Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Elizabeth Besen - Investor Relations Manager, Apollo Investment Corporation

James Charles Zelter - Chief Executive Officer and Director

Edward J. Goldthorpe - President

Gregory W. Hunt - Chief Financial Officer and Treasurer

Analysts

Christopher York - JMP Securities LLC, Research Division

Douglas Mewhirter - SunTrust Robinson Humphrey, Inc., Research Division

Bo Ladyman

Apollo Investment (AINV) Q4 2013 Earnings Call May 23, 2013 10:00 AM ET

Operator

Good morning, and welcome to Apollo Investment Corporation earnings conference call for the period ending March 31, 2013. [Operator Instructions] I will now turn the call over to Elizabeth Besen, Investor Relations Manager for Apollo Investment Corporation.

Elizabeth Besen

Thank you, operator, and thank you, everyone, for joining us today. With me today are Jim Zelter, Chief Executive Officer; Ted Goldthorpe, 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 statements. 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 of companies.

You should refer to our registration statement and shareholder reports for risks that apply to our business and may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law.

To obtain copies of our SEC filings, please visit our website at www.apolloic.com. I'd also like to remind everyone that we've posted a supplemental financial information package on our website, which contains information about the portfolio, as well as the company's financial performance.

At this time, I'd like to turn the call over to Jim Zelter.

James Charles Zelter

Thank you, Elizabeth. This morning, we issued our earnings press release and filed our annual report on Form 10-K. I'll begin my remarks with some financial highlights for the quarter and for our fiscal year, followed by some other recent business highlights. Following my remarks, Ted will provide an overview of the market environment and review our investment portfolio activity for the quarter. And finally, Greg will discuss our financial results in greater detail, then, we will open up the call to questions.

Starting with financial highlights. We reported net investment income per share of $0.21 for the March quarter. Results were driven by stable recurring interest income and dividends offset slightly by a decrease in other nonrecurring income. Fourth quarter GAAP EPS was $0.32, which included the net gain on assets of $0.12 per share.

For the full year ending March 31, 2013, we reported net investment income of $0.83 and GAAP EPS of $0.51. Our net asset value per share was $8.27 on March 31, and that compares to $8.14 at the end of December 2012, an increase of 1.6%.

Over the past year, our investment approach has allowed us not only to increase the secured portion of our portfolio, while maintaining a stable yield, but also, to expand our investment platform in the 2 significant industry verticals: energy and aviation. During the March quarter, we invested $428 million, which was driven primarily by origination activity from our specialty industry verticals.

Net industry activity was $199 million for the quarter, and for the full year, we invested $1.5 billion, and our net investment activity was $200 million. We are pleased with our repositioning of the portfolio over the past year. At the end of March, secured investments accounted for 44% of the portfolio compared to 32% a year ago.

Despite a market backdrop of lower yields, we achieved our target mix while maintaining the overall portfolio yield and adhering to our underwriting standards. Given the current liquid market conditions and the easing of credit standards in the broadly syndicated credit markets, we believe that our direct origination capabilities have provided us with attractive opportunities to deploy capital throughout this past year.

In addition, we made progress further integrating our platform into the broader Apollo credit business. The development of our verticals in energy and aviation were created using the resources, expertise and knowledge base of Apollo's broader credit and private equity businesses.

During the year, these resources allowed us to deploy approximately $325 million of capital, and the pipeline of these verticals continues to remain solid. Given the level of investment activity during the quarter and our leverage ratio at the end of March, we determined that it was prudent to raise equity capital and de-lever our balance sheet.

Adjusting for last week's equity offering, our debt-to-equity ratio at the end of March would have been near the low end of our target range.

Finally, turning our discussion to our dividend. The Board of Directors approved a $0.20 dividend for shareholders of record as of June 20, 2013. Based on our closing share price yesterday and annualizing the dividend, our stock currently offers a dividend yield of approximately 9.4%.

