Apollo Investment F3Q10 (Qtr End 12/31/09) Earnings Call Transcript

Feb. 9.10 | About: Apollo Investment (AINV)

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Call End:

Apollo Investment Corp. (NASDAQ:AINV)

F3Q10 (Qtr End 12/31/09) Earnings Call

February 9, 2010 10:00 am ET

Executives

James C. Zelter - Chief Executive Officer, Director

Patrick J. Dalton - President, Chief Operating Officer

Richard L. Peteka - Chief Financial Officer, Treasurer

Analysts

Sanjay Sakhrani – KBW

Faye Elliot - Bank of America Merrill Lynch

Vernon Plack - BB&T Capital Markets

Matthew Howlett - Macquarie Securities

Chris Harris - Wells Fargo

Greg Mason - Stifel Nicolaus

Scott Valentin - FBR Capital Markets

John Stilmar - SunTrust

Aaron Siganovitch (ph) - Ladenburg Thalmann

Presentation

Operator

Good morning, ladies and gentleman and welcome to the Apollo Investment Corporation 2010 earnings conference call. The call will be open for a question and answer session following the speaker’s remarks. (Operator’s instructions). It is now my pleasure to turn the call over to Mr. James C. Zelter, Chief Executive Officer of Apollo Investment Corporation. Mr. Zelter, you may (break in audio).

James C. Zelter

Thank you and good morning. I’m joined today by Patrick Dalton, Apollo Investment Corporation’s President and Chief Operation 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 Dalton

Certainly. Thanks, Jim. I’d 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 broadcasts in any form be 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 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’d like to turn the call back to our Chief Executive Officer, James C. Zelter.

James C. Zelter

Thank you, Rich. Activity in the credit markets was especially strong during the fourth quarter of 2009. Demand was driven by continued institutional and retail inflows and an improving economic backdrop. As results increased two wave trading flow developed in the loan and high yield bond (break in audio) yield spreads further and improving overall liquidity.

Such improved market conditions also create a spill over into the high quality larger end of the mezzanine market where more issuers saw an additional alternative to the traditional high yield market.

Overall, the fourth quarter ended with significant market liquidity, a tighter high yield index and more investors searching for primary and secondary paper.

Certainly many commercial and investment banks, among other financial institutions, benefited from these improving conditions. And with certain banks feeling significantly better we recognize an opportunity for Apollo Incorporation to pro actively seek an extension of our own credit facility.

We believe this important benefit was open only to a select group of followers with broad based platforms and proven track records of transparency, liquidity and overall credit quality. Accordingly, we believe that our performance and behavior through the cycle led to our ability to successfully and proactively amend and extend our multi currency revolving credit facility out to April 2013. Well after its scheduled maturity in April 2011.

With this extension we believe Apollo Incorporation retains the largest and most flexibly revolving credit facility in the sector. Affording us the ability to continue to grow our business as we further move into this recovery.

(Inaudible) our amended bank facility was another successful capital market’s issuance. During the quarter raising $108 million of additional equity capital. With this raise and at December 31, 2009, Apollo Incorporation had more than $600 million of available capital to invest.

We believe this places us in a position in of strength for our current pipeline of investment opportunities. Therefore, we believe that by proactively extending our revolving credit facility with our banks and growing it fortifying again, our equity capital base, we have accomplished two significant strategic initiatives that will afford Apollo Incorporation the opportunity to continue to move forward into 2010 and beyond.

Other December quarterly activity included realizing some of our pipeline late in the quarter, investing $212 million for the three months. In the end, we closed the calendar year with a (break in audio) measured at fair market value, which represents 70 different companies in 33 different industries.

Other quarterly highlights include a continuation of our stable net investment income and our low leverage level of 0.52-1 debt to equity. Furthermore and even after considering our two recent new share issuances, which affect per share results, both net investment income and earnings per share each remains strong totally $0.30 per share and $0.48 respectively.

We are pleased with these results. And with our portfolio again beginning to build we believe we can further grow our harvest of undistributed taxable income that provides significant visibility and cushion to our quarterly dividends to shareholders.

Before I turn the call over to Rich, I’d like to again reiterate that we take our leadership role within the sector very seriously and remain committed to our investment discipline as we seek to grow our business during 2010.

That said, we will continue to look at all available investment opportunities and execute only when we believe (inaudible).

At this time I’ll turn the call over to Rich to take you through some detailed financial highlights for the quarter. Rich?

Richard Dalton

Thanks, Jim. Let me start off with some December 31st balance sheet highlights. Our total investment portfolio had a fair market value of $2.8 billion as compared to $2.6 billion at September 30th. Our net assets totaled $1.83 billion at December 31st with a net asset value per share of $10.40. This compares to net assets totally $1.68 billion at September 30th. And a net asset value per share of $10.29.

The $0.11 net increase in NEV per share for the quarter was driven primarily by net unrealized at appreciation on our investment portfolio as well as from earnings in excess of our distributions to shareholders.

In addition, we had outstanding debt of approximately $948 million on our revolving credit facility at December 31st. This compares to $902 million at September 30th. And we maintain a modest debt to equity ratio of 0.52-1 measured a fair value.

Accordingly, we continue to be well in compliance with our credit facility financial covenants.

As indicated on our schedule investments, we placed certain investments in three portfolio companies on non ecru status during the quarter. While at the same time, one investment came off non ecru status.

