Apollo Investment's CEO Discusses Q3 2011 Results - Earnings Call Transcript

| About: Apollo Investment (AINV)

Apollo Investment (NASDAQ:AINV)

Q3 2011 Earnings Call

February 04, 2011 11:00 am ET

Executives

James Zelter - Chief Executive Officer and Director

Patrick Dalton - President and Chief Operating Officer of Apollo Investment Corporation

Richard Peteka - Chief Financial Officer, Principal Accounting Officer and Treasurer

Analysts

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.

Arren Cyganovich - Evercore Partners Inc.

John Stilmar - SunTrust Robinson Humphrey Capital Markets

Martin Ji - ClearBridge Advisors

Joel Houck

Jasper Burch

Jason Arnold - RBC Capital Markets, LLC

James Ballan - Lazard Capital Markets LLC

Richard Shane - Jefferies & Co.

Greg Mason - Stifel, Nicolaus & Co., Inc.

Jason Shum

Operator

Good morning, and welcome to Apollo Investment Corporation's Earnings Conference Call for its third fiscal quarter ended December 31, 2010. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Jim Zelter, Chief Executive Officer of Apollo Investment Corporation. Mr. Zelter, you may begin your conference.

James Zelter

Thank you, and good morning, 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

Sure. Thanks, Jim. I'd like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release. I'd also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. Today's conference call and webcast may include forward-looking statements 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, Jim Zelter.

James Zelter

Thanks, Rich. I'll start off with a brief description of market conditions during the December quarter and then move to some of our more strategic initiatives before touching on some portfolio highlights of the business.

The strong credit markets during the December 2010 quarter continued to offer enhanced liquidity for primary issuers and secondary paper. For the full year ended December 2010, high yield had a strong record issuance of north of $300 billion as compared to $180 billion for 2009. Concerns over a double-dip recession and sovereign issuer defaults also waned significantly during the quarter, improving the economic outlook and contributing to a tightening of yield spreads across the spectrum.

This dynamic only further increased demand for secondary paper, driving bond prices higher, lowering yields and finishing a year of strong returns for investors in credit. Investors in the public stock of Apollo Investment Corporation, ticker AINV, achieved a total return of 28.5% for the 12 months ended December 31, 2010, including reinvested dividends.

Strategically, we set out to accomplish three goals during the December quarter. One was to complete the necessary steps to add additional long-term fixed rate debt to our balance sheet. Two was to finalize our due diligence on the credits we liked and were about to add in our portfolio and had been working on. And three, we wanted to further optimize and improve the quality of our portfolio.

That said, Apollo Investment Corporation recently completed its debt raising and capital structure initiatives announced last call. This January, we were pleased to again issue in the strength of the credit markets and issue $200 million senior unsecured five-year convertible notes with what we believe are attractive terms, a 5 3/4% coupon with a conversion premium of 17 1/2%. We anticipate this access to the unsecured credit markets will generate long-term benefits to AIC and introduce us to a new investor base.

Furthermore, and also in January, we were pleased to add another new relationship bank to our revolving credit facility, which added a $50 million commitment to our growing syndicate of revolver lenders. Accordingly, and with the significant recent expansion of our debt capacity, we have deliberately accumulated our liquidity in capital resources as we look ahead and prepare for what may be a long period of M&A activity and related investment opportunity for Apollo Investment Corporation. With our new January debt capital raises, our total debt capacity currently exceeds $2 billion. Pro forma for our 2011 debt maturities later this year, Apollo Investment Corporation will have approximately $680 million available for new investment.

At December 31, 2010, our outstanding leverage stood at 0.53:1, measured as a ratio to stockholders' equity. Now let me briefly go over some portfolio highlights for the quarter ended December 31, 2010. It was an active quarter for us. In total, we invested $382 million in eight new and three existing portfolio companies. We also received prepayments totaling $326 million and sold Collect assets totaling $155 million. At December 31, 2010, our portfolio of investments totaled $2.92 billion, measured at fair value, and was represented by 69 distinct portfolio companies diversified amongst 30 different industries.

Now with that, I'll ask Rich to take you through some detailed financial highlights for the quarter. Rich?

Richard Peteka

Thanks, Jim. I'll start off with some December 31, 2010 balance sheet highlights. As Jim noted earlier, our total investment portfolio had a fair market value of $2.92 billion. Our December 31 net assets totaled $1.9 billion, with a net asset value per share of $9.73. This compares to net assets totaling $1.86 billion at September 30 and a net asset value per share of $9.58. The increase in NAV for the quarter was driven primarily from net unrealized appreciation on our investment portfolio.

Positive contributors to performance for the quarter included our investments in AIC Credit Opportunity Fund and Ceridian Corporation. The positive impact was primarily due to improving valuations. Partially offsetting the company's unrealized appreciation during the quarter was unrealized depreciation from PlayPower Holdings and Generation Brands.

On the liability side of our balance sheet, we had total debt outstanding of $1.0 billion at December 31 as compared to $1.1 billion at September 30. This left our debt-to-equity leverage ratio at 0.53:1 at December 31 as compared to 0.59:1 at September 30. Our 2004 vintage investment in PlayPower Holdings was placed on non-accrual status during the quarter. However, we did exit completely from our investment of Pacific Crane Maintenance Company, as well as restructure our investment in LVI Services, both of which were previously on non-accrual status.

Our portfolio of 69 companies now has two companies with investments on non-accrual status at December 31, 2010 versus three companies at September 30, 2010. These investments represent 2.0% of the fair value of our investment portfolio at December 31 versus 0.2% at September 30. On a cost basis, they represent 6.6% of our investment portfolio at December 31 versus 5.7% at September 30.