With that, I will turn the call over to Ted to discuss the current market environment and our investment portfolio.

Edward J. Goldthorpe

Thank you, Jim. The credit markets were stronger in the March quarter, reflecting economic optimism in the muted impact of our -- of the budget sequester. Investors continue to put money into high yield and bank loan markets creating strong demand for both primary and secondary paper. Dealers responded by bringing transactions to lock in attractive yields and leverage multiples. The mezzanine market was virtually nonexistent given the strength in the broader credit market and tight spreads found at high yields.

Although underlying fundamentals remain solid, we believe the continued strength in the credit markets is mostly attributable to an abundance of liquidity in the search for yield, which continues to result in a mispricing of risk. The middle market has not been immune to the trends in the more liquid markets.

In today's market environment, we are still finding investment opportunities that meet our underwriting standards. Given the risk-reward dynamics we're observing, we were selective investors and focused on direct origination opportunities in both our specialist sourcing verticals, including energy and aviation. We focused on secured investments and investments in companies that we believe are conservatively positioned with ample liquidity.

During the March quarter, we invested $428 million in 10 new and 9 existing portfolio companies, which included $204 million in existing portfolio of companies. We also received $98 million of proceeds from selected sales and $131 million from repayments.

The yield at cost on new debt investments was 11.5%, and the yield at cost on debt dispositions was 11.7% while the yield at cost on debt repayments was 11.8%. The overall yield of our debt portfolio was 11.9%, unchanged from the prior quarter. The weighted average yield on our unsecured debt portfolio increased to 12.7% from 12.6% from the prior quarter, and the weighted average yield on our secured debt portfolio increased -- was 11.2%, unchanged from the prior quarter.

There continues to be a significant spread between liquid and less liquid investments, which has allowed us to generally maintain our yields by redeploying capital into similar yielding assets by taking liquidity risk, while also improving our security position. During the quarter, 45% of new investments were secured debt and 43% unsecured debt, with the remainder in structured products and equity.

I will now discuss some specific portfolio activity for the quarter. To begin, Merx Aviation, our aircraft leasing subsidiary, invested $135 million in 3 aircraft transactions during the quarter, the largest of which was an investment in a portfolio of aircraft purchased from GECAS. The portfolio consists of 26 newer current generation narrow-body aircraft manufactured by Boeing and Airbus. We also invested in 2 smaller transactions.

In addition, we continue to selectively invest in liquid investments as was the case with our $67.5 million investment in the unsecured debt of Ceridian, an existing portfolio company. We believe Ceridian is a strong business that stands to benefit in a rising rate environment.

Notable investments that were sold during the period included our 2 positions in Travelport and our investment in RBS Holding. Notable investments that were repaid in whole or in part during the period included our secured debt investment in Advantage Sales & Marketing, our unsecured investment in Univar and our unsecured debt investment in Avaya.

Regarding our energy vertical, our team continues to actively screen opportunities and has invested nearly $100 million -- $90 million since inception. At the end of March, energy investments accounted for 3.9% of the fair value of the portfolio.

I'd now like to review some general portfolio statistics at March 31. We continue to be diversified by issuer and industry with 81 portfolio of companies invested in 30 different industries. The company's total investment portfolio had a fair market value of $2.85 billion, with 44% in secured debt, 43% unsecured debt, 7% structured products and 6% in preferred equity, common equity and warrants.

The average EBITDA and the average net leverage of companies in which we invested in fiscal year 2013 was below the average of the entire portfolio. This decrease in both EBITDA and net leverage illustrate the progress we have made in shifting the portfolio into more selective middle market companies and had better attachment points in the capital structure.

At March 31, the weighted average cash interest coverage, the amount by which EBITDA exceeds interest expense, remained at over 2x. Regarding our risk rating, the weighted average risk rating of our portfolio measured at cost was 2.3 at the end of March compared to 2.4 at the end of December. The weighted average risk weight of our total portfolio measured at fair value was 2.1 at the end of March, down from 2.2 at the end of December.