The investments placed on non ecru status for the quarter were issued by Oriental Trading Company, Pacific Crane Maintenance Company and Quality Home Brands Holdings. Accordingly they did not contribute any income for the quarter. Our investment coming off non ecru status was issued by Associated Materials.

With these additions and subtractions, our portfolio of 70 companies has five companies with investments on non ecru status at December 31, 2009. And they represent 1.5% of the fair value of our investment portfolio.

On a cost basis, they total 8.6% of our investment portfolio. As for operating results, gross investment income for the quarter totaled $85.6 million. This compares to $84.4 million for the quarter ended September 2009 and $97.5 million for the comparable December 2008 quarter.

Net operating expenses for the quarter totaled $34.2 million. This compares to $33 million for the September 30th quarter and $43.9 million for the comparable December 2008 quarter.

Ultimately, net investment income totaled $50.2 million or $0.30 per average share. This compares to $51.4 million or $0.34 per average share for the September 2009 quarter and $52.8 million or $0.37 per share for the comparable December 2008 quarter.

Also, during the quarter we received proceeds (inaudible) $67 million. In addition the company received a $36 million US equivalent distribution from our Jazz Prismium (ph) portfolio company during the quarter.

These transactions reversed previously recognized unrealized appreciation and depreciation in generated net realized losses of $152 million. This compares to net realized loss of $3.1 million for the September 2009 quarter and $3.6 million for the December 2008 quarter.

The company also recognized net unrealized appreciation of $181.4 million for the quarter ended December 31, 2009. The considers the noted realized losses and compares to recognizing net unrealized appreciation of $60.9 million for the September 2009 quarter and net unrealized depreciation of $524.8 million for the comparable post Leman December 2008 quarter.

In total, our quarterly operating results increased net assets by approximately $80 million or $0.48 per average share. Versus an increase of $109.2 million or $0.71 per average share for the September 2009 quarter. And a decrease of $475.5 million or $3.34 per average share for the December 2008 quarter.

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

Patrick Peteka

(Inaudible) December 31, 2009 demonstrated our success in concluding a number of important strategic initiatives for Apollo Investment Corporation.

As Jim noted earlier in the call, obtaining extension from our cost effective credit facility was critically important in evidence of own bank lenders long term confidence in Apollo Investment Corporation. Our behavior prior to and throughout the cycle was further rewarded by the financial sponsor community which is backed in the table once again asking us to pardon with them on new investment opportunities.

This is significant as we believe the primary market will be an important driver to our net gross over the next 24 months. In addition, these sponsors care more than ever about who they have as lenders to their portfolio companies.

Lastly, our track record of consistency, transparency and responsibility continues to reward us with ongoing equity capital market asset. And (break in audio). Accordingly, we believe we have turned the corner on the cycle and are looking ahead with many lessons learned.

That said, expect us to maintain our strategy, our managing our cost to capital and investing in larger companies and an attractive and accretive risk adjusted return.

Now, getting into our December quarterly portfolio activity. We invested $212 million across two new and several existing portfolio companies. And when we mention investing in existing portfolio companies, are investments are typically added through secondary market purchases not additional direct investments.

Let me take you through some specific information on the portfolio activity during the quarter. First, we made investments in two new portfolio companies during the quarter. ATI Acquisition Company, a for profit post secondary education company and Datatel Incorporated, a provider of enterprise resource planning software solutions to the higher education industry.

We invested $56 million in the senior and subordinated debt of ATI and $20 million in the secondly in debt of Datatel.

We also acquired additional investments in current portfolio companies. For example, we purchased an additional $44 million of the bank debt of Ranpak for the third party seller. Ranpak is a manufacturer and marketer of packing systems. We also purchased an additional $19.5 million of (inaudible) Securities of BNY Convergex. BNY Convergex is an institutional agency only broker and financial technology provider.

We also made $20.6 million investment in the senior notes of Sun Gauge (ph) Learning. Sun Gauge delivers highly customized learning solutions for colleges and universities who specialize content applications and services.

We also added $25 million of high yield notes of General Nutrition Centers. A retailer of health and wellness products.

In addition, we made smaller secondary market add-on investments to several other using portfolio companies, including Catalina Marketing, Sheraton Holdings and FoxCo among others.

Lastly, we made additional $11 million Canadian investment in a common equity of NEG Energy Corporation. A company focused on oil sands development in Canada.

We also received $67 million in proceeds from select asset sales and pre payments. Two of our portfolio companies made pre payments during the quarter. We tendered our $31.4 million positions in Car Holding Incorporated, a vehicle auction provider and 108% of Par, as Car Holdings completed its IPO. This demonstrates the importance and additive returns provided by well structured car protection.

In addition, our $12 million investment in a subordinated debt of Associate Materials, a manufacturer and distributor of building products was repaid by the company at 101% of par during the quarter.

These companies made significant strides through the cycle of (inaudible) through finance under attractive terms in an improved market place.

Additionally, in consistent with our objective of cleansing and optimizing our portfolio for the future, we exited selected underperforming names out of the portfolio. Including our remaining exposure in Euro Fresh, a greenhouse tomato producer, World Directories, a publisher of white and yellow page directories, and Latham Manufacturing, a swimming pool manufacturer.

We also trimmed our position in the bank of American Safety Razor. A razor and razor blade manufacturer at a small gain.

Lastly, we are pleased to have received another $36 million US equivalent distribution from GS Prisnian (ph) during the quarter. Representing approximately 46% of our remaining indirect donorship.

