sponsors of our portfolio companies ahead of any potential problems.

Furthermore, we continue to increase the frequency of communication with all of our management teams and senior lenders, where we believe it will add value.

At this time, I would like to go into some specific information on the portfolio activity for the quarter. As Jim noted earlier in the call, we worked on increasing our liquidity position, utilizing our portfolio optimization strategy. Accordingly, we had investment sales of $82 million during the quarter ended March 31st net. We sold our entire positions in Language Lion Incorporated, a global provider of over-the-phone interpretation services, as well as our senior notes in VWR International, a global lab supplier.

We also trimmed our positions in [Buzhow] and Hamilton, a government consulting firm, and General Nutrition Centers, a nutritional supplements retailer. Again, these sales were undertaken to generate additional liquidity which reduced our overall leverage level and approved the overall portfolio construction in this environment.

Ultimately our investment portfolio at March 31st consisted of 72 companies with a market value of $2.45 billion, and was invested 27% in senior secured loans, 59% in subordinated debt, 4% in preferred equity, and 10% in common equity and warrants measured at fair value. The portfolio continues to be diversified by issuer and by industry. The weighted average yield on our debt portfolio at our cost at March 31, 2009 was 11.7% versus 12.1% at December 31. The weighted average yield on our subordinated debt and senior loan portfolios were 13.2% and 8.2% respectively, versus 13.3% and 9% respectively in the prior quarter.

Please note that our floating rate debt portfolio is well matched with our floating rate credit facility and the reduction in average yield had no significant impact on our quarter’s net investment income. With foreign capacity at LIBOR plus 100 basis points, our net interest margins remain highly attractive for future investment. Furthermore, at March 31st, the weighted average EBITDA of our portfolio companies continues to exceed $250 million, and the weighted average cash interest coverage of the portfolio remains over two times.

The weighted average risk rating for our portfolio did edge higher during the quarter to approximately 2.5 rating at March 31, 2009.

Before I open up the call to questions, I would like to say that we continue to work closely with our equity sponsors, senior lenders, and management teams of our current portfolio companies, always ready and willing to provide any necessary support and assistance. Our focus remains on protecting your capital through this recession and continuing to position ourselves as a consistent, credible, and relevant provider of capital into the future.

In closing, I would like to thank our dedicated team of professionals and our faithful shareholders for their continued long-term support and confidence in Apollo Investment Corporation.

With that, Operator, please open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Sanjay Sakhrani with KBW.

Sanjay Sakhrani - Keefe, Bruyette & Woods

Thank you. Jim, I think you talked about the technical rally in the markets this quarter and I guess I was wondering if you think of that current levels are sustainable and maybe you could just tie that into a discussion on how we should think about portfolio growth? Thanks.

James C. Zelter

Sure. Well, certainly the world, as I started, I think the depths of the market were that first week in March -- March 5th, March 2nd. When you go back to a lot of the charts and there has been a strong rally in the bank loan market, been a strong rally in a variety of high-yield indexes and quite frankly, if you look at a triple C index, those rallies, the riskier the assets, the more that they have rallied since that point in time. It’s covered a lot of assets around the globe and whether it’s commodities or equities and credit, they’ve all gotten a dramatic bid.

I do think that we are back to, if you look at where the indexes now are, I think they reflect a more rational view of defaults and recoveries than they did at year-end. And I think while we are -- what you are hearing Patrick say and you are hearing me say is we appreciate the technical rally but it’s -- you know, we are not off to the races in a new marketplace. We are back to what we think there’s appropriate value in these names, in the high-yield or the bank loan indexes. A lot of the distressed sales that occurred occurred in retrospect in levels that really were indeed distressed sales.

So we -- I view and I’ve been in the credit markets for quite a long time, I believe that the current levels reflect some of the realistic issues that are confronting the marketplace in high yield and loans. And I would also say that really the last six to eight weeks, you’ve seen a real re-opening of the high-yield market but the loan markets only recently reopened. You still have a lot of work to be done in getting a new buoyant, new issue loan market.

