Apollo Investment Corporation F1Q11 (Qtr End 06/30/10) Earnings Call Transcript

Aug. 5.10 | About: Apollo Investment (AINV)

Apollo Investment Corporation (NASDAQ:AINV)

F1Q11 (Qtr End 06/30/10) Earnings Call Transcript

August 5, 2010 11:00 am ET

Executives

Jim Zelter – CEO

Richard Peteka – CFO and Treasurer

Patrick Dalton – President and COO

Analysts

Sanjay Sakhrani – KBW

Faye Elliott – Bank of America

Vernon Plack – BB&T Capital Markets

John Stilmar – Suntrust

Troy Ward – Stifel Nicolaus

Jasper Birch – Macquarie Holdings

Robert Fether [ph] – RIS Investments [ph]

Operator

Good morning. And welcome to the Apollo Investment Corporation earnings conference call for our first fiscal quarter ended June 30th, 2010. At this time, all participants have been placed on listen-only mode. The call will be open for question-and-answer session following the speakers' remarks. (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.

Jim Zelter

Thank you, and good morning to everyone. I'm 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 Peteka

Thank you, 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 broadcast, in any form, is strictly prohibited. Information about the audio replay of this call is available in our earnings press release. I'd also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information.

Today's conference call and webcast may include forward-looking statements 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 Web site 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, Jim Zelter.

Jim Zelter

Thank you, Rich. Early in the quarter we saw continued strength in the capital markets with strong high yield issuance and active industrial demand. However, in May and through the end of the quarter, the markets became more volatile and ultimately ended weaker as investors had heightened concerns over sovereign risks in Europe and the overall global economic recovery.

In addition, there were several reports of inconsistent economic data that kept many investors on the sidelines as they continue to access the potential contagion of perceived issues that arose out of the sovereign debt crisis in Europe. These concerns, among others, also grew high yield credit spreads wider during the quarter by approximately 70 basis points among reasonable steady two-way trading. High yield issuance for the quarter ultimately remains strong totaling $44 billion as compared to the record $69 billion for the quarter ended March 2010.

As we’ve said, we believe that periods of increased volatility present windows of opportunity for our company as volatility provides greater potential uncertainty on deal execution and pricing for larger companies that seek to issue high yield debt. Accordingly, and as evidenced by our commitment on the Altegrity-Kroll transaction, financial sponsor’s place additional value on the stability and certainty of the mezzanine marketplace, especially from capital providers of scale, who can be relevant – who can be a relevant solution like a Apollo Investment Corporation.

Currently there’s an active debate in the overall marketplace on the state of the economy. One group of investors is positioned for double dip as they expect to decline in economic activity. The other group grounds their view on a recent earnings season that has surpassed expectations. Irrespective of that debate, we continue to find interesting risk reward investment opportunities.

Now, let me briefly go over some portfolio highlights. During the quarter we were active investors. In total, we invested $221 million in three new and eight existing portfolio companies for the quarter. We also received prepayments and sold select assets totaling $114 million. Accordingly, our net investment growth for the quarter totaled $107 million. At June 30th, our portfolio of investments totaled $2.85 billion measured at fair market value, and was represented by 68 distinct portfolio companies diversified among 31 industries.

At this time, I’d like to remind everyone of what we have told investors repeatedly going back to our IPO in 2004. We are long term investors that invest selectively in long term assets, seeking superior risk adjusted returns over time. We do not view ourselves as a specialty finance company, and therefore, do not approach our investment operations as a quarterly business with quarterly goals and budgets. Accordingly, we do not provide quarterly guidance on our growth or net portfolio growth, or how the timing of such net growth may impact quarterly results. That said, we do believe that our results are more representative if viewed at, at least a rolling four-quarter basis and our business strategy remains the same as we laid out at the time of our IPO.

As a reminder, we were able – we are pleased to further grow our company’s capital base during the June quarter by closing on our most recent equity capital markets issuance in May, raising approximately $204 million of additional capital at a premium that was accretive to book value. As is typical, that capital initially reduces the outstanding balance of our revolving credit facility until we fully invest the proceeds. Accordingly, the company had approximately $566 million currently available for new investment in operations at June 30th, 2010.