As to our operating results, gross investment income for the December 2010 quarter totaled $94.3 million, an increase from $91.5 million for the quarter ended September 30 and up from $85.6 million to the comparable December 2009 quarter. Expenses for the December 2010 quarter totaled $44.2 million. This compares to $41.3 million for the quarter ended September 30 and $34.2 million for the comparable December 2009 quarter. Ultimately, net investment income totaled $50.1 million or $0.26 per average share. This compares to $50.2 million or $0.26 per average share for the September 2010 quarter and $50.2 million or $0.30 per average share for the comparable December 2009 quarter.

Also during the December quarter, we received proceeds from investment sales and prepayments totaling $481 million. Net realized losses totaled $64.9 million. These were primarily related to the realization of previously recognized unrealized losses on Pacific Crane Maintenance Company as well as LVI Services and its restructuring, all partially offset by the realized gains we received from MEG Energy. These results compared to net realized loss of $89.4 million for the September 2010 quarter and the net realized losses of $152 million for the December 2009 quarter.

The company's investment portfolio also had net unrealized appreciation of $99.3 million for the quarter ended December 31, 2010. This compares to net unrealized appreciation of $107.4 million for the September 2010 quarter and net unrealized appreciation of $181.4 million for the comparable December 2009 quarter. In total, our quarterly operating results increased net assets by $84.5 million or $0.43 per average share versus an increase of $68.2 million or $0.35 per average share for the September 2010 quarter and an increase of $79.5 million or $0.48 per average share to the comparable December 2009 quarter.

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

Patrick Dalton

Thank you, Rich. As we highlighted earlier on the call, it was an extremely active quarter for Apollo Investment Corporation. Strategically, on the back of the company's private note issuance that we announced last call, we continued our efforts to obtain additional cost effective debt capital. These efforts culminated in the issuance of our inaugural, unsecured convertible note in January, and in addition, we also added another new revolving lender to our company, one that has the capabilities and the scale to partner with us for the long term.

Ultimately, we believe our continued access to diversified funding sources to an expanding population of investors is a significant competitive advantage for Apollo, one that is strategic to the future growth of our business. We also believe that this year's successful fund raising initiatives have solidified our balance sheet for new investment opportunities over the long term.

We were also active with our portfolio during the quarter, investing in eight new and three existing portfolio companies. We continued our process of selective portfolio optimization with the intention of generating incremental yields and improving our risk adjusted returns. Lastly, we received significant proceeds back from several of our successful investments, generating attractive internal rates of return. Let me take you through some of the portfolio-specific changes.

Portfolio company investments totaled $382 million. Our subordinated debt investments in new portfolio companies were in Univar, Inc.; Renal Advantage and Exova. Our investment in Univar consisted of $79 million in the mezzanine notes and $9 million in a common equity co-investment. Univar is a global chemical distributor and a CVC Capital Partners and Clayton, Dubilier & Rice portfolio company. Renal Advantage, a dialysis services provider, received an investment from us of $32 million in their mezzanine notes. And Exova, a laboratory-based testing provider, we invested GBP 18 million in the senior unsecured notes.

Other new portfolio company investments were in Vertafore Inc., a TPG portfolio company, where we invested $74 million in a second lien senior secured debt. Vertafore is a leading provider of software solutions to the insurance industry. We also invested $26 million in a second lien senior secured debt of Applied Systems, another provider of software solutions for the insurance industry.

In addition, we invested $15 million in the first lien senior secured debt of Brickman Group, a provider of landscape maintenance services. Other senior secured debt investments and new portfolio companies included small investments in Leslie's Poolmart, a provider of swimming pool supplies, and Global Auto Care, the producer of auto care products such as Armor All and STP.

Our investments in existing portfolio companies included $49 million in the second lien senior secured debt of Advantage Sales & Marketing, a leading sales and marketing agency. This investment followed the refinancing of Advantage Sales & Marketing's previously existing 2006 and 2010 vintage second lien secured debt, which we supported. This successful investment was repaid at a premium to par.

Our additions included $24 million in the discount notes of Catalina Marketing, a leading media and marketing services company, and a small investment in the first lien senior secured debt of PlayPower Inc., a playground systems provider. Other highlights of significant portfolio changes during the quarter include the successful monetization of our 2010 vintage common equity investment in MEG Energy, an oil sands developer in Canada. We realized gains in excess of $32 million on our $55 million investment.

In addition, our successful investments in BNY Convergex, a leading institutional agency only brokering financial technology provider, which we initially invested in 2006, also came back to us at a premium to par. Additionally, we're fully repaid on our 2007 vintage investment in Gray Wireline, a leading independent provider and operator of measurement and maintenance tools used to service oil and natural gas wells. On the restructuring side, we were pleased to complete the recapitalization of LVI Services, giving it more runway to succeed over the long term.

Our activity in the December quarter is certainly reflective of our scale pipeline of investment opportunities and our large global platform, and we continue to stay in a rating to deploy our substantial available capital and grow our business. That said, we will continue to be disciplined with regard to any individual quarterly deployment, especially during any over-zealous periods where, in our opinion, risk is usually mispriced or terms such as rights and remedies are unacceptable. We believe this is prudent investment approach in seeking the most attractive risk adjusted returns and will accrue to our shareholders' best interest over the long term.

At this point, let me go over some portfolio highlights at December 31, 2010. We continue to be well diversified by issuer and industry, 69 portfolio companies invested in 30 different industries. The company's total investment portfolio had a fair market value of $2.92 billion, which was comprised of 29% in senior secured loans, 62% in subordinated debt, 1% in preferred equity and 8% in common equity and warrants, again measured at fair value. The weighted average yield on our overall debt portfolio at our cost at December 31, 2010, was 11.5% versus 11.7% at September 30.