Ultimately our investment portfolio at December 31st remain diversified by issuer and industry consisting of 70 companies in 33 different industries. The total investment portfolio at fair market value was $2.8 billion, which was distributed 28% in (inaudible) secured loans, 58% in subordinated debt, 3% in preferred equity and 11% in common equity and warrants, again measured at fair value.

The weighted average yield in our overall debt portfolio at our original cost at December 31, 2009 was 11.6% versus 11.5% at September 30. The weighted average yield in our subordinated debt and stand alone portfolios was 13.4% and 8.2% respectively at December 31, 2009 versus 13.2% and 7.9% respectively at September 30.

Please note that Apollo Investment Corporations floating rate asset portfolio remains closely matched with the company’s average floating rate credit exposure. Furthermore at December 31, 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 of our total portfolio improves slightly during the quarter to 2.6 measured at cost and 2.1 measured at fair market value at December 31, 2009.

Lately, Apollo Investment Corporation’s leverage ratio stood at a conservative 0.52-1 debt equity. As compared to 0.54-1 at September 30, 2009.

Before I open up the call to questions, I’d like to reiterate what was said earlier in the call with regard to our strategic proactive positioning and the strength of our invigorated balance sheet. As we head into this recovery, there will be many opportunities available for us to invest your significant capital.

That said, we will remain disciplined and selective in (inaudible) to employ all the lessons learned and those that have made it through the cycle, as well as from those that have not made it through. Currently, we expect to continue our investment focus on the larger end of the middle market, seeking more debt like yields rather than deploy your capital into certain smaller companies that are seemingly willing to accept cost of debt capital to survive the cycle.

We believe those companies and the yields they are will to pay as compared to the sustainable margins of the businesses to be more equity like investments with equity like risks.

Again, our single and double debt investing focus will remain with a larger companies. That we believe offer better risk adjusted returns. And given our objective of protecting your capital, we believe our strategy remains prudent.

In closing, I’d like to thank our dedicated team of professionals and our shareholders for your 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’s Instructions) We’ll pause for just a moment to compile the Q&A roster. And your first question comes from Sanjay Sakhrani of KBW.

Sanjay Sakhrani - KBW

Thanks. Looks like you guys had a pretty active quarter in terms of gross originations. Could you talk about how the pipeline kind of looks at this point in time and what you're thinking about in near term growth?

Patrick J. Dalton

Hey, Sanjay it's Patrick. Thanks for your question. We're very happy that the fourth quarter provided us with some opportunities on the primary side as far as a couple of new investments. But also there were some other folks that were cleaning up and winding down some portfolios, and we were able to execute on making some attractive secondary market purchases as people were getting ready for their year ends. That does provide us with some sort of a seasonal opportunity.

Going into this year, the credit markets were pretty hot starting in January and February. They've come back a little bit in the last week or so. We're going to be very selective in what we do there (inaudible) because the credit markets are hot. We think with the pull back in the last (inaudible) opportunities we think will fit our strike zone.

The primary market (inaudible) for second half to – for second quarter to second half opportunity for us because once you have a credit market that shows that it's there and available then sponsors will bring companies that they own out to the market for sale, and we're seeing books (inaudible) will take a quarter or two to sort of get to the finish line, and new books are hitting our pipeline each week, but they will take time to develop, to do the due diligence for us to not chase the market if it becomes too hot. We're not going to sacrifice our capital. So we are optimistic, but we are going to be selective and prudent.

Sanjay Sakhrani - Keefe Bruyette and Woods

Okay. Just to be clear. On some of the investments you made to existing companies, they weren't for distress situations, they were just opportunistic secondary market buys?

Patrick J. Dalton

Yeah, we are not a distressed market buyer. We're looking out for opportunities that are accretive to our business – maybe the seller is more distressed or stressed – but these are what we look at as par loans that we expect to get our full recovery or full payment at maturity, or sooner. And if it's accretive to our business we'll take advantage of that. But it's really as you mentioned an opportunistic par loan investment versus a distressed investment.

Sanjay Sakhrani - Keefe Bruyette and Woods

Maybe, Patrick (inaudible) and kind of what happened for each specific item?

Patrick J. Dalton

Yeah, sure. We're going to be a little careful about what we say because these are private company situations and we are under NDA's but these names should not surprise anybody. They are names we've talked about in the past, they've been on our watch list for some time. The companies had either a covenant amendment that may be coming up, the company's – you know their performance has not improved to a point where we thought that those restructurings would be in the favor of us to put them back on – to continue to accrue the interest.

We're also taking the opportunity in a couple of situations where we think that we can restructure our get perhaps in the form of equity, of converting generation brands – did file for bankruptcy, which is quality home brands. It's now emerged from bankruptcy (inaudible) equity like holdings of that company. We knew that going into last year that that would be the likely outcome but it had not yet happened so we did not want to put in a new security into our portfolio that doesn't exist (inaudible) come through.

We now own equity in that company. We are optimistic that the company's capital structure will allow the company to sustain itself and hopefully improve into recovery, and perhaps there will be a nice recovery on the equity. Time will tell. So each situation is different, it's unique it's fluid. But if we sit together as investment committee and with our board of directors at the end of the quarter and going through the performance of underlying companies and we feel that we – we ought not to be accruing anymore and/or we're not being paid current interest, then they will just automatically go on non-accrual.