So in our mind, as Patrick said, we in summary spent our time focusing on our liquidity, realizing that’s a crucial issue for all the BDCs, and did some optimization. We like our portfolio. We are very comfortable with a lion’s share of the assets in there and only when we really want to optimize something, we’ll pull that trigger. But portfolio construction going forward, we have a strategy that we are relative value investor in this space. That’s proven well to us thus far. We’ve constantly wanted to upgrade our portfolio because we have found that the companies that are able to withstand the headwinds of this economic challenge cycle are the larger companies. So we are -- what you are hearing me say is we applaud what’s going on in the capital markets. It’s good for all credit issuers. It’s good for all the recovery of these companies. It gives them more optionality but we are -- and we are looking to put new money to work certainly but we are doing so in a -- with moderate caution because we still think that there are fundamental challenges to the underlying economy and commercial real estate, which we’ll take some time to deal with over the next 12 to 36 months.

Sanjay Sakhrani - Keefe, Bruyette & Woods

Okay, great. And then a question on one of your non-accruals, Euro Fresh -- I saw there was an article out there about a consortium, you know, considering making an equity investment. I mean, how should we think about it from a recovery standpoint? Do you think you guys could recover beyond what the current mark is?

Patrick J. Dalton

Thanks for the question. We have to be a little sensitive given that this is a developing company and it has public debt outstanding. We are very much involved with the company on the creditor’s committee, given our position and the capital structure. There is some capital that has been on the sidelines willing to inject in the company. It’s probably more likely to be from folks who are familiar with the credit than from new people coming in and you can rest assured that given our position in the capital structure and our influence there, we are deeply involved there working collaboratively with the management team through their process to ultimately get the best recovery that we can.

The securities we own are quoted securities and therefore our broker dealer has set the value on those securities. Obviously those are at very low levels at the moment and we would do everything we can to optimize a recovery there. The story has yet to be written. There is a process going through the bankruptcy court and we are actively involved.

Sanjay Sakhrani - Keefe, Bruyette & Woods

Has the debt rallied since that happened?

Patrick J. Dalton

Not really -- I think it’s too much of an unknown as to the process going through and there’s not a lot of -- it takes time and there’s not a lot of trading happening right now. Folks who own it like us aren’t willing to sell at these levels necessarily and I’m sure there’s not a lot of folks who are able to get the diligence done that they would require to buy the asset, given its status.

Sanjay Sakhrani - Keefe, Bruyette & Woods

Okay, great. And I’ve got a final question for Rich -- I was wondering if you could help us think through the spillover and the fact that you guys are actually earning more than your dividend. I mean, at some point it seems to me like the dividends either got to go up or all else equal, obviously, or a special has got to be paid. I mean, how should we think about it, Rich? And then maybe you could also just touch on the activity in the stock kind of after hours yesterday. It seemed like it was down. Was there anything specific there?

Richard L. Peteka

Thank you, Sanjay. Let me answer the second question first -- you know, after hours yesterday, our friends at Reuters put out an incorrect report noting that our entire fiscal year earnings and loss of $4.39 for the full fiscal year was the actual loss for the quarter. That was a mistaken report on Reuters. They did publish a correction later on but I think most of the people in the after hours, especially retail, didn’t see that so -- I know there’s a lot of confusion out there with regard to that. Even TheStreet.com put out a misleading note last night with regard to picking up Reuters’ comments where they just got it wrong. And let me add that Reuters outsourced this function a while back and they actually messed up another BDC last quarter. I won’t mention the BDC but that BDC got -- there was some confusion in the market with a similar accident last quarter.

So that said, we think that the research team on the call and those institutional investors and retail investors that have owned our stock for some time now really understand and actually read our press release versus a snippet that came out from Reuters mistakenly.

Now, going back to your dividend question, note 13 in our financial statements within our 10-K talks about our spillover. There’s roughly $86 million there that are earnings that have been monetized in excess of distributions through March 31, 2009. Those earnings need to be distributed before we file our tax return. I should say -- let me clarify that -- they need to be declared, not distributed, before we file our tax return and given our dividend per share of $0.26 per quarter, that equates to roughly $37 million a quarter.

So with $86 million harvested and there to support the dividend going forward, we roughly have the June and September and part of, or half of, the December ’09 dividend really come out of earnings that were already earned through the year ended March, and so all the earnings that we are earning today for April 1 through the end of December or through mid-December, is really going to be there to be pushed into calendar 2010. That’s the way the spillover works.