The weighted average yields on our subordinated debt and senior loan portfolios were 12.9% and 8.7%, respectively, at December 31, 2010 versus 13.3% and 8.9%, respectively, at September 30, 2010. Also 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 2x. The weighted average risk rating of our total portfolio was 2.3 at December 31, unchanged from September 30, measured at cost and continues to be rated 1.9x, measured at fair value at December 31, 2010, which is also unchanged from the prior quarter.

Before I open up the call to questions, I'd like to reiterate that we continue to be pleased with how our current overall investment portfolio is performing and how the underlying companies are progressing even in this uneven economic recovery. We also believe that 2011 and 2012 will be an active period for M&A activity, which should provide us with an array of investment opportunities given our substantial available capital and relationships with high-quality financial sponsors. In closing, we'd like to thank all the dedicated and long-term investors in Apollo Investment Corporation for your continued support and confidence in us. Now with that, operator, please open up the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Sanjay Sakhrani of KBW.

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.

My first question is for Jim and Patrick. I guess what I find striking at this point is some of the larger BDCs have had a little bit of a tough time posting net growth despite having a ton of liquidity and great access to the public markets. I was wondering to what do you ascribe this? And can you just talk about how that dynamic changes from here on out?

James Zelter

Sure. Let me start out, Sanjay, and then Patrick will add. We've been in business for a number of years now. We've obviously reached critical mass and when you have a portfolio as large as ours, where you made a lot of investments in '06 and '07, it's natural as the markets rebound and rally that companies that can refinance, do refinance, so that's expected. Certainly, in the last 30 to 90 days, we've been in a very robust period, a lot of search for yield and, candidly, as we look at not only our company but all the whole BDC marketplace, we look at the returns and the yields as pretty compelling on a lot of people's stocks versus the alternatives out there. But I'll remind people that last February, March, we had the same period and then all of a sudden in April, you had a market sell-off. So what you're hearing me say is there's no doubt there's a lot of euphoria out there right now and when you look back to the last cycle, periods of euphoria aren't always the best times to invest. But there's inevitably windows. There's inevitably volatility. Last April, when the market fell down, that's when we really had an opportunity to do a very interesting transaction that resulted in our investment in Altegrity, which took a few months. But the windows open and close pretty quickly. And while certainly, we see a lot of wins in the economic backdrop right now, it's proven us over time that there will be volatility. Now do I expect volatility like '07 and '08 with the credit crisis? I don't. But I've been in the high-yield market for plus 23, 24 years, and there's always windows that open and close. And that's why we want to be poised to have those things right now. So what you're really hearing me say is yes, we have the luxury of having a big portfolio, some really good investments rolled off. We made some good investments in December quarter and we're going to be prudent but inevitably, there will be opportunities for us to find areas for growth.

Patrick Dalton

And the only thing I would add to Jim's comments, Sanjay, is the markets do change. The only thing we can do is stay true to our strategic initiatives and our investment prudence so we that can build a portfolio of the long run. And we are confident that those opportunities will be here.

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.

What is the average duration of the portfolio today relative to where it was maybe a year ago? And then just in terms of pricing, kind of what's the pricing like in the sweet spot of where the opportunities are available to you?

James Zelter

On the duration, I'll just give you some off-the-cuff numbers and Patrick could talk about the pricing. But certainly, you know the size of our overall portfolio, $3 billion. You saw what we lost in the fourth quarter in terms of just repayments, not sales but repayments, and on that characterization, our portfolio on a December pace would have an average life of around three years. Now we've always said in this business that it's going to vacillate between three years and 4 1/2 to five years. During '07 and '08, it was close to that 4 1/2 and five years because we were getting very few repayments. So right now, I think it'll be our view that our portfolio has a duration of 3 1/2, maybe four years, 3 1/2 years on average. And with our proportion of some senior bank debt and second liens and mez, that may accelerate. Because you're getting prepayments in the loan market right now in excess of 25% in aggregate. That's what I would say on that.

Patrick Dalton

And on the pricing side, there's no doubt that the credit markets have continued to tighten into this quarter. It is competitive out there. We are looking for the best risk adjusted returns. We have had a bias towards a more floating rate on the asset side as we fixed some of our debt on the fixed rate of our own debt to take advantage of a rising rate environment to accrue more income into our company. But pricing really -- it's a total yield. It's a total return. It doesn't a move around as much as you see the high yields of the bank loan market when you're dealing with mezzanine. But it is competitive. And we just need to make sure it's accretive. We make sure it's the right risk adjusted returns or we may not play, which is we're not going to -- if you force investment into the portfolio at the wrong pricing terms, it'll come back to hurt you later on either through your NAV or lack of repayment or credit issues down the road. So we're going to be opportunistic. We're using our scale and our competitive advantages that we have to find -- that's why we were able to do last quarter over $380 million in a marketplace that was several billion. We're going to be selective but we're going to be prudent. And if it means we need to be a little patient, we're going to be patient.

James Zelter

And Sanjay, I would just say one more thing again. I want to make sure people understand our perspective on this. If you look at the industry in total, not just our company but the yields on the dividends if you look at those in aggregate versus a variety of other credit products right now, there's a pretty substantial gap. Our companies are pretty -- as an industry, we're fairly low leveraged right now, probably prudent to be, but when you see the indexes on single Bs going through 7% in the mid 6s, and the dividend yields of our companies in aggregate and our company in particular, we believe it's a pretty healthy dividend and a pretty appropriate yield for the opportunity that exists.