Sanjay Sakhrani - Keefe Bruyette and Woods

Okay, and then finally, Jim you mentioned that banks were starting to lend again as evidenced by you guys securing the revolver renewal. I mean, are we seeing that spread through to the middle market, so that you guys have someone on the senior debt side?

James C. Zelter

You know, I guess what my view is Sanjay is that we saw a year and a half of frozen lending environment, and now we're seeing the fall open up. I think you'll see periods over the next year and a half where there will be some volatility – yes people are looking to be a bit more active in the primary markets on the senior side, as well as in the subordinated side, so I think that there is some capital out there to put behind quality issuers. Certainly there's a lot of lessons learned by a lot of lenders in their process – and their underwriting process is extremely rigorous now but yes there is an opening and I think that a lot of companies that had had access in the past may not necessarily have it in the future. And we were very happy to be the first ones to come out and be in this space in what we believe is the largest and most flexible facility to get ours done first.

Sanjay Sakhrani - Keefe Bruyette and Woods

Okay, great. Thank you.

James C. Zelter

No problem.

Operator

Your next question comes from Faye Elliot of Bank of America Merrill Lynch.

Faye Elliot - Bank of America Merrill Lynch

Hi, good morning. On the NPA's, I guess the level stays flat at 8.6 but that was net of the investments that were sold off, and if we grossed it up it would look like NPA's were a bit higher. And so any guidance you could give that would kind of impart some confidence that we are nearing kind of the peak of the credit cycle with regard to your particular portfolio?

Patrick J. Dalton

Well Faye, thank you for the question. I think from a qualitative perspective our watch-list is shrinking, that's a good thing. We're not adding new names to that watch-list. We've definitely seen since the March quarter sequential quarter over quarter growth in both revenue and EBITDA for the portfolio in aggregate. Those were encouraging signs.

There will be as there are surprises that come – unfortunately some are negative some are positive. We think that we have done a good job of marking the portfolio appropriately that there should not be any surprises. Therefore you see the risk rating at fair value at around the two, which is as we expected the investments to perform. We've seen an improvement – slight improvement in the ratings at cost. We're going to cleanse the portfolio. We're focused on the future, we've had access to capital, to opportunities that should be attractive but we do think that the recovery as a team – the recovery will be choppy, we're not \expecting that we're going to be in a violent you know sustainable uptrend. There may be quarters where the economy gets a little choppy. But we've now cleansed our portfolio enough and optimized it and fortified the balance sheet that we can take advantage of opportunities if we can learn our lessons and be more selective as we go through the early parts of recovery and be able to sort of focus on the larger end of the market – there's a little less competition there over time as the credit markets come back then we should see more M&A flow and we can be relevant – investor of our capital.

Faye Elliot - Bank of America Merrill Lynch

Okay. And so, you know at (inaudible) portfolio, but should we expect maybe going forward that that would result in a lower NPA at cost as opposed to this quarter where it was kind of just a replacement?

Patrick J. Dalton

Yeah, I think that's a fair statement (inaudible) in this prize fund. If we're not surprised by you know any information that comes with the company that we're not aware of, then that statement you made is not an unreasonable statement.

Faye Elliot - Bank of America Merrill Lynch

So basically, as you look at it now that's a reasonable statement, as you just said. Thank you very much.

Patrick J. Dalton

Thank you.

Operator

Your next question comes from Vernon Plack of BB&T Capital Markets.

Vernon Plack - BB&T Capital Markets

Thanks very much. Patrick at the end of the quarter the portfolio was 28% senior secured 58% sub-debt and 14 % equity. I'm curious – should we expect a shift in the next fall forward?

Patrick J. Dalton

You know, when we look at senior debt and we look at mezzanine or subordinated debt, you know senior debt is predominantly second lien, which was a replacement in the last cycle in the secondary market was built which really replace mezzanine securities or subordinated securities. The risk adjust of returns we look to match, maybe with the lien you get a little bit more security and you have a little bit lower yield. The floating rate is mostly in the second lien versus the subordinated which is mostly a fixed rate. We're seeing less activity in second lien but that could – market may come back, and we're going to be looking at both markets as opportunity so if the markets are there and issuers want second lien securities then we will do more there, if issuers want more fixed rate securities then we'll do more there. It's really- we look at it on a credit adjusted basis not being that dissimilar from each other, and it's certainly different attributes and it depends upon the marketplace for second lien versus subordinated debt and as a relative investor we unfortunately can't do either.

Vernon Plack - BB&T Capital Markets

Okay, thanks. And I'd like to get current thoughts on the refinancings that will likely take place in the portfolio, obviously lots of debt coming through here in the next several years. Are you looking at that as an opportunity or perhaps a challenge?

Patrick J. Dalton

In our portfolio we've certainly tried to model what we expect to happen, and the good and the bad of having high quality portfolios, our companies do have options. You know, KAR holdings was a terrific investment for us, we bought it down when the markets corrected and we got it at a discount and we got back 108% of par. Unfortunately we no longer hold the investment in that company which is a good company, so it's a bit bittersweet.

There are a number of companies in our portfolio that fit that same profile. If we have an opportunity to stay involved, using our call protection perhaps as a currency if it's a sale to somebody else or if it's refinancing. But what we've always done is if the refinancing is at a higher leverage level or at a lower price than we're willing to accept then we'll let it go and we'll find other opportunities out there. So that's within our portfolio. Outside of our portfolio we do expect that the refinancing windows that's going to (inaudible) bank that should provide us with opportunities where stretch senior loans will no longer be stretch senior loans. It'll be a pocket between the senior debt that's refinance able and the junior capital that currently exists in the capital structure. It may be a nice opportunity for us to come in the middle of that and invest at a good yield with good credit quality and good solid credit protection.