Our outstanding leverage, measured as a ratio of stockholders equity, stood at 0.54 to 1 at June 30th. We believe this relatively low leverage level and the amount of currently available dollars to invest remain a significant competitive advantage in our industry. And when combined with what we believe is one of the lowest cost of capital in the sector, we believe we can continue to improve our balance sheet as well as the overall risk adjusted returns to shareholders as we head further into this economic recovery.

Before I turn the call over to Rich, I’d like to take a brief moment to again note the ongoing difficult situation with our investment in Innkeepers USA Trust to Grand Prix Holdings. As previously noted, we are currently – certainly disappointed. And at June 30th, our entire investment in Innkeepers USA Trust is now deemed to have fair value of zero. At this point, the situation is fluid and remains complex. And as described in publicly filed documents, we potentially have an option. And if that option becomes an investment, we will have a discussion about it on our next call.

Now with that, I’ll ask Rich to take you through some detailed financial highlights for the quarter, and then onto Patrick for some portfolio discussion as well. Rich?

Richard Peteka

Thank you very much, Jim. I’ll start off with some June 30th balance sheet highlights. As Jim noted earlier, our total investment portfolio had a fair market value of $2.85 billion, which is essentially flat with our portfolio value at March 31st, 2010.

Our net assets totaled $1.84 billion at June 30th, with a net asset value per share of $9.51. This compares to net assets totaling $1.77 billion at March 31st and a net asset value per share of $10.06. The $0.55 decrease in any of these per share for the quarter was driven primarily by a change in net unrealized depreciation on our investment portfolio. Negative contributors to performance for the quarter included our investments in First Data, Sorenson, LVI Services, and PlayPower Holdings, and were due to a mix of both credit issues and technical mark-to-market.

Our one note of light on the liability side is our revolving credit facility, which had $993 million outstanding at June 30th as compared to $1.06 billion at March 31st. This left our debt to equity ratio at a modest 0.54 to 1 at June 30th as compared 0.60 to 1 at March 31st.

As indicated on our schedule of investments, we placed one investment on non-accrual status during the quarter. This investment was issued by LVI Services, a provider of integrated remediation, demolition, restoration, and emergency response services.

Our portfolio of 68 companies now is five companies with investments on non-accrual status at June 30th versus four companies at March 31st. These investments represent 0.2% of the fair value of our investment portfolio at June 30th versus 0.07% – I am sorry, versus 0.7% at March 31st. On a cost basis, they represent 8.1% of our investment portfolio at June 30th versus 6.8% at March 31st.

As for operating results, gross investment income for the quarter totaled $78.2 million, down from $87.7 million for the quarter ended March 31st and $82.6 million for the comparable June 2009 quarter. Expenses for the quarter totaled $37.4 million. This compares to $39.1 million for the March 31st, 2010 quarter and $33.2 million for the comparable June 2009 quarter.

Ultimately, net investment income totaled $40.8 million or $0.22 per average share, which includes the increase in average shares from the May equity raised mentioned earlier. This compares to $48.5 million or $0.28 per average share for the March 2010 and $49.3 million or $0.35 per share for the comparable June 2009 quarter. Also during the quarter, we received proceeds from investment sales and prepayments totaling $140 million.

Net realized gains totaled $3.9 million. And this compares to net realize losses of $219.7 million for the March quarter and $98.2 million for the June 2009 quarter. The company also recognized net unrealized depreciation of $129.0 million for the quarter ended June. This compares to recognizing net unrealized depreciation of $161.3 million for the March 2010 quarter and $133.3 million for the comparable June 2009 quarter.

In total, our quarterly operating results decreased net assets by $84.3 million or $0.45 per average share versus a decrease of $9.9 million or $0.06 per average share for the March 2010 quarter and an increase of $84.5 million or $0.59 per average share for the comparable June 2009 quarter.