Operator

Your next question comes from Rick Shane of JP Morgan.

Richard Shane - Jefferies & Co.

When we look at what's going on in the high-yield markets and what's going on in sort of the more traditional middle market BDC environment, there's a pretty significant differential. Middle market yields are still extremely high. High-yield spreads have come way in and I think that's a function both of fundamentals and technicals. Your strategy is to sort of bridge the gap between those two markets. Do you think that the pressure of tighter spreads in the high-yield market is one of the things that's actually really driving the higher repayment activity within your portfolio?

Patrick Dalton

Rick, it's Patrick. I'll start. Absolutely. When you have -- an issuer has an opportunity to refinance their capital structure at a much lower rate or a much higher leverage and take a dividend, that's something a sponsor is going to look at closely. We have fought that for many years and have more duration on than one would expect given some call protection that we fight for going into a transaction. So as we talked with some of those prepayments, we got some nice call premiums and that we like to continue to exist in our business. We play across all markets where there's best relative value. We were able to acquire a lot of good assets of large companies in '07, '08 and '09 in the secondary market, so now we're seeing some of those pay us back. That's great. It's a successful investment. If right now, the middle market has the right risk adjusted returns, I think that quite candidly, if you look at the yields across the space, the middle market is not as a big of a gap as one may think it is where deals are getting priced or the risk you're taking for those prices, either on leverage or on terms or on structure. So we're open to all opportunities where it makes sense for us. If it means we end up doing more primary issuance in the middle market today, the name of the market dislocates more than the secondary market. That's the benefit of our model, is where relative value and the global platform we see opportunities across all the markets.

Richard Shane - Jefferies & Co.

So realistically, what you're suggesting is that over the next 12 months or 24 months or whatever the horizon is, that there's probably a greater opportunity for you to move down a little bit in terms of enterprise-valued transactions and look at some of those deals.

Patrick Dalton

Maybe is the answer. The high-yield market, as Jim mentioned last year, when that capped out, we were able to do Altegrity-Kroll transaction, which is a $327 million EBITDA company. Several billion dollars of value there. And so we're going to stand ready and look at everything across all marketplaces and when the best relative value opportunity comes to us, be it from large-cap, mid-cap, up and down the capital structure, as long as it's complementary to our core skills and we can make it accretive to our business, we'll selectively take advantage of those opportunities. So we want to promise which market, but we're going to look at all markets.

Operator

Your next question comes from Jason Shum of Bank of America Merrill Lynch.

Jason Shum

This is Jason, I'm filling in for Faye [Elliott]. Just a couple ones, were you guys surprised about PlayPower going on to non-accrual status? It seems a little late in this part of the cycle for new NPA. And my second question is can you guys comment on where you guys are seeing the yields right now?

Patrick Dalton

On PlayPower, this is a business that we've been involved in since 2004. They're one of the only manufacturers of playground equipment in the U.S., in the U.K. and in the Netherlands. It's performed very, very well for many years. Some of the buyers of this playground equipment are municipalities and you're seeing a current dislocation in what's happening at the local and state governments in the municipal bond market. So that's, obviously, something that's had more of a lagging affect on the performance of this company. The business has continued to cash flow. The issue that the company faced were the covenants stepped down. Business that has a covenant issue has to deal with the covenant issue and generally requires restructuring or reorganization or recapitalization. We're very actively involved there. Prospectively looking at what an outcome perhaps maybe. And we'll have more to report with that hopefully by the end of our next quarter. But it was not a surprise for us. The company just missed its covenant. So when you find out where you are but had been appropriately overvalued and put on non-accrual when the catalyst of that non-accrual happened. And then on the yield, I think we talked a little bit about where the yields are. It depends on which market you're looking at. I think yields are a little tighter in this market than they have been historically, but the bands of the yields we're searching for between all markets, say, we always call somewhere between 10% and 16% market. Depending upon the risk you're willing to take and the opportunity and what value you're providing to your sponsor client, be it certain to your structure or long-term commitment and you can get paid a premium for that. We're totally turn focused. So we're looking at coupon. We're looking at upfront fees and we're looking at call protection on the back end and we'll manage each of those different parts of the deal to get us what we expect to be a yield over the long run. So we're not believing we're going to see a significant deterioration in that, especially as we enter into a rising rate economy.

Operator

Your next question comes from Greg Mason of Stifel, Nicolaus.

Greg Mason - Stifel, Nicolaus & Co., Inc.

First, I wanted to talk a little bit, if you can, about the convertible debt you issued in January. What is the likelihood that, that can convert if your stock trades is above the conversion price? Or are there things to protect that? And then number two, as we understand it, there's kind of two methods and if convert or net share settlement, can you talk about how you're thinking about potentially accounting for that?

Patrick Dalton

I'll answer just the first part, this is Patrick, and I'll let Rich address the accounting. We were very, very focused on that exact question. There was a comparable done on our industry in December which had a bit more flexibility. We look at this as our approach to this is we're a replacement for debt capital. We were really focused on the price of debt in the structure and early conversion being very unlikely. We've put in some protections. I think the note agreement is a private document, so I can't go through in detail. But there are significant protections where i.e. the stock got to be such a high-level, well above the conversion premium in there that we would have protections against someone's ability to early convert. So without having major changes in the market environment on the up or the down, we think that the significant protection and we look at this as a debt replacement. Now let me ask Rich to answer the question on the accounting.

Richard Peteka

There are a number of accounting structures or structures that require different accounting. I can't really speak to the others in industry that have issued, but for us, this is a traditional if converted structure. Again, it's really a debt substitute for us. It is debt unsecured, our first entrée into the unsecured market and we're going to accrue interest at the coupon assuming its debt and I think that we're required to show on a fully diluted basis. Even though we won't be paying dividends to those additional shares, and if it is outstanding for the five-year tenure that we hoped when we issued this thing, again no dividends will be paid on those shares even though we'll report either on our income statement or in the notes to the financial statements what the fully diluted impact would be to EPS. But again, keeping our interest expense down and concentrating on net investment income and how that relates to our dividend is really our focus.

Greg Mason - Stifel, Nicolaus & Co., Inc.

I know historically, you guys haven't broken out kind of lumpy fees in the quarter. But you talked about you had $325 million of repayments and you guys have talked in the past that you've fought for call protection. So it seemed like that heightened repayment activity would have led to some prepayment fees in the quarter. Can you just give us some guidance about how we should be thinking about that this quarter and going forward?

Richard Peteka

This is Rich again. I think consensus was 24 for the quarter. We beat consensus by a couple pennies and we did have active quarter with a significant amount of repayment. So it's very, I think Patrick took you through some of the vintages. Some of these things were 2006, some were 2007, some were more recent. I think it's reasonable to think that some of the older ones, some of that call protection had either run off or was very low. But some of the other stuff, the BNY Convergex is if you track to our public filings, you could see we added -- it was initial 2006 investment but we continued to add in '07, '08. So the more recent vintage investments in BNY, it would be reasonable to think that there is a call premium. So it's really a mixed bag depending on the vintage, absolutely kept us on some of these good credits that had de-levered. Kept those credits in our portfolio longer. We are duration focused and again, we think that, that matches up to a dividend liability that we have to pay every quarter. We haven't broken it out, but again, I think that the fact that beat consensus by a couple pennies, we did some upfront fees, we had some write downs, write-offs with PlayPower and then we had some back-ended fees from call premiums all kind of gets you back to that net $0.02 over consensus.

Greg Mason - Stifel, Nicolaus & Co., Inc.

Given that you have all of this debt capacity, what are your thoughts about equity issuance here in the next two, three quarters?

Richard Peteka

I think right now, Greg, we feel like our balance sheet and our capital structure's the way we like it right now. We don't find any, I mean, certainly we have a view that if we can opportunistically fix rates, unsecure debt at rates that make sense for us long term, we will do so. But I don't think that we feel we've got a pretty nice balance sheet right now. We're not in a rush to make any kind of urgent changes.

Patrick Dalton

Having dialogue with our investors, I think, our hope is that they continue to appreciate our discipline when it comes to raising equity.

James Zelter

And to the extent that our pipeline changes and we're closing significant transactions, not many, but if you close a few large ones like we did in the Altegrity, if that happens, a deal's not done until it's done, but if that was to come, that would be a good problem and then we would revisit that.

Operator

Your next question comes from James Ballan of Lazard Capital.

James Ballan - Lazard Capital Markets LLC

If you just look at the top line, just the income taking the other income out of it, and you compare that to the portfolio at cost, the performing portfolio at cost, it seems like there's a big step up in the weighted average yield across the portfolio, and when I look through sort of the ins, what came in and what went out on the portfolio in the quarter, it was kind of hard for me to come up with a reason why that would have come up. Could you give me a little color on what drove that?

Richard Peteka

It's really just geography under GAAP call premiums or forgone interest and they belong in the interest income line item. So that's really where you're seeing that, where if on new business, you see a structuring fee, that may be, a fee for service, that would in other income. So we had net deployments $382 million out the door so that would be -- to the extent there was fees involved in that, that were for services rendered, those would be in the other income line. To the extent we have call premiums back on the $326 million that were prepaid, those would appear in the interest income line.

James Ballan - Lazard Capital Markets LLC

Can you give me a little bit of a feel of maybe the recurring portion of the interest income line?

Richard Peteka

I think my best guidance is for you to -- because we report our weighted average yields on a cost basis, you can probably look at that times our portfolio, and we break that down by asset class: senior, subordinated and present equity. So take a look at it and the total. So you should be able to budget pretty easily that way; we're pretty transparent with that.

James Ballan - Lazard Capital Markets LLC

Rich, also, could you give us an update on just where you are from an undistributed taxable income basis on a dollar amount or a per-share basis? And maybe talk about what that means for the sustainability of the dividend.

Richard Peteka

Sure. Technically, E&P for tax is not measured until your fiscal tax year end, which for us is March 31. We're getting closer to that and we're really further away from the tax numbers that we were required to report last March 31 that we reported in the end of May. But I would say if you were to take our last reported tax number and roll it from a GAAP perspective, I think that assuming no significant deviation between GAAP and tax, and there always are some, but I'm not sure how material that would be because there's not a full GAAP to tax reconciliation because you can't do that in an entry year. But I would say that if you were to just roll it forward, we probably have, my estimate would be $0.28 to $0.30 just rolling the GAAP numbers relative to the last tax number reported. That's remaining in the spillover there to support or discipline quite frankly in being prudent and investing our money in the best risk reward. So that's there to cover that. It was really put in place there for this reason, whether it be a temporary decline in per share amounts when you raise equity in the bull robust times or whether you're having prepayments. Again, it's part of our overall strategy and has been since we launched our IPO in 2004.

James Ballan - Lazard Capital Markets LLC

Can you maybe give some of your thoughts on the credit opportunity fund? I mean, when you're putting new assets into the portfolio, are there thoughts of expanding that? Or at this point, do you think it's all going on the balance sheet?