Vernon Plack - BB&T Capital Markets

Okay, thanks.

Operator

Your next question comes from Matthew Howlett of Macquarie Securities.

Matthew Howlett - Macquarie Securities

Great. Thanks for taking my question. Just a clarification on new investments going forward. There's about $10 billion I think ready to price in the forward calendar in the leverage loan space, are you seeing that you're really not going to participate meaningfully in that primary market over the next month?

Richard L. Peteka

No. I mean I think what you're hearing us saying is we do watch the leverage loan market. Certainly our primary market is the mezzanine market and as you probably know the average high yield deal last year and the last couple of year has been approaching $500 million. So those are important barometers for us, what gets done in those markets. We continue to look at every deal that comes forth, that some of the absolute pricing on the forward leverage loan marketplace, the calendar just does not have the right return characteristics for us. Good companies, not very levered, but the actual return (inaudible). So we look at all those, we look at that backlog. I think the theme that Patrick was alluding to earlier is a vigorous new issue leverage loan and high yield market, we believe that incents and creates a lot of sponsors to then review their companies and say okay now what can we put up for sale, what would be able to be financed, and therefore we believe there will be some very good primary product for us to purchase as the second quarter and the year goes on.

So it's going to be an environment where we believe the falls have peaked. We believe we're going to go through an elongated period of two or three years of periods of 4%-6% high yield defaults and we're going to have periods of volatility where the high-yield market opens and closes. That's more of a normal credit cycle and we expect that and that's why we really wanted to be proactive with cleaning our portfolio and getting our balance sheet in order such that we can be opportunistic from our vantage point during that environment.

Matthew Howlett - Macquarie Securities

Got you, thank you for the clarification. And then just remind us again where you see the optimal leverage or debt to equity sort of at this point in the cycle? And Patrick, you spent some time on the Hill last year, I mean any major structural changes you think for the BDCs in the near term as well?

Patrick J. Dalton

Matthew, your question about leverage, that leverage levels for our business our portfolios are the leverage level for portfolio companies —

Matthew Howlett - Macquarie Securities

Your level, your financial leverage.

Patrick J. Dalton

Yeah. I think what we've always said is our operating margin is obviously very healthy. We're very comfortable moving that up. Once we've approached 0.7, 0.75, we've historically chosen to access equity capital and deleverage further. We want to always have cushions between what our covenant limits and regulatory limits are and so we're not going to try to take leverage up too high. It does give us dry powder if we had to or needed to. We've historically accessed the markets when we had leverage levels get that high. Expect the same strategy from the management team here.

As far as regulatory changes, we did spend some time individually and as an industry in Washington. I think that there's a lot of other priorities ahead of us, unfortunately many of those priorities remain. I think at the right time once the industry has sort of cleansed itself and we've got an opportunity to have a dialogue that's constructive and that makes sense, we certainly will approach it. But we're running our company assuming that there will not be any changes. I think that's the right decision. It's been prudent for us historically, except that there's for us around the edges a way for us to help the small and middle market, and the US financial (inaudible). There is less folks focused on providing capital to that market. We read about that every day. If that resonates in Washington, we can be a provider of that capital, but at the moment we're going to sit at the ready to have that conversation, but let's not expect any changes.

Matthew Howlett - Macquarie Securities

Great. Thanks, guys.

Operator

Your next question comes from Chris Harris with Wells Fargo.

Chris Harris - Wells Fargo

Great, thanks a lot. It appears that your investment in innkeepers increased. I'm curious, did you provide additional capital into that investment number one, and then number two I know you guys are always asked about this every single quarter, but if you can just give us a little update on what's happening with innkeepers and whether you think the rebound in the economy is going to potentially help out that position?

Patrick J. Dalton

I'll let Rich take the question on the cost basis and I'll take the question on the company.

Richard L. Peteka

Yeah. Hi, Chris. The increase in the cost basis was just on the prep (ph), and that's the capitalized deferred interest for the quarter. That's all that is.

Patrick J. Dalton

And as far as the company goes, you can imagine a lot's going on where in the industry we are seeing sequential improvement quarter to quarter. The industry is still down year over year. Last year was a very tough year. It remains a challenged market. Visibility remains low which really is a function of folks waiting until the last minute to book travel. We are seeing corporate travel quarter over quarter, but we are not projecting another violent recovery there. It's going to be a tough, tough road here. Our management team has done a tremendous job of right sizing the cost structure. We've got great partner relationships with our franchiser partners or management company. We can change work very diligently on our capital structure.

The nice thing about having us marked appropriately, which is obviously or unfortunately low versus our cost basis, but it gives us the flexibility to be aggressive and assertive when it makes sense to be assertive with the capital structure. We're watching the industry closely. You read about many, many companies in the commercial real estate space working on restructurings, working on proactive change to capital structure. We seek every opportunity given the breadth of Apollo and what we can do as a sponsor as well as this company's management team working closely with all of our lending relationships there and we're going to be aggressive when we need to be aggressive. Fortunately the company is performing relatively well versus the competition. We try to maintain very good healthy relationships with our franchisor partners and investing capital when it makes sense to invest capital — the company investing capital in its properties, not necessarily Apollo, but we stand ready to be supportive in any way that we can. Again, too early to tell you what the outcome's going to be.

Chris Harris - Wells Fargo

That's very helpful, Patrick. Thank you. And then, Rich, maybe you could remind me here, the non-extending lenders on your credit line, is that an amortized only line or are you able to revolve up until the maturity date there?

Richard L. Peteka

I'm sorry, Chris, on that $380 million of non-extending, what was your question?

Chris Harris - Wells Fargo

Correct. Yeah, whether you're able to revolve on that portion of the line?

Richard L. Peteka

Yes, absolutely.

Chris Harris - Wells Fargo

You are?

Richard L. Peteka

Through April 2011 at that cost of LIBOR plus 100.

Chris Harris - Wells Fargo

Okay great. Thanks, guys.

Operator

Your next question comes from Greg Mason of Stifel Nicolaus.

Greg Mason - Stifel Nicolaus

Great. Good morning, gentlemen. Rich, I wanted a little bit of discussion or color on the other income line that had been running about $1 million on average over the last four quarters. It was $5.8 million this quarter. I know a lot goes into that number, but could you give us a little color on the cause for the jump this quarter?

Richard L. Peteka

There was probably about 10 different items that contributed to that number and they really are all over the place. There were some fees on the upturn fees that we took. There was some consent fees, some amendment fees, and so there was a whole host of fees. Patrick mentioned some restructurings, so it's really a compilation of about 10 different fees that went into it. From a modeling perspective they're generally nonrecurring, although in this environment you're always prone to get some money in there and it was a couple million dollars higher than usual so I wouldn't model that in going forward, but you never know. Each quarter brings a different potential market for fees and as we start putting money to work now moving forward with our (inaudible), in the primary market if and when you do close deals there will be fees available. We just don't know when and we (inaudible) valuable. It's a case by case basis so it's very lumpy for you to model and we apologize for that, but it's really just one component of the overall investment.

Greg Mason - Stifel Nicolaus

Okay, great. And you had the tax expense this quarter, do you have your final dividends pullover from a taxable income perspective for the end of the year?

Richard L. Peteka

I do not because we have a March 31st fiscal year end and taxable E&P is measured on that date so March 31st 2010 will actually have that number. But if you wanted to ballpark it, Greg, one of the things you can do (inaudible) from operations you'll see that we brought approximately $86 million of spillover into the fiscal year beginning April 1st of 2009 and if you just took, on a relative basis if you look at our P& you'll see that our net investment income less our distributions for the fiscal year to date for those three quarters — you'll have about another $19 million or so that we're going to add to that $86 million. So we've grown our harvest in dollar terms, but given the fact that we've raised equity and issued shares in August and December, there's an impact on a per share basis, but clearly for the three quarters we've grown our dollars of harvest to support the divided and give investors good visibility in the future.

Greg Mason - Stifel Nicolaus

Great. And then one last question, Fed fund futures are projecting that at some point this year we're going to start seeing a rise in interest rates. How well are you guys matched from a rising interest rate perspective and what do you want to do to either protect or take advantage of a potential rising rate environment?

Patrick J. Dalton

Hey, Greg. It's Patrick. One thing that we always by design have done is really try to match our floating rate liabilities with a floating rate asset so we're agnostic from a profitability perspective. It has had an impact on NAV as you mark to market your portfolio. Generally you're mark to marketing versus a fixed rate market so we have the really well performing assets. When LIBOR decreased the marks were taken on those assets even though our spread in profitability was the same and the collectability was still very, very good. So yeah, you may have some volatility in NAV that may reverse itself out if rates do rise, but we're not really prone to speculate on rates. We like the matching of our business. The profitability is what generates our earnings which generates our dividends.

If you had to on balance invest in a security fixed or floating, what we have done is when you look at the swap curve you may have a lower yield on a floating rate instrument versus a fixed rate instrument because the swap was sort of a 200-300 basis point swap because the market does expect rising rates. If we didn't use our revolver to hedge we'd probably look to use some other instruments to hedge that out so we don't speculate on rates.

Greg Mason - Stifel Nicolaus

Great. Thank you, gentlemen.

Operator

Your next question comes from Scott Valentin of FBR Capital Markets.

Scott Valentin - FBR Capital Markets

Good morning and thanks for taking my question. We've heard from some of your peers there's been a little bit of a bifurcation in the market that the large liquid investment market is seeing some signs of maybe some covenant weakness or term weakness. I mean, nothing what it was a couple of years ago, but some weakness for maybe where it was six months ago versus the middle market which still remains pretty constrained. Any thoughts? I know you guys prefer a large liquid market, but any thoughts to maybe moving down to smaller investment sizes?

Patrick J. Dalton

That's a great question. We've always maintained — what happens — the focus and challenges in our portfolio happen really when we were a smaller company and we're investing in smaller companies themselves. What you see is there a more (inaudible) tracker into the larger end of the markets, especially coming out of the cycle, because the resilience in those companies has proven itself and folks are obviously going to reenter the market; banks and their other institutions reentering the lending market. They're going to enter where they believe is resilient in liquidity and that is at the upper end of the market. That resilience and that liquidity in our portfolio has really afforded us the pathway to get through the cycle and emerge as a leader.

There is a dearth of capital that was in the small middle market and you can extract value in the form (inaudible) of these companies and that's really not our model. There are folks that have exited that market. There are many, especially finance companies whether it's CapitalSource or CH (ph) and others who have had challenges in that marketplace working on their own restructurings to improve their companies coming out, but the funding of those businesses is challenged.

We look at that opportunity. We think what we're good at is really focusing on what we do and what we've done is to focus on the larger end of the market being a relevant investor, being early, getting working very closely with sponsors of high quality who invest in that space and there is market opportunity for others in the small end of the market. That's not something that we're currently designing our business around.

Richard L. Peteka

And Scott, let me add that we've managed our cost of capital from day one in our business so that we don't need to chase yield. Those yields, I think as mentioned earlier in our call, were more equity-like risks in some of those yields, especially in the middle market. So what we're concerned about is there have been a lot of issues in the space with some of those players, those commercial lenders, but right now we think there is some yield tightening in the large end of the middle market given all those attributes that Patrick mentioned, no liquidity and the performance and the resiliency through the cycle, but again we've managed our cost of capital since our IPO and those transactions we can still find very accretive and quite frankly on a risk-adjusted basis we think are more compelling.

Scott Valentin - FBR Capital Markets

Okay. Just one followup question. In terms of target industries, your outlook for the economy, wondering if maybe you're shifting towards more cyclical industries away from more defensive industries?

Patrick J. Dalton

We don't really instigate which deals come of the primary market. It's really a function of the company that performs because companies that perform can be sold. Companies that have not performed recently, although that's tough on (inaudible) sales — we've seen in our business the attractive investments we've made have been in those defensive industries because they've proven themselves through this very, very difficult time. Education, health care, and government have been just some common industry groups which we've done some of those investments not because that they're in those industries per say, but because they've performed and they performed at a very, very (inaudible).

We expect to see that some of the companies away from defensive, not the deep cyclicals because that's not an attractive industry group for us, but a lot of companies have some reliance on GDP growth that will broaden that universe out for us and those companies that have performed maybe relatively better than others. And as a debt provider we don't necessarily need growth in those companies, we just need sustainability. Maybe sustainability at trough levels will be how those companies are capitalized and we'll be providing a benefit to us. If they troughed out and there's cash flow there and capital structures are over equitized (sic.) versus historical measures and we can get our capital in there at a good place and the business will continue to go sideways, we're going to get free cash flow generation and deleveraging, and those are very attractive for us. So you probably would expect to see, as we do, a broadening out, but not an intentional broadening away. But if we're 10.1% in education today which is about where we are, you're probably not going to see too many more education assets coming to our portfolio because we do like diversity.

Scott Valentin - FBR Capital Markets

Okay. Thank you very much.

Operator

Your next question comes from Greg Ravenson (ph) of Sun Trust.

John Stilmar - SunTrust

Good morning. Actually this is John Stilmar. Guys, thank you for allowing me to ask my questions, I have three of them. Patrick or Jim, maybe starting with you mentioned I believe in your remarks talking about both revenue and EBITDA trends up. Can you provide something a little more quantitative or a little bit more precision tot hat and generically what you're seeing at least in terms of revenue and EBITDA trends at least in terms of the slope or pace of the recovery that you're seeing in some of your portfolio companies? And then with that, is there a bifurcation between some of those portfolio companies that may have been more cyclical versus noncyclical? Where are you seeing the bulk of your revenue and EBITDA growth as you've sort of talked about earlier in the call?

Patrick J. Dalton

Yeah, John. Great question. We have a portfolio of 70 companies. It's a dynamic portfolio so it's hard to measure over time and give specifics (inaudible), again, the generalities more specifically than the details because companies can come in and out of the portfolio and they may be meaningful investments and have a meaningful impact, but we do look at quarterly trends in our business of what the current portfolio is today and what it looked like historically and what we're seeing is sequential growth. Still a little bit down over the last year. You look at the full year basis, but sequential basis, and quarter to quarter improvements getting in the right direction. So direct (inaudible).

Unless you had a static portfolio that you had a runoff that you could measure that over time and our portfolio is dynamic — we're in a growth mode. So some of our best performing investments we expect in the future will be the ones that we've just made so it's hard to really sort of turn those back over time because we were not involved in those companies, they didn't have the capital structure they currently have, et cetera. So we're going to be cautious about giving specifics on that, but since the March '09 quarter we are very happy that as the current environment looks like across the board and you read about in the paper, things are getting a little bit better. They're not getting meaningfully better yet. They're getting better. Stabilization first now getting a little bit better quarter over quarter. We may have a negative surprise of one company next quarter that's a large company may be down 5% on top line, but up 10% on EBITDA.

We've seen a little bit better performance on the EBITDA line because the companies that have gone in have been aggressive about their cost structures as we hoped and expected that they would have done and they have done that. We are optimistic that a little top line improvement going forward will have a nice flow through given the revised cost structure of many of our companies. So I can't give you more detail than that, John, but that's kind of what we're seeing and we're pleased with that kind of dynamic. But again we may be in a choppy environment for the next 12 months. We're not economists who are predicting that it's a stable aggressive growth.

John Stilmar - SunTrust

That's actually really helpful. And then, Patrick, to follow up, we've often talked about Apollo's relevance in the primary market both in proprietary looks at deal volume as well as being relevant and providing structural leadership. Can you talk to me about how both of those things may have played out in your new primary investments this past quarter?

Patrick J. Dalton

On both those two investments they were primary in the December quarter: HEI Acquisition Corp and Datatel. We were very much engaged with both the sponsor and the banks who are lending and the capital structure as well. I think without getting into specifics these are private companies so the situation is that both sponsors I think would say some very positive things about us. Datatel was Hellman & Friedman and we've invested in them three or four times in the past. We have investments with them today and a few companies that have performed very, very well. We like them as a sponsor. Hopefully, as you can see that they're coming back to us we remained widely open in our dialogue with them. We'd love to be helpful to them going forward.

HEI, BT Partners, we are investing with them here. We're in dialogues about hopefully helping them on many opportunities. We have a very active direct dialogue with them, and as well as Wall Street. With the markets improving in this first round because of cash flow coming into these markets, the last couple of days have been a little bit choppy. Banks are going to want to know that they can de-risk their originations pipelines by finding providers of capital that are there, are relevant, can help structure, and we're in active dialogue and discussion with those opportunities. And we are today going forward, as Jim mentioned, that the markets get overly hot. We've seen them. We've looked at them. We will stand down if the markets window closes for more syndicated finances. We can come into a meaningful investment. I mean, you look at the size of our investments in HEI relevant to the size of that (inaudible), we were very significant. I think that that was helpful to both the sponsor and to the banks who were working on that financing.

So we'll work on everyday (inaudible) on a sponsor coverage basis direct with the sponsors, as well as with all the Wall Street firms to our capital markets team that's here talking to Wall Street every day.

John Stilmar - SunTrust

Perfect. Thank you for your time.

Operator

Your next question comes from Aaron Siganovitch (ph), Ladenburg Thalmann.

Aaron Siganovitch - Ladenburg Thalmann

Hi. I was just — maybe I missed this in the call earlier, but were most of the new investments this quarter made toward the end of the December quarter?

Patrick J. Dalton

Yes. That's right, Aaron.

Aaron Siganovitch - Ladenburg Thalmann

Okay. So generally the average investments should kind of produce a higher net interest income in the coming quarter?

Richard L. Peteka

Yes. There was not a lot of contribution to earnings from those investments. Many of the sponsors or sellers in the market came to us in the latter half of December and therefore we'll see those accrete to earnings in the March quarter.

Patrick J. Dalton

Yeah. Just one comment on that. It wasn't we were looking to make investments in December, but it's natural. It happened in the year before and the year before. A lot of folks like to get things done by year end and that's good for us as a buyer because we can extract some value for that because we spend a lot of time on these companies, we've even known them. Some of them in the secondary market were already in our portfolio and folks had a desire and a need to clean up their portfolios and sell assets, and that accrues to value to us because we can come in there and we can be patient and use that to our advantage.

Aaron Siganovitch - Ladenburg Thalmann

Great. And then also on your exits of your non accruing companies, what's your strategy or do you have a specific process in terms of exiting these companies that are (inaudible)?

Patrick J. Dalton

Yeah. There's a few things that go on there and every situation is very different. We are not in the business of exciting something that we think ultimately would have higher value for our shareholders. These names that we excited, we've been in these names for a long, long time as they've been stressed and with either cushion or a relief into a restructuring. EuroFresh (ph) did emerge from bankruptcy and we have a restructured instrument in the form of equity and we had a few. We had folks who were interested in acquiring those securities to us either come to us and/or we could seek that market grow the marketplace with our platform of relationships we have of other folks who may be more in the distressed option or opportunities that they want to buy (inaudible). So they're all fluid, they're all very different. We're not trying to give it away. We will exhaust all of our resources if we think there's more value to be had. If there's not, then we're not going to sit there and watch further value deteriorate.

Aaron Siganovitch - Ladenburg Thalmann

Okay, thank you.

Operator

And our final question is from Faye Elliott with Bank of America/Merrill Lynch.

Faye Elliott - Bank of America/Merrill Lynch

Hi. Thanks again. Is it possible to give a breakdown of vintages of your portfolio, particularly since you are investing more heavily now?

Patrick J. Dalton

Again, it's a dynamic portfolio. We've done a fair amount of investments each of the years. I think that we've seen — the average hold period in our business is generally 3-5 years. Our portfolio is a little bit shorter than that because there were investments made in 2005 and '06 that came up pretty quick. It's not a disparate between years. I think that what we're pleased to see is some of those vintages that others may consider a risky vintage. '07-'06 have performed very, very well for us, amongst the best performing. As we continue to grow the size of the companies we're investing in, the resilience of those companies has proven so and so we've been very pleased with that. So I wouldn't say it's a big disparity on the numbers of investments. As we've gotten bigger our dollars of capital have gotten bigger, we've invested in bigger companies so the trend may look each year getting a little bit bigger in the vintages, but there's nothing I would say that's meaningful from a statistical point of view.

Richard L. Peteka

Yeah, Faye. We don't really track it that way and that's why we don't have the numbers for you it's really a bottom's up investment as a time. And again, it's trending, as Patrick said, as we grow our capital base and we sought bigger companies and wanting to be relevant and control documentation, et cetera, or have liquidity. Those were some of the primary drivers not necessarily — it's not really a portfolio approach, it's really bottoms up one at a time.

Faye Elliott - Bank of America/Merrill Lynch

Okay. Thank you.

Patrick J. Dalton

Thanks, Faye.

Richard L. Peteka

Thanks, Faye

James C. Zelter

Well, with that I'd like to thank everybody for joining our call today. We appreciate your continued support and we look forward to giving you the update at the end of the next quarter. Take care.

Patrick J. Dalton

Thank you.

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