With that, I will now turn the call over to Greg, who will discuss our financial performance during the fiscal fourth quarter.

Gregory W. Hunt

Thank you, Ted. I'd like to remind everyone that in addition to our 10-K, we have posted a financial supplement presentation on our website.

I will now discuss Apollo Investment Corporation's financial performance for the fiscal fourth quarter ended March 31, 2013. Our total investment portfolio had a fair market value of $2.85 billion compared to $2.63 billion at the end of December. The increase was driven by positive net investment activity, as well as portfolio appreciation.

Net assets totaled $1.68 billion with a net asset value per share of $8.27 at the end of March. This compares to net assets totaling $1.65 billion and a net asset value per share of $8.14 at the end of December.

The increase in NAV was driven from unrealized gains across many investments, partially offset by unrealized losses at only a handful of our other investments. On the liability side of our balance sheet, we had $1.2 billion of total debt outstanding at March 31, up from $1 billion at the end of December. At March 31, the company's debt-to-equity ratio was 0.69, up from 0.63 at the end of December.

Our net leverage ratio, which includes the impact of cash and unsettled transactions was 0.7 at the end of March, up from 0.58 at the end of December. Adjusting for our equity -- our recent equity offering, our debt-to-equity ratio would have been 0.52 at the end of March.

Our quarter-end leverage was near the upper end of our target range in anticipation of April and May refinancing activity. Regarding our debt, I'd like to mention that earlier this month, Fitch Ratings acknowledged the progress that we have made repositioning our portfolio and maintained our BBB rating and revised their outlook to stable.

In the March quarter, one investment, our second-lien position in Cengage Learning, was placed on non-accrual. At the end of March, securities in 3 of our portfolio of companies were on non-accrual status, representing approximately 4.9% of our portfolio on a cost basis, and 0.8% on a fair value basis compared to 3.2% on a cost basis and 0.3% on a fair value basis at the end of December.

As for operating results, total investment income for the March quarter totaled $84.6 million, a 1.7% increase from the December quarter and a slight decrease from the March 2012 quarter. The sequential increase reflects an increase in dividend income as a result of holdings within our AIC Credit Opportunity Fund and our Kirkwood investments, offset slightly by a decrease in interest and fee income.

In addition, expenses for the March quarter totaled $42.6 million. This compares to expenses of $41.1 million for the December quarter and $44.2 million for the March 2012 quarter. The sequential increase in expenses was mainly due to a higher outstanding debt balance and management incentive fees.

Net investment income totaled $42.1 million or $0.21 per share for the March quarter. This compares to $42.1 million or $0.21 per share for the December quarter and $41 million or $0.21 per share for the March 2012 quarter.

For the quarter, net gains, which include realized and unrealized gains and losses, totaled $23.8 million compared to a net loss of $64.8 million in the December quarter, and net gains of $76 million for the year-ago quarter. For the March quarter, net gains were reported on over 70 investments totaling $66 million, offset by write-downs on PlayPower, Garden Fresh and Cengage. In total, our quarterly operating results increased net assets by $65.8 million or $0.32 per share compared to a decrease of $22.7 million or $0.11 per share for the December 2012 quarter, and an increase of $117.2 million or $0.60 per share for the March 2012 quarter.

I will now turn the call back to Jim.

James Charles Zelter

Thank you, Greg. Over the past year, we believe that we have made meaningful strides in achieving many of our strategic objectives and repositioning the overall portfolio. Given today's liquid market environment, where spreads have tightened and leverage levels have increased, we will remain highly selective with a focus on direct origination and secure debt investments in companies with strong liquidity. We will also continue to selectively sell lower-yielding assets when possible, while continuing to selectively look for opportunities to grow our specialist origination capabilities.

In conclusion, we believe the long-term outlook for capital providers to the middle market like us remains strong.