So right now, we are fine with our dividend of $0.26. As you know, we have not given guidance since our IPO back in 2004 on where the dividend will be, but at least at this point, given our RIC rules, given the RIC rules on distributing our taxable earnings, the $0.26 appears to be for this quarter out of tax [earnings] and we appear to be -- to support that. Again, we have to our $86 million by December.

Sanjay Sakhrani - Keefe, Bruyette & Woods

Okay, great. Thank you very much.

Operator

(Operator Instructions) Your next question comes from the line of Matthew Howlett with Fox Pitt Kelton.

Matthew Howlett - Fox Pitt Kelton

Thanks for taking my question. Could you just go over the trend with the underlying portfolio debt-to-EBITDA, 12-month trailing EBITDA levels?

Patrick J. Dalton

The underlying, the portfolio, we don’t disclose the leverage levels because they are misleading. What we do disclose in the portfolio, the interest coverage because the leverage levels do not capture working capital and true free cash flow. They have trended on both cash flow coverage and on leverage level stable. Obviously one-off companies are higher leverage, given some of the stresses that we talk about on common names that we’ve talked about for the last 12 months. Other companies are outperforming. As I did mention in my comments about defensive credits performing -- outperforming, excuse me, non-defensive credits, we’ve been very pleased with a number of the investments we’ve made, particularly in 2008, where we did -- we invested intentionally in defensive credits who have shown significant out performance. Jim has mentioned some of the larger credits -- some of the larger credits have outperformed expectations. Expectations may be flattish to down and they are outperforming them, which is a good sign on a relative basis and as a lender, we get the benefit if we’ve underwritten free cash flow. Businesses that do go sideways still generate cash flow and de-risk the asset for us, so overall the portfolio in aggregate is encouraging.

There are a number, which we talk about, of situations that are stressed and will continue to be stressed until we see the real economy have a consistent series of good news events and confidence levels increasing and consumers and business spending that we hope to see over the near- to mid-term.

Matthew Howlett - Fox Pitt Kelton

Okay, good. Fair enough -- and then, with respect to timing, and I know it’s very difficult to do this on a quarterly earnings call, but a few names I just want to ask about, if you could really just quickly provide us any color in terms of margins or cash flows, and I think we have upcoming interest payments -- the first would be Fleet Pride, which of course is in the automobile and the truck industry.

Patrick J. Dalton

Fleet Pride is performing extremely well on a relative basis versus all of its competitors. It’s a market leader there. Business is a little bit down. This is a public bond as well so we have to be very careful. It’s a 144-A registered so we can’t give too much. We do have access to board materials so we do feel good about the investment. We are holding it. We at the moment are expecting to have the company fulfill all of its cash obligations.

Matthew Howlett - Fox Pitt Kelton

Okay, fair enough. Quality Home Brands?

Patrick J. Dalton

Quality Home Brands -- this is a business that’s been on our watch-list for a while. It’s a great company in a challenging industry. They are the leading provider of lighting. They serve the building products, the mass retailers, home builders, and show room space. The sponsor has been very supportive, has invested more capital into the company. Having said that, we do expect ’09 to continue to be challenged. The company is actively and prudently working with all of its lenders to -- should they need relief to work towards that. We are very involved -- with the sponsor and the management team and are going to do the best we can to help the company get through this cycle.

Matthew Howlett - Fox Pitt Kelton

Okay, and the last one, Play Power.

Patrick J. Dalton

Play Power is a business we’ve owned since 2004, end of 2004. It serves mostly municipalities and local governments. Obviously they are somewhat stressed under their tax receipts, et cetera. This business is cyclical. We knew it going in, was cyclical. It was cyclical in 2003. We expect it to be cyclical now. However, we do hope that the stimulus package and the cash capital that ultimately does get to the local governments will be used for infrastructure and spending in education and schools, where as a big buy of our products, of the company’s products.

You know, the first half is not the strong season for this business, so we don’t really have the color as to how ’09 will perform. We are at a good position in the capital structure with a relatively modest amount of senior debt in front of us, with a friendly bank group which did recently do an amendment waiver for the company, to give it a little more covenant relief. And the sponsor is very actively engaged and there’s a very a strong management team.

Matthew Howlett - Fox Pitt Kelton

Great. The three I just mentioned, only Quality Home Brand is on the watch list, is that correct?

Patrick J. Dalton

Not necessarily -- we have a very -- we are more conservative for what goes on our watch list and Play Power, not necessarily for what’s happened to the company but in the industry, is a company we put on the watch list because of the industry that it’s in. And given the cyclicality of capital to the local governments, but it doesn’t necessarily mean if it’s on the watch list, it’s a three, four, or five rated asset -- everything that is three, four, or five and three just means we are watching it more closely.

Matthew Howlett - Fox Pitt Kelton

Great. Thank you.

Operator

Your next question comes from the line of Jim Shanahan with Wachovia.

Jim Shanahan - Wachovia

The question I have was related -- two of them, actually. The first one to Inn Keepers, if you could provide an update there. And the second question I had was related to equity -- several of your peer companies have been raising equity capital below book value. I would just like an update or a reminder as to what your position is on equity raises below book value. Thank you.

Patrick J. Dalton

Thanks for the question. On Inn Keepers, this is obviously -- remains a challenged investment given the space that it operates in. We had under a very conservative model going into ’09 and that model is proving to be true. What we are more challenged by is the visibility in the industry and you can hear comments from every one of the CEOs of all the major brands, including even Marriott yesterday on CNBC, commenting that we hope that the world does get better and the consumer and the business traveler does continue to travel, or will start to reemerge and start traveling more frequently. That really hasn’t happened yet.

What we have seen is that the decline has stabilized, which is hopefully the first sign of the positive feedback loop that will come in time. It’s not getting worse for a while, going from the fourth quarter into the first quarter. Things did get worse on a year-over-year basis. We track results on a daily basis. The management team has done a very good job of being proactive on revenue management, market share gains, and aggressive expense controls, in light of what’s happened in the industry. It’s an industry wide phenomenon. We operate in the -- not the high-end market, which I think is the one marketplace that’s having greater stress but we are really focusing on the small and medium-sized enterprises, business travelers spending more than one night in these limited service hotels, which is the vast majority of our portfolio. And we are seeing it stabilize but not quite get better just yet, Jim. And we are watching it daily and when we start to see a trend develop in the right direction, we’ll be much more encouraged. But for now, it’s performing as we expected it would perform and the visibility is not as great as we would like.

James C. Zelter

Let me handle your first question, I believe on the equity or other capital markets activities. You know, we certainly are very -- we are a player in these markets and understand what is going on in terms of fundraising. Our goal is always to have an optimal capital structure but very, very focused on what the cost of our capital is, whether it’s debt or equity capital. And certainly we’re just -- we are in a monitoring stage right now and really going to watch what the alternatives are and depending on what makes sense for our shareholders long-term, with the right cost of capital balanced with the opportunities that we find, we’ll make that decision but we have no impending plans to do anything in particular.

Jim Shanahan - Wachovia

Okay -- one more follow-up in that -- what do you feel the appropriate leverage is for your assets, given the risk profile and other factors, such as say where we are in the economy, et cetera?

James C. Zelter

You know, certainly we’ve -- I think we’ve been pretty clear and consistent that we really wanted to operate in and around a zip code of 0.5 to 0.7 to 1. Certainly in the last 12 months, we were well underneath that prior to the dislocation and because of the manner in which we need to fairly mark our assets, we incurred a great degree of leverage, not by buying new assets but just purely following the appropriate accounting treatment. So it’s our view that over a long cycle, we want to operate in this 0.5 to 0.7. I think that the tone you should take away from here is we understand what’s going on in the capital markets right now, we are very focused on that leverage. We feel we have a fair cushion right now but I think right now we are in a -- still focusing on deleveraging a bit of the book but we want to make sure that we do not -- always are -- we want to make sure we have the right balance between offense and defense.

Jim Shanahan - Wachovia

Thank you, gentlemen.

Operator

Your next question comes from the line of Chris Harris with Wachovia.

Chris Harris - Wachovia

Sorry about that -- my questions have been answered. Thank you.

Operator

Your next question is a follow-up question from the line of Sanjay Sakhrani with KBW.