James Zelter

No, I would say that that's an attractive vehicle for us. We're finding some interesting opportunities right now. As we source opportunities, some are on the subordinated level, somewhere on the senior basis and if we've been -- that's assuming if we found the right opportunities, you should not be surprised if we expand that over the course of the year.

Operator

Your next question comes from Jason Arnold of RBC Capital Markets.

Jason Arnold - RBC Capital Markets, LLC

In discussions internally with Apollo and with your other private equity sponsors that you work with, what are the thoughts on deploying capital into deals over the next 12 months? Would you say that sponsors are looking for more or less or similar activity ahead versus perhaps with the deal was last quarter?

Patrick Dalton

Jason, that's a very good question about the environment. We have had dialogues with all of our sponsors we cover and down to the parting level. There's a tremendous amount of optimism that we're seeing and hearing from the sponsors and their desire and their comfort and their ability to deploy capital into an active M&A pipeline. We haven't quite seen that develop in closing transactions, but we're seeing it significantly in developing our pipeline of new opportunities that are coming and the economy has been sort of a question mark over the last couple years. That's giving people more comfort so they can underwrite business performance over the long term and be able to get their returns that they need for their private equity funds. So there's optimism. There's opportunity. We're seeing our pipeline develop. Those take three, six months to close those transactions, but we're encouraged by what we're hearing that it should be an active year and it should last for at least a couple years.

Operator

Your next question comes from Joel Houck of Wells Fargo.

Joel Houck

I'm looking at the book value per share number of $9.73, and it grew modestly from last quarter but just given the strength in the high-yield market and even the equity market in the December quarter, can you maybe articulate why perhaps we didn't see as much NAV growth as the underlying market dynamics? Was there something unique with your portfolio that would account for about 1 1/2% NAV growth?

Patrick Dalton

Joel, it's Patrick. September was a pretty good credit market as well. There was improvement between September and December, for sure. We saw in general the portfolio appreciate given it's marked by third parties and where the credit markets are and yield base approach is generally the methodology used. We did have a couple of offsets in the quarter and we mentioned in our script between Generation Brands and PlayPower, you had a couple of fundamental items that were depreciated and net-net only came to that sort of position of $9.73. But in general, the portfolio, but for those couple of situations, we were pleased to see net appreciation.

Joel Houck

Patrick, just to follow up on that, what do you guys think of in terms of where you've written things down? You can't obviously predict precisely what's going to happen with potential problem credits, but given what you see in the portfolio today and the underlying metrics, are you guys comfortable that the marks are kind of behind you, if you will, in terms of the sub-debt and equity portions of your portfolio?

Patrick Dalton

We can never predict, as you had mentioned on the call, we feel very comfortable with the marks that are done by third parties each quarter, given the information we have at that measurement period. We have seen a lot fewer names on our watch list, so that's an encouraging fact pattern for us. PlayPower is something that we were hoping to avoid an issue, but the continued challenges in the municipal bond market and the EBITDA was a little less than we expected, and you trip a covenant and you're in a different place on that credit. So we would like to not see that happen again. We don't see much in our portfolio that would continue to go in that direction. Net-net we believe it's hopefully a better environment. But we also, if you point to Gray Wireline or MEG, these are assets that are volatile and Gray was going through a restructuring just over a year ago. And now the company was sold at a nice premium. We got some equity there. We got nice upside. We got nice returns. So businesses have the time and the good management to get through a difficult period of time. We see appreciation even in some of the ones where there was historic significant depreciation. So it's really a long way of saying we don't really know for sure the specifics, but we're feeling very darn good about the overall portfolio.

Operator

Your next question comes from John Stilmar of SunTrust.

John Stilmar - SunTrust Robinson Humphrey Capital Markets

Patrick or Jim, this the first question for you. With regards to the investments that you've made this quarter and with the investments that you've passed on this quarter, can you take me through obviously on a no-names basis, but maybe the term structures of the investments that you found compelling? And then inside of those, how this fit inside the capital structure of the businesses that you were funding? So it's term structure and then the capital structure that you're financing for investments that you have purchased or you have put on the portfolio versus ones that you might have passed on, looking for the relative opportunity that you speak of.

James Zelter

One thing that I'll just start with, John, it's a good question. It's insightful about our business, but we're obviously very cautious about hold-co dividends. A lot of the companies we're familiar with. We've seen, they've done well, companies are refinancing and they're able to take a dividend out. I think what we've been quite cautious on those as a concept and there's been a variety that have gotten done very successfully. So that's one theme I'm thinking about. The other one I would say is some of the middle market senior debt is at fairly aggressive yields. So we're trying to focus more on the subordinated nature of opportunities and as the questioners said before, we took an approach in '07 and '08 to be in larger cap companies. There's a broader spectrum of companies that are coming into our radar screen, if you would, that pass muster that we're finding interesting opportunities, large-cap and middle markets. So those were just a couple that I pointed out off the top.

Patrick Dalton

You know John, if you look at Bloomberg today, there's an article just about how robust the bank loan market is. People are -- do a bank deal two months ago, and now you're redoing it with the same price but getting rid of all the covenants. It's just a supply and demand imbalance. A lot of cash in both loans and high yields and the publicly known credit markets. And that's just foreseeing a lot of activity for people who are current issuers because there isn't that M&A pipeline hitting the market yet. What that does, it sops up some of the excess cash flow. We should some more standard or standardized capital structure that we're comfortable. But that's a perfect example of in my comments about us looking at an over-zealous market, being as prudent as we can be to avoid those, these may become interesting secondary market opportunities for us in the future. We're going to look at all of them, but terms and structure is as important as price and leverage.

John Stilmar - SunTrust Robinson Humphrey Capital Markets

If I was to kind of reiterate what I heard from you, Patrick, it seems like today, the market itself is sopping up some liquidity and you hope that the return of a much more fervent primary market would provide a little bit more opportunities to normalize this supply-demand imbalance.

Patrick Dalton

There's still significant inflows each week into credit funds, both high-yield and bank loan. So we're still seeing additional cash coming in but there hasn't been the other side of it, which is the primary market issuance to support new M&A transactions which, that's what we had back in 2007; you had a very robust market but you had ton of issuance. Here we have a robust market and not a ton of issuance. So when that comes, we think that'll just normalize the market to a level that we hope will be attractive and should be attractive to us, and in and around that, we are finding ways to use our competitive advantage in relationships and structure and size and scale and certainty to still find those unique opportunities to put into the portfolio that we will feel comfortable that we're a buy-and-hold investor, that we should be buying and holding these investments.

John Stilmar - SunTrust Robinson Humphrey Capital Markets

You kind of prefaced the range earlier of 10% to 16% as sort of the targeted return and that's obviously scales for opportunity. But as we look at your portfolio today of 11 1/2%, and I would assume just given that the yields came down a little bit that maybe the marginal investment is a little bit lower than that. Is it fair for us then to, using that 10% to 16% range as a spectrum for risk, to sort of view the opportunity as much less on the risk side of the spectrum today? Or is it more of something else, like floating rate versus fixed? I mean, you'd spoken to that a little bit which kind of can have an artificial risk return relative to yield. So I was wondering if I'm missing something here, or if there's a little more color you can add to that relative to your previous comments.

Patrick Dalton

John, you're right on the spot. Given the bias towards credit quality and getting repaid, if the markets are robust and we have to go on the lower end to get a higher quality asset, as long as net-net it becomes accretive, we'll do that. And also, some of those have more call protection on the back end, which we don't factor into the coupon. So sometimes we will actually negotiate, we're willing give up a little on the coupon to get three or four years of call protection and premiums thereafter. We won't know what that ultimate investment's going to achieve in a total return until we get called out, but as we've just seen now, a lot of those calls we're getting to pay us back, we're getting premiums on the back end. So that's definitely an important point. Second is we have had a bias towards floating rate. And right now, we're willing to maybe be a lower end of total return because LIBOR is so low. We're getting some LIBOR floors in there, but if rates do increase and we've now moved our liabilities to a more fixed-rate business with floating rate assets to being higher level than our fixed rate, floating rate debt, we hope that over time the swap curves that those investments themselves will continue to tick up as rates tick up and accrue to the benefit of our company.

Operator

Your next question comes from Jasper Burch of Macquarie.

Jasper Burch

Just some clarity on the diluted share count calculation. Does the share count only increase from the dilution on the converts when your stock is above the strike price, or the convert price, $13.5?

Patrick Dalton

I'm sorry, Jasper, can you repeat that?

Jasper Burch

Rich talked a little earlier about the diluted share count calculation. It sounded like he was saying that you're going to have the diluted share count's going to be higher than the actual share count now just because of the convert. I was wondering for a little more color on that calculation. Does the diluted share count only -- does the increase in diluted shares only start when your stock is actually trading above the convert price on your convertible debt?

James Zelter

No, Jasper, that would be on the other, the net shares settlements that someone mentioned earlier. So for us, again, we don't have to pay a dividend on those shares, but we have to report fully diluted, as if we're paying that dividend, but we're not.

Jasper Burch

So it's fully diluted. Patrick, a couple of times now on the call, it was mentioned shifting into floating rate assets and also the benefit of locking in the fixed-rate liabilities. I was wondering if you could give us a little more color on what your outlook is on interest rates on timing of interest rates rising. And also, if you've considered sort of swapping out some of your interest-rate exposure on the liability side.

Patrick Dalton

You guys didn't call in to hear my interest rate forecast today and other than saying that we have a general view that probably we're going to see higher rates at some point in the future. So with that view, we had a very simple capital structure a year ago, a year and a half ago. We've become more critical mass. We've accessed these other avenues, which are really important to us. And not only are they are important from another shareholder base, but for us to lock in some of these liabilities we think makes sense for us. So that's all we've done so far. We're not taking out an aggressive view on swapping, but certainly, via our secure debt and our convert debt having a little bit of fixed rate in debt in this environment, we feel that's the right path to go down.

Richard Peteka

We've now got about $425 million of fixed-rate debt which is about $1 billion of borrowings. We think that is a hedge itself. Over above that entry into a swap agreement, it's not really necessary for us. But we don't know when, but we don't think rates are going to get any slower. We think they'll go higher, but don't know exactly when that's going to be. But we just position ourselves to certainly not get hurt and maybe benefit a bit on the upside.

Jasper Burch

Lastly, looking at your dividend, I was wondering what sort of assumptions does the board bake in, in terms of looking at when you'll be fully deployed and sort of the sustainability of the dividend.

James Zelter

'

In terms of declaring our dividend, or...

Jasper Burch

Well, no. I mean, in terms of looking at your dividend rate and the dividend run rate, obviously, it's based on a little bit more leveraged capital structure. And I was just wondering sort of how far in the future is the board looking? And what sort of assumptions are they baking in, in terms of the full earnings power of the company?

James Zelter

We've been public and consistent, saying that we're comfortable operating our company between 0.5x and 0.7x leverage. Right now, we're on the lower side of that, so we have a little bit of room to operate a little bit more leverage. We feel comfortable declaring our dividend this quarter. We've not been on the track of pointing to a lot of future on that, but we understand the importance of that and are very, very focused on constantly increasing and maintaining our NII. So the board really is driven by that.

Operator

Your next question comes from Arren Cyganovich of Evercore.

Arren Cyganovich - Evercore Partners Inc.

Just a point of clarification. I think I heard you say that the leverage level today was at 0.53:1. Did I hear that correct?

Richard Peteka

Yes, as of December 31.

Arren Cyganovich - Evercore Partners Inc.

What was driving the reduction in the leverage?

Richard Peteka

It's more of portfolio given the repayments for us are net deployment.

Arren Cyganovich - Evercore Partners Inc.

Also, you've mentioned a couple times that the market is a little bit overzealous. Can you kind of maybe just clarify this? We're not really seeing a level of overzealous market like we did in '07, but are you thinking this is more familiar to how it was last year? So we're not really seeing crazy pricing and leverage levels out there; it's just a little bit more active. Is that a fair...

James Zelter

I would say you've seen a couple of, not particular to this business, but you've seen a few bank deals be what's called, covenant light. As Patrick mentioned, there were a few transactions done in the fall, new buyouts that already have refinanced their back deals or announcing to refinance our bank deals within three to six months. That would be, that's not what you'd see in a normal market. That's signs of a little bit of an aggressive or overzealous market. The thirst for yield from a wide variety of investors and what's happening in the muni market is forcing a lot of investors in institutional retail into credit products. That brings money into the bank loan market, brings money in the high-yield market and when that occurs, certainly, investors come into credit. So we're by no means seeing some of the excess that you saw in '07 and '08. But it's a pretty robust calendar right now and transactions are being subscribed to in a very short period of time. So momentum can change and if the equity market takes off and there's a big sector rotation out of fixed income into equities, that may have a bit of a negative impact on where fund flows go. But certainly, it's next to '07, '08, it's very robust out there right now.

Arren Cyganovich - Evercore Partners Inc.

Lastly, you talked a little bit about seeing opportunities on the radar screen in the large cap and middle market. How do you define the large cap for your segment?

Patrick Dalton

We've always really used the term upper end and middle market. We're not necessarily focused on supporting new transactions in the primary market at a large cap. Generally, those are going to get done at levels that are not necessarily accretive to our business.

James Zelter

The high-yield market.

Patrick Dalton

The high-yield market. But those opportunities do end up coming towards us when those markets dislocate. So those become more secondary market opportunities to us. Our sweet spot, in our average EBITDA, as I've mentioned, is over $250 million and that's a mixture of primary and some of the secondary opportunistic transactions we made post 2007, '08, '09. But really, our sweet spot's between $50 million of EBITDA up to $200 million of EBITDA sized companies. That's kind of the larger end of middle market and we're able to buy and hold and structure and commit to solutions for sponsors in all those -- across that range of EBITDA.

Operator

Your next question comes from Martin Ji of Clearbridge Advisors.

Martin Ji - ClearBridge Advisors

Just want to follow up on the asset liability match. Just wonder, as you term up your loans through some more unsecured debt offerings, are you also trying to tweak on the investment side? Maybe like say, for example, just expand the duration for a little while to kind of maintain the spread, other things equal?

Patrick Dalton

We have always tried to -- for good asset, we like to hold the asset for a long time. So we're always fighting for call protection. Jim gave you some kind of bands of where, when markets are robust, the duration is shorter. If like, for example, we were called out of a couple of investments at a premium, it was still net-net cheaper for the sponsor to call us out, even paying us a premium, to access credit today that's much cheaper than when we did some of those deals. So we're going to fight for that stickiness. And at least if we do get taken out, we'll get taken at a premium and make some earnings for our shareholders, but we're always looking to get the longest side of duration. But because we focus mostly on supporting financial sponsors, their whole periods have generally been on average three to five years. So we're going to fight for call protection, but without refinancing, usually they'll sell their company and we'll get paid back when they sell their company.

Operator

Next question is a follow-up from Greg Mason of Stifel, Nicolaus.

Greg Mason - Stifel, Nicolaus & Co., Inc.

Patrick, I wanted to follow up on something you said about M&A activity still not being that robust. Can you talk about what it's going to take for that to really pick up? Some of the things that were hindering it in the past were a lack of senior debt availability. That seems to be fully in place now. What's it going to take for the M&A activity to really pick up?

Patrick Dalton

One clarification, Greg: What I meant is it hasn't closed, these transaction haven't closed yet. They take a long time to gestate and then come out the back end and actually close. But I think we have seasonal slowdown into the latter part of last year and early part of this year. That's just seasonal. Then you add on top of that companies wanting to see a sustainable economic recovery. You look at the job reports today, you look at what's going on in the U.S., people are feeling more comfortable to pick and sell their company and get a value that they want and a buyer with conviction to put that out there. So there's a natural decision at the board level of portfolio companies to sell themselves and we think that those decisions have generally been made or are being made as we speak. And then there's a period of due diligence and putting the documentation together to sell the company and there is a three to six month timeframe for those companies to actually get sold and close. So we, by having the dialogue we have and the pipeline that we have today, we're in the middle of a lot of the stuff that's happening that we may not see in our business close until the second part of the year.

Greg Mason - Stifel, Nicolaus & Co., Inc.

Rich, the last couple of years, you've had an income tax expense in the December quarter and nothing this year. Can you talk about where the moving factors that impacted that this year?

Richard Peteka

It's really just timing, Greg. That's all it is. It's the timing of income recognition and short-term gains and losses.

James Zelter

On behalf of Apollo Investment Corporation and my partners, we appreciate your longstanding support and great questions and participation on this call. And we look forward to talking to you at the end of next quarter. Thank you very much.

Operator

Thank you for participating in today's conference. You may now disconnect.

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

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

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