With that, operator, please open the call to some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Chris York of JMP Securities.

Christopher York - JMP Securities LLC, Research Division

Can you talk about the performance of your investment in Cengage Learning, which you placed on non-accrual this quarter?

Edward J. Goldthorpe

Yes. So we obviously talked about this in the last conference call when we obviously took the vast majority of the loss in this position. I think we continue to monitor it very, very closely just given what's going on with the headwinds the businesses are facing, and we continue to risk manage the position.

Christopher York - JMP Securities LLC, Research Division

Okay. So nothing on the fundamentals that is moving?

Edward J. Goldthorpe

So if you recall, they came out with earnings that were substantially worse than what people were expecting at the end of last year. And subsequent to that time, the probability -- I think the market has changed the way they look at the company and frankly, has changed their view of the ability for the company to refinance their debt. So that's caused the debt to trade lower and obviously, a position we're very focused on. So the position -- the position still pays interest, but we thought it was the most prudent thing to put it on non-accrual just given where it's valued.

Christopher York - JMP Securities LLC, Research Division

Sure, okay. And then, one last question here for me. What was the weighted average yield on your structured product portfolio?

James Charles Zelter

In terms of new investments we made for the quarter, or our overall portfolio on a static basis at the quarter end?

Christopher York - JMP Securities LLC, Research Division

I'll take both if you got them.

James Charles Zelter

Okay, let me pass it on to Greg here.

Gregory W. Hunt

Yes, our weighted average on our structured products at the end of the quarter was about 12.2%.

Operator

The next question comes from Doug Mewhirter of SunTrust Robinson Humphrey.

Douglas Mewhirter - SunTrust Robinson Humphrey, Inc., Research Division

I just wanted to know, of the total investments you made this quarter, how much came -- were originated through your energy branch?

Edward J. Goldthorpe

So energy was less than 10% of originations this quarter.

Douglas Mewhirter - SunTrust Robinson Humphrey, Inc., Research Division

Less than 10%.

Edward J. Goldthorpe

Yes, it was a very small number in terms of originations this quarter. Because it's proprietary originated, I would say, it varies quite dramatically from quarter-to-quarter.

Douglas Mewhirter - SunTrust Robinson Humphrey, Inc., Research Division

Yes. Understandable. And just as a reminder, your aircraft leasing is -- it's actually done through a wholly-owned subsidiary. So you're -- the $135 million of investments that, that company made did not -- that doesn't reflect on your total investment activity, right?

Edward J. Goldthorpe

It does.

Douglas Mewhirter - SunTrust Robinson Humphrey, Inc., Research Division

$135 million...

Edward J. Goldthorpe

Yes. So the way it works is as we'd make investments out of Merx, which is our aviation subsidiary, we obviously downstream capital, which counts as an investment -- and counts in our investment activity. But Merx was about 1/3 of our investment activity this quarter. It was driven primarily by the GECAS transaction that we talked about in the last conference call.

Operator

Your next question comes from Bo Ladyman of Raymond James.

Bo Ladyman

Could you give us a little more color on your position in the capital structure for your airline lease transactions, specifically the GECAS transaction?

Edward J. Goldthorpe

Sure. So on the GECAS transaction specifically, it's a highly structured transaction. I think what's -- and we have to be careful because we're obviously under confidentiality, but there was a significant amount of senior secured debt raised against the structure, and then, we -- our investment is kind of below the senior secured debt.

James Charles Zelter

So we -- in typical fashion, we would look at it as, really, as a mezz investment to a diverse portfolio, where we're very comfortable with -- the genesis of this was the idea of when we compare these types of transactions versus corporate transactions, we just felt that there was a greater amount of diversity of hard assets, a greater diversity of counterparties with the leases and long-term inherent value of the asset class with a great partner in the business. So if you were to look at it versus a typical transaction under our corporate mezz book, as Ted said, big piece of secured debt, and then, we are a slice underneath that with the right alignment of interest with our partner.