Sanjay Sakhrani - Keefe, Bruyette & Woods

Is it fair to assume that if there was a material addition to the non-accrual bucket, it would probably be mentioned in the K, because it’s been a while since quarter end? Thanks.

Richard L. Peteka

Certainly if it was a material event, the answer would be yes.

Patrick J. Dalton

Yes, it would have been a subsequent event if there were any material events before we filed yesterday.

Sanjay Sakhrani - Keefe, Bruyette & Woods

Okay, I just wanted to make sure. Thank you.

Operator

Your next question comes from the line of Faye Elliott with Banc of America Merrill Lynch.

Faye Elliott - Banc of America Merrill Lynch

Good morning. I apologize if you’ve already noted this -- I had to pop off briefly. Did you give the average investment grade in your portfolio? I know you were planning to do that.

Richard L. Peteka

Yeah, we gave the -- the weighted average investment grade has edged up to about 2.5 on the portfolio level. Last quarter it was closer to 2.

Faye Elliott - Banc of America Merrill Lynch

Okay. And any -- I mean, directionally, I guess probably through this cycle it’s probably not going to get -- head back toward 2 anytime soon? Would that be logical to assume?

Richard L. Peteka

You know, I think logical -- it would be logical to assume. We anticipated and we would expect that we would be pulled down the continuum, given that 3 -- we are watching closely in the capital structure. We are putting more onto the 3 -- if we believe we ought to be watching it for industry issues, macro issues, or economic, individual micro issues at the company. And it’s as expected right now.

Faye Elliott - Banc of America Merrill Lynch

Okay, great. And then the other question I have is with your deleverage efforts, are you finding that the market is loosening up in terms of being able to sell assets or delever relative to the past couple of quarters?

Patrick J. Dalton

You know, that’s a great question. Fortunately given the portfolio of construction and the quality of some of the assets, we were even able to access these markets to see assets at reasonable prices in December and in the last quarter when the markets were significantly dislocated. Obviously with the rally and credit, there are more -- there’s more in-flow to capital, which I mentioned, significant in-flows in the high yield and significant in-flows in the bank market and with more capital on the sidelines and those markets rallying, there’s more folks looking for assets to purchase. Without an origination platform, which many folks don’t have, or without a new M&A calendar, a primary market calendar, when they are more flush with cash, assets do trade more frequently and the size of companies that we invest in have a larger following, and companies can get up to speed easier than smaller companies that no one is going to get engaged, or actively get engaged to find out what they should be paying for these assets. So the answer is getting even more open but we were fortunate to be able to even access some capital when we needed it, given our goal to have a less levered business in December and in the March quarter.

Faye Elliott - Banc of America Merrill Lynch

Okay, great. That’s helpful. Thanks so much.

Operator

Your next question comes from the line of Bob Nicholson with Pine Cobble Capital.

Bob Nicholson - Pine Cobble Capital

Two quick questions -- the first one, given the rally in the underlying levered loan and the high-yield indices, as well as individual names, do you guys have an estimate on what you think the impact to your book value is, if you were to bring the portfolio forward to where the market is today?

Richard L. Peteka

It’s a great question. We monitor that on a daily basis; however, it’s not something we communicate. It does change also on a daily basis. We monitor as closely as we can to make sure that our portfolio optimization strategy and goal of maintaining a less leveraged portfolio is -- will be there at quarter end.

Bob Nicholson - Pine Cobble Capital

Okay, and I guess the follow-up, how -- for you, Patrick, as you make a decision on when to monetize assets, what are the things that you look for as you think through that -- you obviously have a number of sizable positions in good companies. There’s a lot of demand right now out in the market for sizable positions in good companies. How do you think through how you optimize that portfolio, what you sell and where you add assets?

Patrick J. Dalton

Very good question -- the four kind of key drivers, number one is the specific credit itself. We have an asset in our portfolio that we believe is going to have more credit challenges going forward and likely end up depreciating the asset or ultimately reducing a recovery in that asset.

Secondly, as we look at this impact on the diversity in the portfolio -- are we overexposed in the name and we should lighten up the name? Maybe another name, we’ll do a swap where we are actually less exposed and we want to be more exposed.

Then the third thing we look at is where the prices are relative to where we are carrying that asset, and the fourth thing is how much of that asset could we sell quickly should we need to, and we prioritize the portfolio at least weekly on the scale of what we could sell. And there was a significant amount of assets we could sell. We don’t like to sell good assets so it’s really -- it’s there, as Jim mentioned, in the liquidity ladder in his comments. It’s a real concept here where we have multiple tools and we’ve discussed them in previous calls to generate liquidity and this is one of those tools.

Bob Nicholson - Pine Cobble Capital

Okay, great. Thank you.

Operator

Your next question comes from the line of Sam Martini with ECI.

Sam Martini - ECI

I have three questions, in just a random order. First of all, could you remind me what your ability per your charter to go down the liquidity scale? In the CLO market, obviously huge dislocations. You own some CLOs -- what’s the ability to add to CLO positions? Question one -- question two, you’ve talked about delevering, per the last question, the high yield market has improved materially in terms at least of marks since quarter end. How much of your delevering strategy is based on a forward-looking view? I.E. you had to delever because the whole world was delevering and you wanted to be prudent and now things are stabilizing, you might consider taking leverage back up.

And thirdly, just on the AIC and the [Prismean] situation -- the positions, could you just -- and I read note 6 and have somewhat of an understanding of Prismean. Could you just in layman’s terms tell me exactly what AIC is levered towards and exactly how you own Prismean? It’s just through -- you’re just the LP but is that just the common equity that trades in Milan and we can track that as a percentage? Thank you very much.

Patrick J. Dalton

I’ll start and then Jim will jump in. First on the CLO question, there is no restrictions. What we own is a double D tranche of CLOs. We can buy as much of that as we like. When we went into it, we did it more as a research and development effort. Looking at it, we saw dislocation versus fundamentals and price. That market has continued to be more dislocated.

There are several assets we could acquire. Obviously the access to the underlying portfolios is important to us and we did have the ability to [diligence] the underlying portfolios of these managers and the managers themselves. You don’t always get that benefit, so we are going to be cautious about just taking, making a marked call on a recovery of CLOs. That’s not our fundamental investment strategy but we can do more.

Sam Martini - ECI

But you have -- I mean, you have a view on the underlying collateral and it seems to me that this is probably still one of the last remaining hugely dislocated pieces of the market. Is it something that you are interested in adding to going forward?

Patrick J. Dalton

Again, we could be and we would be, except that we got the access [in-line] portfolio. There are many CLO managers and some are good and some are not so good -- some are in business, some are for sale. The underlying portfolios, some can trade, some don’t trade, some have reading defaults, some have reading defaults coming. So there’s an extreme amount of diligence that needs to get done for us as a fundamental value investor that isn’t available, generally available to do that to make that call, so we are monitoring that as one of the many options. You know, the keep it simple strategy for us has worked. If we find an asset that is non-structured products related that we can -- that is accretive to our dividend and consistent with how we invest, that may be a better place to deploy our capital.

Sam Martini - ECI

Understood.

Patrick J. Dalton

Secondly, I’ll talk about the AIC Opportunities fund and [Prismean], and then I’ll come back to deleveraging and Jim will jump in there with some comments. AIC credit opportunities fund, these are three underlying debt investments that have credit facilities that were provided by the folks from which we bought them from, and so really we look at them a replacement for using our revolve. Now that’s simply what they were and we are getting value out of those facilities. Obviously those are mark-to-market. Some facilities require some margin, a few dollars here or there. With the asset prices improving, obviously that’s -- that constraint has gotten easier for us and the fact that there may be capital available to us as the prices recover.

GS [Prismean], we have --

Sam Martini - ECI

I’m sorry, just to finish up there, the debt -- the leverage to the credit, is it at -- at which piece? Is it at the most subordinated piece? Is it at the senior piece?

Patrick J. Dalton

It depends. These are all non-recourse, some of which are senior loans and some are subordinated loans, so some are bank loans and for example, in TXU, [inaudible] bank loans. First Data is a subordinated debt loan and we own some of that same loan on balance sheet.

Sam Martini - ECI

Right, so it’s basically just additional TXU/FDC and Alliance [Boots] exposure through a non-recourse vehicle that still flows cash to you? It’s effectively more exposure to these loans that you already own, because it’s the First Data bonds, right?

Patrick J. Dalton

That’s extremely well put. We agree. And then the last question on deleveraging, on the technical rally, that is a good thing for us, as Jim mentioned to our companies. Obviously we -- asset prices rally but what we must be cautious about is the asset prices go the other way, and so we are going to be cautious about that.

James C. Zelter

I mean, if you look at our Qs and Ks last year, our leverage went up because of what happened to our assets. We didn’t incur more leverage, and we are now getting the benefit of that and again, I think that our view right now is we like what is going on with our balance sheet, we like what is going on with our portfolio. We make individual decisions based on each individual asset and certainly the tide is affecting us in a more beneficial manner right now with regard to our leverage. But we watch it on a daily basis, we’re hawks on this and we have a comfort zone. We want to get to that 50 to 70 but we’re not uncomfortable right now where we are. We are very happy where we are right now.

Sam Martini - ECI

Got it. And so it sounds like it’s more of -- you’re watching the monthly reports more than you are watching the prices to decide whether or not you want to be levering up or delevering further?

James C. Zelter

We watch it all. You know, certainly the ability to have less leverage right now is a good thing, generically speaking.

Patrick J. Dalton

But certainly having assets that we like fundamental but there’s volatility in the underlying price so they will be more beneficial to the [capital] --

James C. Zelter

Exactly, so it’s a combination between underlying fundamentals of the assets, the overall view of the market, and then the context of where we think the market is going so we are comfortable where we are today and have been diligent in monitoring this and the multi-dimensional nature of it.

Patrick J. Dalton

And I forgot to answer your question on GS [Prismean] -- what we own is a partnership interest and that partnership owns underlying stock of GS [Prismean]. We are a part of the Goldman Sachs private equity group. Obviously that business has done very well for us as [we invest] alongside of them. We are subject to lock-ups but we have drag and tag rights. I think with their leadership on at what point in time to get liquidity, we are in active discussions with them. It does have some volatility but the underlying business is performing well and we are going to continue to hold it. Should that be free to trade, then we will make a decision at that point in time.

Sam Martini - ECI

Got it. Thank you very much.

Operator

Ladies and gentlemen, we do have time for one final question. Your final question today comes from Walter Keating with Apollo Investments.

Walter Keating - UBS

I’m with UBS Financial Services. My question is this -- by the way, congratulations on a good quarter in a difficult environment. What will it take to have you begin more -- what will it take for you to be comfortable to begin to make new investments, and if you did, would you primarily [inaudible] with the new situations or more money to additional investments, to existing investments?

Patrick J. Dalton

We actually have access to capital should we need it. We can recycle capital on a daily basis for new investment opportunities. We are actively out there, talking to sponsors. We are actually talking to the banks. There seems to be a lot more discussion and activity. A couple of the large LBOs that were recently announced, we were actively involved. Now, they did not go to the mezz route and we were involved there. We continue to want to be involved and to be relevant in the marketplace and these are companies that we think are either defensive in what we believe might be some more fundamental pressure and are priced well and are structured well, we will be engaged.

The new pipeline of opportunity is not deep yet. When the -- the [inaudible] rally took us in this cycle. Maybe it leads us on the way out but the fundamentals and the real economy we talk about will make us more comfortable to look at a broader set of opportunities. Right now we are being very selective.

James C. Zelter

The only last comment I would make, Walter, is the decision to put new money into an old investment undergoes the same rigor that we would undergo to buying a new investment to date. There’s no emotion. It’s just the facts. It’s the returns. There are -- the question earlier about one or two of the names, are we putting new money. There will be some that we put new money in and there will be some that we do not put money in. Every one is an individual decision based on the facts and the merits and the returns at that point in time.

Patrick J. Dalton

Okay?

James C. Zelter

Walter, you set?

Walter Keating - UBS

Yes, thank you very much.

James C. Zelter

Great. Well, first of all, I would like to thank, on behalf of the management team and our entire investment team, we want to thank all of the investors for participating today and some great questions. We look forward to your support and look forward to talking to you in the coming quarters. Take care.

Operator

This does conclude today’s Apollo Investment Corporation’s fourth quarter and year-end 2009 earnings conference call. Please disconnect your lines at this time and have a wonderful day.

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