Now, let me turn the call over to our president and chief operating officer, Patrick Dalton. Patrick?

Patrick Dalton

Thank you, Rich. As Jim noted early on the call, we were active investors during the June quarter investing in three new and eight existing portfolio companies. We were successfully in making investments in certain existing portfolio companies that we know and like. In other cases, we’re able to recycle out a lot of certain yielding securities and to slightly higher yielding securities where we believe we are well-positioned.

Now, let me take you through some specific highlights on the portfolio changes during the quarter. The new companies added to our portfolio were American Tire Distributors, a leading replacement tire distributor in the US that was acquired by TPG Capital.

We invested $30 million across the capital structure, primarily in senior and senior subordinate notes, along with a $3.1 million equity co-investment. We also invested in Sedgwick Holdings, a leading third party administrator in the US operating in the workman’s compensation, disability, and liability claims outsourcing markets, where we invested $25 million in second lien bank debt to back the acquisition of the company by Hellman & Friedman and Stone Point partners.

Lastly, we invested in US Renal Care, a dialysis and ancillary services provider where we investment $20 million in subordinated debt. As for additional investments and existing portfolio companies, we elected to reinvest $50 million in the second lien bank debt of Advantage Sales & Marketing in support of the refinancing of their mezzanine debt. We will refinance, out of our original mezzanine position, at a premium. Advantage Sales is a leading sales and marketing agency providing outsourced services to its customers. We also purchased $15 million of Intelsat bonds in the secondary market. Intelsat is a fixed satellite service provider.

Furthermore, we invested $13 million in the second lien bank debt of Garden Fresh, a casual restaurant chain operator. In addition, we had small secondary market investments in several other existing portfolio companies, including Ozburn-Hessey, PlayPower, FoxCo, and Hub International among others.

A special note with two additional prepayments during the quarter, one, our investment in C.H.I Overhead Doors, which was a 2004 vintage investment, was repaid by the company at par; while PBM Holdings, a 2006 vintage investment, was called away at a premium.

In addition, it was reported in our 10-Q that we made a $231 million commitment to support the acquisition of Kroll Inc. by our existing portfolio company, Altegrity, Inc. The combined company will be a global leader in the risk consulting and information services business, including e-discovery, federal background investigations, commercial pre-employment screening, due diligence, and investigations. On a combined basis, the company generated over $325 million of EBITDA as of March 31, 2010. The company is controlled by Providence Equity Partners. We are pleased to report that this transaction has closed, with AIC investing a total of $130 million in debt securities and $15.5 million in an equity co-investment. We reduced our initial commitment by bringing in other investment partners into the transaction.

As of today, our pipeline remains strong. And we continue to build on our relationships with top-tier sponsors like Providence Equity Partners, where we believe our scale and certainty remain competitive advantages in the marketplace.

Our investment portfolio at June 30th continues to remain well diversified by issuer and end industry consisting of 68 companies and 31 different industries. The total investment portfolio had a fair market value of $2.85 billion, which was comprised of 32% in senior secured loans, 57% in subordinated debt, 1% in preferred equity, and 10% in common equity and warrants, again measured at fair value.

The average yield on our overall debt portfolio at our cost at June 30th, 2010 was 11.7% versus 11.8% at March 31. The weighted average yields on our subordinated debt and senior loan portfolios were 13.3% and 8.8%, respectively at June 30, 2010 versus 13.5% and 8.5%, respectively at March 31, 2010.

Please note that Apollo Investment Corporation’s floating rate asset portfolio continues to be closely matched with the company’s average floating rate revolving credit facility exposure. Furthermore, at June 30th, the weighted average EBITDA of our portfolio companies continues to exceed to $250 million. And the weighted average past interest coverage of the portfolio remains over two times. The weighted average risk rating of our total portfolio was 2.4 as compared to 2.3 at March 31 measured at cost, and 1.9 measured at fair market value at June 30th, 2010, unchanged from the prior quarter.

Before I open up to call to questions, I’d like to state that as we stand here today in early August, we continue to believe that the very worst of the challenging credit cycle is behind us. We also believe that the global economy will continue with its uneven progress with unusually high volatility. Yet, we will persevere into a more sustainable and normalized recovery beginning 2011. Along the way, we will continue to use all of our competitive advantages in striving to capture what we believe will be the best risk adjusted returns available, especially during windows of opportunity in this high volatile marketplace.

In closing, we’d like to thank all of our dedicated long term shareholders for your continued support and confidence in Apollo Investment Corporation. And with that, operator, please open up the call to questions.

Question-and-Answer Session

Operator

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

Sanjay Sakhrani – KBW

Thank you. Good morning. So my first question is on this new non-accrual that you guys had in LVI, I was wondering if you could just talk about a little bit more. And then, I was wondering if you just talk about how you feel about the rest of the portfolio and whether or not there's anything that we should be mindful of that might come about in the near term. And then second, perhaps you could also touch on the debt capacity. You guys have a maturity next year in April, and I was wondering what was the thought process there as well. Thank you.

Patrick Dalton

Sure, Sanjay. It’s Patrick. On LVI, it is a private company, so I’ll be a little bit careful what I disclose. This is a situation that’s been on our watch list for a while. And we have been working very closely with the owners of the company, the management team, and it’s lenders across the capital structure. It’s a project-based business. The projects are lumpy. The backlog remains strong. However, covenants due over time step down. And given what the company has been able to achieve, it’s been fairly impressive in light of the economy.

However, it’s the time for us to look at recapitalizing the company or reorganizing. And we are in discussions with all parties. Nothing has been formalized yet, but hopefully we’re close to something that we will provide an opportunity for recovery going forward – return going forward.

As far as other non-accruals, we fell the portfolio is in great shape by and large. There are always one or two situations that surprise us. We cannot comment that there'll be no surprises going forward. But as we've stated time and time again, we’d been working very, very diligently over the last number of years to build a high-quality portfolio best positioned for growth, best positioned to be amongst the strongest sustainable earners. And then, we can find our way to growing our business. And given our strong pipeline of opportunities, taking advantage of our competitive advantages in the marketplace, we’re seeing a very, very strong demand for our capital.

The M&A environment is also lumpy. The timing of which, closing the transaction, we can’t predict. So by and large, we’re feeling very good about where things stand today if you look at the portfolio on a static basis. It’s been a lot of work to get here.

On the debt capacity side, let me turn it over to Rich to comment on – because certainly this is a path of mine and Jim as well.

Richard Peteka

Thanks for the question, Sanjay. Debt capital is available to us. It’s always been available to us just like equity capital has based on the transparency and the way we run our business and our track record. But we are very, very focused on our cost of capital. I think you heard some of Jim’s comments earlier in the call with regard to our lowest cost to capital in the space. We take that very seriously. It’s not by accident. It’s something that we’ve been very focused on since our IPO in 2004. We did not have to – given our liquidity and given our management, we did not have to raise money at extremely expensive prices in the worst of the cycle, and then have to figure out how to pay for it later on.

Really, what we’ve done is manage our fundraising very, very carefully to manage that cost of capital. But at that the same time, debt costs are going up. Financial institutions, broadly, have been impaired or stressed or strained. And those entities that can borrow 4, 5, 10 times don’t mind paying 10% or 11% for their debt capital because they can leverage that up to pay for it. And they're willing to do that because they're stressed.

We’re not stressed. We’re not willing to pay for that kind of cost for our debt capital. And so, we're being very, very prudent. We’re waiting for some of the markets to heal, the banks to heal, our relationships. And right now, we would have to pay for that debt capital and not have to use it right now. So we’re trying to time our relationships and our prowess in fundraising, even on the debt capital side, to windows of opportunity at the right price. And so, we’re constantly working on that. We’re looking at a number of situations as to whether to talk about it. But I will say that we’re very active in our review of the many alternatives that are available to us from the debt capital side.

Sanjay Sakhrani – KBW

Thank you.

Jim Zelter

Thanks, Sanjay.

Operator

Thank you. Your next question comes from the line of Faye Elliot with Bank of America.

Faye Elliot – Bank of America

Hi. Thanks. Can you hear me?

Jim Zelter

Yes, yes. How are you, Faye?

Richard Peteka

Hi, Faye.

Faye Elliot – Bank of America

Hi. Can you just discuss your thoughts, given your comments that the worst of the credit trouble may be behind you, regarding future investment and what portion of new investment dollars might go towards new investment as opposed to legacy investment?

Jim Zelter

Well, let me start. This is Jim. Certainly, the transaction that Patrick mentioned, the Altegrity transaction, is a great example of what our franchise can offer to the marketplace. While the high yield market is quite strong right now, you have to remember that the average high yield issuance is close to $600 million now, $575 million.

So there're many, many new companies that we are looking at in our pipeline. We feel very comfortable with our pipeline. We feel that there have been periods where – again, as a relative value investor, it made more sense for us to buy secondary pieces. But our primary focus is on primary origination, especially in light of what we're seeing right now and with the activity which is taking place in the sponsor community. In the upper middle market, I would expect to see – we have a very – we have probably as active of a backlog of new opportunities that we’ve seen in the last 18 months.

Faye Elliot – Bank of America

But do you think that we can start seeing a shift more towards new names and away from legacy names going forward?

Patrick Dalton

Yes, Faye. That was certainly what we would expect to be the case. However, when the high up market like it backed up dramatically, it provided us with opportunities that we didn’t think we were going to have. We stayed ready in evaluating both the secondary market and the primary market. We ended the March quarter, the credit markets were strong. We tried out one of these buyers of secondary loans. Then the market backed up, great names at higher yields that we know well. It'd be a great thing for us to include in our capital, so nice to be able to do both.

We are positioned. And we expect the M&A pipeline to grow as we find a pudding in the economy and all the CapEx has been unspent, which provide opportunities. But we're going to be disciplined. We're not going to do every transaction by – far from that. We're going to look at every transaction on its own merits and to ensure it makes sense. But what we are very pleased about is, even top chair sponsors that have – legacy who have always gone to the higher market are choosing the mezzanine product for those who that provide a full solution. And there're only a few providers of capital who can write a commitment as large as we can, a solution away from another credit market.

It's this competitive edge that we have that we’ve seen some very, very top tier sponsors, even with the opportunity to access public markets for debt, are coming to the mezzanine market to pose like us. We are excited. We are positioned well. If the markets do back-up again, we may find some more secondary market opportunities. It’s all a relative value investment set for us.

Faye Elliot – Bank of America

Great. Thanks. And then, I think this is a question on everybody’s mind, with NOI moving down relative to the dividend. Do you think that this is something that you can grow back into or is this a number you might have to reconsider?

Jim Zelter

I think as we said before, you need to look at our earnings over a longer period of time. There are some lumpy events in our portfolio, where we get paid maybe twice a year versus four times a year, like the AIC opportunities fund. And I think at this time, we have some spillover earning swell. We feel very comfortable with the sizing and setting of our metrics right now. But we are moving ahead with the metrics we have put forth.

Patrick Dalton

And the good news is because we have a cushion, we don’t have to force their earnings. We have a plan. We look at it everyday and find our way to improve the earnings. We understand this quarter, where we are higher share account from last quarter as well. But there will be some pockets of time where that may move up and down. But we have a plan that we're working very, very hard. And it really starts with good investments, good credit quality, good monitoring. And then, we can drive our earnings over the long run.

Richard Peteka

And Faye, let me add. This is Rich. Let me add that – going back to IPO, our strategy was to always have that cushion to take capital gains during the good days, know that you’ll need them for the rainy day when do you have losses in a fixed income portfolio, and the strategy remains the same. I think that harvest that we do have to support the dividend was maybe less important through the thick of things in the recession, where two years people were flat to down from a portfolio sizing perspective.

But really, now that people are heading into the recoveries like we are, people need to refocus on the variabilities that come back into play when you are in business because when you do equity raising, you’re going to raise more shares outstanding that’s going to lower your per share amounts. And clearly, we did have a top line decline slide. At least some of it's lumpy. But I think that it’s nothing that we are concerned about.

There is a plan, as Patrick said. But that's going back to that strategy to expect that whenever there is a quarter with – when you’re growing your balance sheet and you're into a recovery, we're not that idle balance sheet anymore. We're growing again. So we're going to start growing this balance sheet from an assets perspective, irrespective of the technical mark-to-markets and use that strategy that we’ve employed from the beginning. So expect lumpiness or variability in both our earnings or net portfolio growth. And that cushion is there for a reason because it really supports a strategy of growing a portfolio, raising equity, growing your portfolio, raising equity. That helps support the dividend through any potential short term drag in our earnings.

Faye Elliot – Bank of America

Fantastic. Good news. Thank you.

Jim Zelter

Thanks, Faye.

Operator

Thank you. Your next question comes from the line of Vernon Plack with BB&T Capital Markets.

Vernon Plack – BB&T Capital Markets

Thanks very much. And now, there's been some discussion today about the leverage ratio, the debt equity ratio. And I’m sure part of the plan is to utilize that leverage up a little bit more. Where are you comfortable with your leverage ratio being in this type of environment and looking forward?

Patrick Dalton

Hey, Vernon. I think what we said in calls in the past is we don’t want to use the last dollar of leverage. Obviously, it doesn’t buy enough caution. And our strategy isn't predicated on eating every dollar of leverage to make the returns that our shareholders would like to see us make so we can hopefully drive our dividend.

Once we get to a 0.75, 0.8 times, historically, we then use those opportunities to go raise equity and pay down our revolver on a temporary basis, bring it down to the area where we are today. And then, there's an investment – that we invest those proceeds over time. And once we get to that 0.75, 0.8 times area, then we'll start really thinking about the investment pace, raises of capital. It seems we wouldn't need to raise capital at that point in time.

We're not really looking to drive our business into the high nine-type leverage because markets are volatile, asset prices change. We are a mark-to-market vehicle. We use third parties to value our portfolio every quarter, so that we cannot afford that kind of perfection on value – on leverage, excuse me. Our strategy does not command our need to leverage up that high.

Vernon Plack – BB&T Capital Markets

Okay. So now that we're looking at things improving, we should not be surprised to see you leverage back up to 0.75 or so?

Patrick Dalton

I wouldn’t be surprised if that happens.

Vernon Plack – BB&T Capital Markets

Okay. Thank you.

Patrick Dalton

We are not to be surprised.

Vernon Plack – BB&T Capital Markets

Thank you.

Operator

Thank you. Your next question comes from the line of John Stilmar with Suntrust.

John Stilmar – Suntrust

Hi. Good morning. First question, Patrick, as you guys are so plugged into the private equity sponsor universe, especially in some of the larger more liquid names. Can you talk to us as to really the source of backlog or types of transactions? Is this really a refinancing type environment that is driving the portion of your backlog? Is this just the redeployment of excess private equity capital that needs to be put to work? What are the principal motivations that really drive some of the backlog that you're just trying to see?

Jim Zelter

This is Jim. Let me answer that for you. I think you're getting – certainly, a lot of activity has been refinancing to date, probably 70 to 80% of the overall activity. I think in the last three to six months that is getting being more balanced and you’re seeing more primary activity. Sometimes, it’s new transaction. Sometimes it's something like we saw with our transaction with Altegrity and Kroll were as a strategic add-on.

But I think you’re seeing, over the course of 2010, the pendulum is swinging from 75% refinancing in new deals versus a 75% by the end of the year. I think the majority – a good portion will be new financings. You still have a big refinancing hurdle in 2013 and '14. So refinancings will always be part of the market. But the transactions that are in our pipeline right now, many of them are new transactions.

Patrick Dalton

Most of them are driven by folks who – probably the sponsor line who demonstrate liquidity then and true sale of the company, and also the $500 billion of unspent private equity capital to be spent the next two years and has been sitting on the sidelines for a while. So there is a real desire, on both sellers and buyers, to transact, obviously, the backdrop of a stable economy as what's needed and open credit market. I think that the confluence of those characteristics is coming together – continue to come together. Our pipeline is mostly made-up, as Jim said, primary market sales and purchases of companies.

John Stilmar – Suntrust

Perfect. But then, follow-up question with regards to the amount of equity that you guys are thinking about as a long term target for your portfolio. Obviously, I don’t expect for you to comment on Innkeepers. But if we were to think about, over the next 24 to 36 months, the ratio of yielding versus equity investments that you would consider, how should we think about your portfolio orientation because you have done such detailed planning and you are also thoughtful about your portfolio and the composition? How should we be thinking about that over the next, let’s call it, 12, 24, 36 months in equity exposure?

Patrick Dalton

Great question, John. And I think that it’s not different from what it's been last six years. And we spent no more than 10% of all of our dollars in the form of equity securities since inception. That’s a good balance for us. This is a debt portfolio, fixed income portfolio. Ninety percent over time should be the average of what we are – on a cost basis. You have a high class problem sometimes that the equity appreciates beyond that to drive the overall complexion to be more heavily with equity.

We think that now is an interesting time, with your coming or being able to recover, interesting time to be open-minded to maybe make us some equity co-investments over time. When the market gets robust, we're even more selective. So I would say, from a modeling perspective, a 10% rule-of-thumb is not an unreasonable rule-of-thumb.

John Stilmar – Suntrust

Great. Thank you, gentlemen.

Patrick Dalton

Thanks, John.

Operator

Thank you. Your next question comes from the line Troy Ward with Stifel Nicolaus.

Troy Ward – Stifel Nicolaus

Thanks, guys. I just have one additional question to some of the others. On fee income, how should we view your ability to generate fee income and I guess basically in the primary market because obviously, the secondary purchases are going to be real specific? But what are you seeing as upfront fees in the primary market and what you're seeing?

Patrick Dalton

Hey, Troy. It’s Patrick, very good question. Our business is a predominately investment income business. However, when we are structuring transactions where we could be solution for the sponsor and we are working to diligently structure those deals, there are fees that are associated with that. The fees range between 1.5 points and 3.5 points, or 4 points. Generally, it’s going to be in the 2.5 points to 3-point range for fees.

We're an all-return investor. So sometimes you can trade coupon for fees or call protection. It really is what drives the individual transaction if we're – if the sponsors, what they’re priorities are. Certainly, call protection is something that we’ve been very focused on and have been for years. There's generally more value in that. So if we – it became a tradeoff between a fee and call protection that’s what we consider. But every investment we go into, we factor all of those into the overall yield on our investment and making sure it meets our hurdle rates.

Troy Ward – Stifel Nicolaus

So in the most recent quarter, the fee income was lighter than we were expecting. Can we conclude that there're some call protections on your new primary market deals?

Patrick Dalton

You can conclude that. That’s not an unreasonable assumption.

Troy Ward – Stifel Nicolaus

All right. Thanks, guys.

Patrick Dalton

Thanks, Troy.

Operator

Thank you. Your next question comes from the line of Jasper Birch with Macquarie Holdings.

Jasper Birch – Macquarie Holdings

Hi. Good morning, gentlemen. Just turning off with MEG Energy, I know it’s in file for an IPO. I think that recently they downsized the guidance on that from about $1 billion to about $780 million. I was just wondering if we get, first, more color on that transaction specifically and also your evaluation on it; and, then secondly, any other visibility that you can give us into possible prepayments or divestitures on the book.

Patrick Dalton

Sure. Hi, Jasper. Regarding MEG Energy, it is now a public company. They did file for an IPO. And they did execute the IPO last week. Prior to the deal getting priced, the market did contract on the pricing. The price stock was higher than where they ultimately decided to price the deal. That was out of our control. We're a very small minority owner. We feel we are far better positioned given the liquidity that we now have. We’ll make the assumption that we sold into the IPO.

Obviously, with the public equity investment stock holding, there is volatility (inaudible). We'd like that. While we held that, we don’t want to hold that as a public stock. We think, overall, the company is a great company. We think the opportunities set for that company are tremendous. There were some more technical reasons we believe around why the pricing and security at the IPO, given some of the comparable transactions prior to MEG going public, having an impact. There're a lot of folks who rotated out the stock. That didn't happen – it doesn’t seem to be the case right now. But the only things that we sold are securities there, but we will look for the appropriate time. We do think this is good company.

Outside of that, there are – our portfolio is – the bitter-sweet part is we've got very good companies that have opportunity and have filed to go public. Booz Allen has filed an S-1. Goodman Global has filed an S-1. VNU Nielsen has filed an S-1. Those vintage businesses are not public yet. The IPO markets are fickle. We'd love not to go public. We own some equity and a couple of those situations. So that’s also good from one side of the ledger.

But these are great investments that have performed extremely well, have provided their sponsors with an opportunity to exit, get some liquidity. And when and if they go public, we’ll be repaid. And that's more capital for us to invest in this new vintage. So we track it. We look at it very closely. It's part of our overall fundraising. We do not assume now, until we get repaid, that will be repaid. And we don’t want to run our company assuming that will be that liquidity.

Jasper Birch – Macquarie Holdings

Great. Thank you. Looking at your book value, your par weighted book value is about $12.25, obviously, $9.50 the fair value is. I'm just wondering if you can give us some commentary on how much of that you think is ultimately recoverable, just ignoring the equity transactions, and what you see as recoverability on the 6% of your comp basis on non-accrual.

Patrick Dalton

Jasper, that’s very good question. We're going to be cautious on giving guidance as to what we think the ultimately realizable value is. We don’t use that concept here. The fair market value does exclude lot of tactical, but obviously, there's some fundamental in there as well. We are doing our very best to recapture as much of that over time. So that’s our guidance that we're going to want to give to the community to set up an expectation. We do hope there's appreciation in there.

Jasper Birch – Macquarie Holdings

Okay. Well, thank you for time.

Jim Zelter

Thanks, Jasper.

Operator

(Operator Instructions) Your next question comes from the line of Robert Purdue [ph] with RIS Investments.

Robert Purdue – RIS Investments

Hi. Your book value is $9.61 as of June 30th. You had a proposal to sell stock below book value. I think it’s currently before the stockholders. The stock seems to be under pressure. It's $7 to $10 now maybe because of that fear as well. But I was wondering, July was a great month because you do have that proposal on the table. Has your book value – is it reasonable to assume that your book value has gone up as of today or at the end of July?

Jim Zelter

Well, thank you for the question. It’s not been our historic precedent to really talk about book value on month-to-month basis. Certainly, you are correct. We had our annual meeting the other day. And the shareholders did approve our ability to access the equity market at various times regardless of the value of our stock versus our NAV. We’ve shown a prudent view. I have proved we’ve exercised that with great caution and prudence in the past. And we’ll do so with the advice of our – in the counsel of our Board going forward.

But as Patrick and Rich said, we have a high quality portfolio. There certainly is some NAV volatility because of the nature of our holdings. And really, I’ll let the comment go as that and you can read into it what you'd like.

Robert Purdue – RIS Investments

Well, is it safe assume that July was a better than June. I mean the markets were really resilient in July. And when you price that, would you price it based on the last June 30th, $9.61 number?

Richard Peteka

Yes, because we do follow FAS 157 or ASC 820, at the end of the day, audit third party evaluation firms do employ US GAAP, and do look at changes in the various industries. And if the industries have gone our way or any of it would go up based on those principals.

Robert Purdue – RIS Investments

Thank you.

Operator

Thank you. I will now like to turn the call back over to Jim Zelter for closing remarks.

Jim Zelter

Well, again as Patrick said, we appreciate the continued support from a great shareholder base, and certainly take the job very seriously. And we’ll work hard to continue to create value – long term value for our shareholders. So thank you. And we look forward to talking to you in the end of next quarter. Thank you.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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