Bo Ladyman

Any color you could give on the amount of equity behind you in that transaction?

Edward J. Goldthorpe

Yes, I'm sorry we can't because, again, it's under -- we're under confidentiality.

Bo Ladyman

Right, right. I understand that. Okay, one other one or maybe 2 more. Last quarter, you talked about seeing some potential spillover origination activity from Q4 into Q1 and potentially, a slowdown in the back half of Q1, calendar Q1. Is that -- did things end up front-end loaded or were they spread pretty evenly through?

Edward J. Goldthorpe

Through, sorry, through the March quarter or through the..?

Bo Ladyman

Through the March quarter.

Edward J. Goldthorpe

Yes, I mean, I think through the March quarter, it was -- we had a lot of activity at the very start of the quarter that was a spillover from last year. As you recall, given the -- post-election, after the election, there was a lot of deal activity in the fourth calendar quarter, a lot of which got pushed into the first month of the next quarter. So I think it's fair to say that most -- a lot of -- we had a very good first month of originations during the first calendar quarter.

James Charles Zelter

Bo, this is Jim. I'll add a couple of comments to Ted's comments. Certainly, the tone that has been expressed by many of our peers in terms of the elevated number -- the elevated activity in the high-yield market has muted some of the activity, and certainly, we feel very happy that we made this strategic move a year or so ago and expanding our front end right now because for those players that haven't been able to do so, you're really relying on a very, very elevated market in terms of lower pricing and higher leverage. But I think the overall tone, which our peers have expressed, we would echo in the sense that it's -- the credit markets are priced very favorably for issuers right now. And we're making sure that we are appropriately cautious in putting new money to work in this kind of environment.

Edward J. Goldthorpe

Yes, I'd make one follow-up comment to that, which is -- and we've mentioned this previously. We are not finding a lot of opportunities in the liquid markets. We also are not seeing a lot of activity. The sponsor channel on our sponsor clients are very active, but there's very little net new activity. A lot of it's refinancing the existing portfolio companies. So most of our origination, all the way through to today, has been direct origination versus, I would say, a sponsor origination.

Bo Ladyman

Could you give us a little more an idea of how investment activity has been shaping up for this quarter?

Edward J. Goldthorpe

Yes, I think through today and obviously, things can change going forward, I think we've continued to see relatively robust originations. But we've also seen a decent amount of harvest. So I think in the first quarter -- just in the first calendar quarter, I think you saw a lot of refinancing of bank debt, senior secured bank debt. And I think you're now seeing a spillover into the second-lien market and unsecured market. So we've actually had a -- we feel pretty good about originations this quarter, but we also have been taking out some of our or we expect to be taking out of some of our bond on the capital structure risk. So as we kind of reposition the portfolio, some of this is just happening organically. A lot of the stuff originating is senior secured, top of the capital structure and a lot of the stuff that were being taken out of is mezzanine or unsecured risk.

Bo Ladyman

Right, right. One last one. Could you remind us how much you sort of target for your 2 direct -- the aviation and the energy verticals, how much you can see those being in the future as a percentage of your portfolio?

James Charles Zelter

Yes, we've talked about both of them being plus or minus 10% of the portfolio. You know, if you've got a $2.5 billion to $3 billion portfolio, that should give you some indication. Certainly, we are not driven to that. if the yield were to compress and the opportunity was not as buoyant as it is today, we're not going to just go down that path because we talked about 10%. So -- but that's a general direction which we'd like to go in.

Operator

At this time, there are no further questions. I would now like to turn the floor back over to Mr. Jim Zelter for any additional or closing remarks.

James Charles Zelter

Well, once again, we thank everybody for participating on the call today. We appreciate your loyal following and questions and your time. And we look forward to talking to you in the future. With that, we'll say goodbye, and thank you.

Operator

Thank you. This concludes your conference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Apollo Investment Management Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts