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Apollo Investment Corporation. (NASDAQ:AINV)

F1Q09 (Qtr End 06/30/08) Earnings Call

August 7, 2008 11:00 am ET

Executives

Jim Zelter - President and COO

Patrick Dalton - EVP and Chief Investment Officer

Richard Peteka - CFO

Analysts

Sanjay Sakhrani -KBW

Jim Ballan - JPMorgan

James Shanahan - Wachovia

John Stilmar - FBR

John Baugh - Stifel Nicolaus

Jon Arfstrom - RBC Capital Markets

Adrian Day - Adrian Day Asset Management

Lee Author - Hammock Investors

Operator

Good morning and welcome to the Apollo Investment Corporation’s First Fiscal Quarter 2009 Earnings Call. At this time, all participants have been placed on a listen-only mode. The call will be open for questions-and-answer session following the speakers' remarks. (Operator instructions)

It is now my pleasure to turn the call over to Mr. Jim Zelter, President and Chief Operating Officer of Apollo Investment Corporation. Mr. Zelter, you may begin your conference.

Jim Zelter

Thank you and good morning everyone. I would like to welcome you to our first fiscal quarter 2009 earnings conference call. I am joined today by Patrick Dalton, Apollo Investment Corporation Executive Vice President and Chief Investment Officer and Richard Peteka, our Chief Financial Officer. Rich, before we begin would you start by disclosing some general conference call information and include the comments about forward-looking statements.

Richard Peteka

Sure, thanks Jim. I would like to remind everyone that today’s call and webcast is being recorded. Please note that they are the property of Apollo Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Audio replay information is available in our earnings press release.

I would also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. Today’s conference call and webcast may include forward-looking statements and projections and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections.

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

At this time, I would like to turn the call back to our President and Chief Operating Officer, Jim Zelter.

Jim Zelter

Thank you, Rich. The widespread volatility in both the credit and equity markets continued throughout the quarter. It has been more than a year now, since we had advised on the technical pressures that it forced liquidity to the sidelines. While the markets brief after the Bear Stearns’ bailout and throughout May. The broader market in June backed off due to appropriate concerns about fundamental credit and reports of more evidence of the weakening economy.

Clearly, the consumer continues to experience stress from higher energy and food cost and this stress is impacted top line revenues of many companies broadly across the economy. That said our strategy of transitioning our investment portfolio into exponentially larger companies ahead of the credit crunch has better prepared us for the challenges within economic slowdown will bring.

As you noted on last quarter’s conference call, we believe that many high quality companies would be patient under these market conditions, that is waiting for more favorable market conditions before accessing the market for financing or M&A. This has indeed played out and we expect to continue until the economy and/or broader markets show more signs of reliable or steady improvement. Again, we strategically invest in these typical companies.

Given our strong commitment of preservation of capital and our objective of capturing only those opportunities with appropriate risk adjusted returns, we continue our patient approach. We believe we understand market cycles and continue to manage our portfolio and capital with the purpose of preserving our dividend to shareholders and growing it over the long-term.

Since our last call, we have seen many diligent commercial investment banks, continuing their efforts to work off the majority of the corporate LBO loan and bond inventory. We have also seen, and seek to raise more than $175 billion of much needed liquidity from new equity and debt investors.

We expect them to utilize to accumulated invest liquidity to prudently rebuild and strengthen their balance sheets, while rationalizing their businesses and other commitments. At such time, when the banks show up their balance sheet, we would expect the capital markets to regain some constructive momentum. We do not expect linear movement, but do expect high variability with both fits and starts.

While we do not know how deep or how long journey, we are generally indifferent. These are times, when those with strong conservative balance sheets and those with significant capital to deploy have many advantages and fewer distractions. These companies like Apollo Investment Corporation can focus on improving their position and increasing their presence in the marketplace. From a historical perspective, with the second lean primary market apparently dissolved and with a high yield markets stalled, we expect demand for opportunistic mezzanine capital to rise significantly over the next 12 months. We believe these opportunities will certainly have improved pricing and better terms and conditions all that more attractive leverage levels.

Before I turn the call over to our Chief Financial Officer, Richard Peteka, I want to highlight that when the quarter ended, June was filled with several successes on different funds. In May, we closed and what we believe to be the largest overnight common equity takedown ever for a business development company. We raised $380 million in gross proceeds overnight.

In June, our investment performance infrastructure and control environment was recognized with a BBB investment grade rating from the Fitch rating agency. We were extremely pleased with that outcome given the current market environment. Also in June, we established the Apollo Investment Corp credit opportunity fund, which we will expect to capitalize on a handful of unique and opportunistic investments.

With some interesting opportunities identified during the quarter, we are not ultimately structured and closed on two investments, each with highly attractive additional financing offered only to select investors such as Apollo Investment Corp. Again, we expect the near-term utilization of AIC credit opportunity fund to be limited to capture only unique and opportunistic investments that complement our overall investment portfolio, and to accrue the benefit of AINV shareholders. Our Chief Investment Officer, Patrick Dalton will discuss the AIC opportunity fund in more detail in a few moments.

In addition, let me express that we are encouraged with the current dialogue we are having with some financial sponsors, including their acknowledgement during these challenging times of how important it is to know and have a relationship with their capital providers. They also acknowledged how important our scale and credible consistent, no surprises capital commitment process is to them. Accordingly, and with primary market activity significantly muted for more than a year now, we expect these and other financial sponsors to reenter the market over the upcoming months and begin work on perspective investment opportunities.

Apollo Investment Corporation remains ready as a preferred provider of capital.

With that, I will turn the call over to Rich, who will provide us with some additional details on our quarter. Rich?

Richard Peteka

Thanks, Jim. Let me follow-up with some balance sheet highlight. We closed our quarter end on June 30, 2008 with an investment portfolio of $3.3 billion, up from $3.2 billion at March 31st. Our stockholders' equity totaled $2.3 billion at June 30, with a net asset value per share of $15.93. This represents an increase of $0.10 per share from our NAV of $15.83 at March 31st. Furthermore, with only $966 million drawn on our revolving credit facility LIBOR plus 100, our conservative leveraged balance sheet now as a debt to equity ratio of only 0.4 to 1.

As for operating results, gross investment income for the quarter totaled $91 million. This compared to $88.9 million for the comparable quarter a year earlier. Net operating expenses for the quarter totaled $44.6 million of which $27.6 million was management and net performance-based incentive fees, $13.9 million was interest expense and $3.1 million was general and administrative expenses.

For the comparable June quarter a year earlier, net operating expenses totaled $34.2 million of which $23.8 million was management and net performance-based incentive fees, $7.6 million was interest expense and $2.8 million was general and administrative expenses. The increase in quarterly expenses year-over-year was driven primarily by the growth of our investment portfolio.

Accordingly, net investment income was $46.3 million or a $0.35 per share for the quarter, compared to $54.8 million or $0.53 per share for the comparable June quarter a year earlier. The decrease in net investment income year-over-year was primarily attributable to a $10 million upfront fee in last year for the public to private acquisition of Innkeepers USA Grand Prix Holdings.

As a reminder, net investment income can vary quarter-to-quarter based on many factors including the timing of investments made, as always when investments are sold or repaid.

Apollo Investment Corporation’s GAAP net investment income also continues to represent only a portion of our taxable earnings included in quarterly dividends. Taxable earnings also include structuring, commitment and other upfront fees, we receive on investments as well as net realized capital gains. Our investment sales and prepayments for the quarter totaled $89 million.

Net realized losses totaled $29.8 million, as compared to $20.7 million for the comparable quarter ending June 30, 2007. Realized losses taken in the current quarter was driven primarily by our exit of American Asphalt & Grading. Therefore, you recognize approximately $26 million in losses.

Also during the quarter, we recognized unrealized gains of $55.3 million. This compares to unrealized gains of $143.7 million for the comparable June quarter a year earlier. In total, our quarterly operating results increased net assets by $71.8 million or $0.55 per share versus an increase of $177.7 million or $1.72 per share for the quarter ended June 30, 2007.

Let me just finish up with some performance figures. Since the IPO on April 8, 2004 and through June 30, 2008, Apollo Investment Corporation has generated cumulative and average annual total returns based on net asset value of 70.2% and 13.4% respectively. The cumulative average annual total returns based on the market price of AINV shares for the same period of 35.8% and 7.5% respectively.

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

Patrick Dalton

Thanks, Rich. During the quarter ended June 30, we continued our primary focus on managing and optimizing our existing portfolio and remain prudent with our capital; investing only when and where we saw the best relative value. We reviewed several new opportunities in both the primary and secondary markets. Once again, with the volatility of the overall credit markets, many of the higher quality companies continued to stay on the sidelines for M&A or new capital raises. With our focus on larger, more defensive companies with more liquid securities, we expect to have the added benefit of taking certain gains and trimming and/or avoiding potential losses where we see potential for future underperformance.

During the quarter, we exited our $34 million investment in American Asphalt & Grading, a grading and paving business operating primarily in the Las Vegas housing market. The sale, we classified our previously recognized unrealized loss to a realized loss of $26 million, which had no impact on NAV per share. We also took advantage of the mid-quarter market rally set to sell our full position of $18.5 million in Yankee Candle, a consumer product retailer and trimmed our position in Associated Materials, selling our discount notes realizing a 16% internal rate of return.

Lastly, we saw the full repayment of our successful $34 million investment in Norcross Safety Products realizing a 15% internal rate of return. We closed our first fiscal quarter, having invested $185 million across six new and eight existing portfolio companies. The quarter also saw repayments and other exits totaling $89 million. Since our IPO in April 2004, our total invested capital now exceeds $5.3 billion across 118 portfolio companies.

Let me take you through some of the activity during the quarter. We at Apollo have the benefit of a broad sourcing network that sources unique and proprietary deal flow. As an example, there are certain large banks that are trying to sell assets to relieve pressure on their own balance sheets. For select investment platforms like Apollo, these banks may also be willing to provide additional debt capital to finance the purchase of these assets.

During the quarter, we were approached by two banks of purchasing securities of First Data and Energy Future Holdings, which is the parent company to TXU, at significant discounts. Moreover, the banks were also willing to provide additional attractive financing to Apollo to support the purchase of these assets. Therefore, we created the AIC Credit Opportunities Fund to hold a select number of these types of investments.

We believe that this creates additional benefit to AIMV shareholders of increasing our debt capacity beyond our current revolver and takes advantage of the market dislocation to purchase what we believe are high-quality assets at significant discounts. Ultimately, we invested $39.5 million and $11.4 million respectively in the finance transactions of First Data and TXU.

Concerning Financing cost and net debt in between LIBOR plus 150 and 200 basis points, we only expect a select number of high-quality investments to be placed into the AIC Credit Opportunities Fund, and its assets and liabilities will be transparent to our shareholders.

We also invested $24 million in the senior notes of U.S. Food Service. U.S. Food Service is the second largest food service distributor in the U.S. U.S. Food Service is owned by Clayton, Dubilier & Rice, and KKR.

We also began adding NCO Group to our portfolio during the quarter. NCO is a leading global provider of business process outsourcing services with a primary focus on accounts receivable collections, and customer relationship management, and owned by One Capital Partners. We invested $7 million in the high yield notes to the secondary market.

We again selectively added to our position on the bridge loans of First Data Corporation during the quarter, investing an additional $32.8 million at a significant market discount to original issue price. First Data is a dominant global transaction processing franchise providing payment processing services in electronic commerce to merchants and card issuers.

In addition, we invested approximately $44 million in the secondary market, the names that we currently hold such as Alliance Boots, (Inaudible), US Investigations Services, TransFirst, and Hub International, substantial discounts to original issue price.

We also identified attractive investment opportunities from the double the BB Tranches of three extremely well managed CLOs during the quarter. These investments totaled $23.4 million, as we acquired them at substantial discounts. Two of the CLOs are managed by Babson Capital, who we believe is one of the premier managers in the CLO space.

The other CLO is managed by Shenkman Capital Management. Shenkman is independently owned investment advisory firm dedicated to investments and leverage companies with a conservative and prudent management style. These investments are another example, where our broad originations platform and relative value investment strategy allow us to prudently and selectively invest in assets that we believe offer an attractive risk return and where we do not have to rely exclusively on an active primary market for compelling investment opportunities.

Ultimately, our investment portfolio at June 30th consists of 74 companies with a market value of $3.3 billion and would we have invested 23% in senior secured loans, 54% in subordinated debt, 7% in equity and 16% in common equity and warrants measured at fair value.

The portfolio continues to be diversified by issuer and by industry. The weighted average yield on our debt portfolio at June 30 was 12% unchanged from the previous quarter. The weighted average yield on a subordinated debt and senior loan portfolios moved slightly to 12.9% and 9.7% respectively, versus 12.8% and 10% respectively in the prior quarter.

We continue to closing match our floating rate assets with floating rate liabilities and maintain a balance net interest margin on our portfolio. The weighted average EBITDA for total portfolio continue to increase during the quarter and remained well an excess of $200 million per company.

After observing the management teams of our portfolio companies, since the credit crunch begin more than the year ago. We are even more convinced that the experienced management teams of larger companies are much more intuitive and far more prepared for and capable of handling ongoing and future challenges of managing their companies to economic cycles.

Accordingly and as of June 30th, the weighted average risk rating for total portfolio remained a two. The weighted average cash interest coverage also remained over two times. We did not have any loans defaults on the interest payments during the quarter and there were no new loans placed on non-accruals status.

Lexicon Marketing remains the only non-accrual on our books. Furthermore, there were no past due interest or dividends receivable. Ultimately, we remain comfortable with the fundamentals, the resilience and the overall credit quality of our portfolio.

Before I open up the call to questions, I would like to note that over the last several quarters, we strategically expanded our dedicated portfolio monitoring team to continue with value added, comprehensive and proactive approach to monitoring our investments and working closely with our financial sponsor partners. This is over and above the rigorous monitoring obligations in fact this is of our investment teams. We have always believe, that what we own is much more important than the potential next investment.

Furthermore, we believe significant value can be realized by staying ahead of potential problems. As we mentioned earlier in the call, our portfolio of quarter's investments have significant liquidity and our proactive monitoring for prospective issues offers us the added option to more easily exit our investments and preserve shareholder value.

In closing, I would like to thank all our shareholders for your support, as well as thank our highly dedicated and growing investment team for other hardworking commitment to Apollo Investment Corporation.

With that operator, please open up the line to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question is from Sanjay Sakhrani of KBW. Please go ahead.

Sanjay Sakhrani -KBW

Hi, thank you, good morning. Patrick, you talked about credit quality, maybe could you elaborate on that a bit. What kind of trends did you see across your investment companies and was there anything discernible and kind of where do you think we are headed.

Patrick Dalton

Sanjay, thanks for the question and welcome to the call. Certainly in this credit environment, we are very focused on the performance of every one of our portfolio companies. We definitely, as Jim mentioned in his part of the presentation, that all companies across most industries these days are feeling stress on the top line. The rubber rally meet the road is when you can't ultimately put your business at the risk of just a demand side, what can you really do on the cost side and what we have seen is, most of our companies were encouraged by this have taken aggressive steps early in the cycle to cut their cut costs, without cutting service, without affecting customers and over the last few years many companies have had the benefit of putting probably a lot of cost structure that was somewhat redundant and we are seeing a lot of that action.

We are pleased with the company that we're investing in, because they are for the most part market leaders and they are taking market share away from some of the smaller companies that maybe can't perform as well for cycles. But we are very focused on the credit quality of all our companies and it's a tough environment out there. We don't know how long it's going to last, but we see companies improve their liquidity positions, improve the cost structures, and make significant changes to their own organization should they need to, to right size the businesses inline for what we think will be a tough couple of quarters ahead of us and we can't say how long it's going to last. But we're pleased with what we're seeing in our companies and we're also very focused and I’m not optimistic what the environment is going to bring at least in the next few quarters.

Sanjay Sakhrani -KBW

Okay. Then start on the Opportunity Fund. I mean how big can that get from a relative standpoint, where we are today?

Patrick Dalton

I'll jump in, Jim to try me this well here. We don't quite know yet. We're being selective. Number one, it's really about the assets themselves. Are these companies that we want to invest in and will be invested in without having the added benefit of leverage. And we don't look at leverage as a reason to do the investment. We look at it as an added benefit. So, the names in this portfolio are only First Data, which we have a meaningful position and TXU, which is already an existing position. Should towards the end of the year some banks issue even lighten up the balance sheets to more so, we expect maybe some opportunities, but we're not counting on it. If the fund ultimately is two investments, when we've got additional leverage, that's fine, it's the right thing to do at that time.

Jim Zelter

Yes. I’d say, Sanjay, we feel we've talked about this before. We feel, we use a baseball analogy, I know for in the fifth, sixth, seventh inning, but certainly as the LBO backlog is gone from plus or minus $400 billion to less than $100 billion there are still some institutions that want to provide an interesting financing for you be able to purchase assets and we want to make sure we had the opportunity to do so, to benefit our shareholders and our dividend then. That’s what, what we created, but it’s not, I don't want you to get the wrong idea. We are not changing our business model. This is purely incremental. Our business model does not change nor has the underlying attributes of our portfolio construction; it really is business as usual.

Patrick Dalton

And lastly I’d say on, it really adjusts to the platform of Apollo because we need opportunities wouldn’t necessary come to everybody, until we benefited Apollo Investment Corporation, but the access to Wall Street and then showing us these types of transactions.

Sanjay Sakhrani -KBW

And I tend to agree with you and from an economic standpoint; I’m assuming any distributions off that would flow through the P&L of AINV. So, the fund will make a distribution to AINV?

Patrick Dalton

That's correct this is 100% for the benefit to the shareholders.

Sanjay Sakhrani -KBW

Okay great. And then just one last question on the spillover or kind of excess income that hasn’t been paid out yet, could we get that number?

Jim Zelter

Rich

Richard Peteka

Yes, on a tax basis it's reported once a year on our 10-K. So, on March 31st it was $137 million.

Sanjay Sakhrani -KBW

Okay, great. Thank you very much.

Operator

Thank you. Your next question is from Jim Ballan with JPMorgan.

Jim Ballan - JPMorgan

Great, thanks a lot. Just staying with the opportunities on the First Data investment, we tell me if I’m wrong Patrick. That it looks like there is First Data sub debt that you had on the balance sheet to 331, that's no longer there. Was there some sort of a swap involved here or was that a separate transaction?

Patrick Dalton

It was a separate transaction, but what we were able to do is to take that $100 million phase basically convert into this fund, we are getting additional financing post the quarter end. They didn’t exist that quarter in last time, so effectively with the sale and a repurchase with leverage of those same types of securities.

Jim Ballan - JPMorgan

Okay. So, do you sense currently exposure to First Data similar just change the structure of that?

Patrick Dalton

That's correct.

Jim Ballan - JPMorgan

The other question I had was just regarding that the Babson and Shenkman CLOs. Can you give us a little more color on that just, you know, the types of securities that are in those CLOs maybe what advantages or maybe what the leverage in those CLOs there?

Patrick Dalton

Sure on the Babson CLOs, they’re new issue CLOs and they consist of the current environment of bank loan to current prices. We know the Babson guys extremely below the firm. We diligent not it, - what they do they are premier player in this CLOs space.

We have a view into what their portfolio is today, what they’re expected ultimate portfolio will be suppose to closing of those transactions. We like all the companies in those portfolios, we is the firm uphold broadly had looked at all those credits as well and that's very important for us within the inline portfolio.

We’re looking in Shenkman’s an investment firm that we've known for many, many years has grown up the subordinated debt space of high yield as we moved up the capital structure in this CLO, which is secondary transaction and has very tight terms, the conditions in the asset selection in those portfolio as much more driven towards first lean assets.

So, away from some of the basket others have and we of diligence those and the discount margin that we pay puts the yield that very attractive and accretive to our investors and can withstand. And we are buying mezzanine debt, we are not buying the equity of CLOs in our vehicle these are the mezzanine they’re tranche. So, run our models, we can withstand significant defaults in these before we actually lose any of our expected return.

I like the equity tranches that lose the dollar for dollar return of the top. So, a combination of the supply and demand imbalance in this market for the BB tranches has created the opportunity and while from a relative value perspective, we like the underlying assets, but there are not a lot of liquidity and if you are a buy and hold investor like we are, we can take advantage of that imbalances client demand and purchase this debt tranche of the CLO highly diversified CLO, which should terms and conditions and make a very attractive return. And should there any issues in these loans either the manager can trade in all those loans to protect their portfolio, and we can also withstand significant losses before we actually get impaired at all.

Jim Ballan - JPMorgan

That's great. Thanks a lot Patrick.

Patrick Dalton

Thanks, Jim.

Operator

Thank you. Your next question is from James Shanahan with Wachovia.

James Shanahan - Wachovia

Thank you, good morning. A couple of quick ones here. The couple of write-up in the quarter MEG and Exco both oil and gas companies totaling I guess of about $60 million in value written up during the quarter if my math. Was this driven by strength in commodity prices or were some other sustainable driver of that value increase?

Patrick Dalton

I will take them separately, because Exco is a publicly traded company they has public stock and is in the natural gas, is also benefited from both what's happening in energy space as well as the increase in commodity prices, but also it’s an exploration company and has some really attractive assets that have been valued significantly in the marketplace.

Clearly given that we have a diversified portfolio, energy was very popular in the first quarter, we would expect energy to be up, some other investments being down, should that reverse of course going forward that would be, we'll that play out. We look to be opportunistic should we, if we can to monetize in some of that if can.

On MEG, it’s a private security. In a company, that is in the oil sands business that is continuing to purchase land and move towards production. Oilsand is a popular investment place to be these days given just the high price of oil, but I will tell you in the vehicles the actual assumed cost of oil, that should be in the production business is much lower than the actual spot price of oil. So, we expect some, they don’t want the dollar for dollar and we don't expect a one down dollar for dollar if we get high-quality assets, we think the long-term demand for oil is going to be there, and so that was did get impacted by the dollar for dollar price in oil, but not on a dollar for dollar basis.

James Shanahan - Wachovia

But typically, is the required spot rate for oil to for this business to work?

Patrick Dalton

If you look at the analysis research it between $75 and $85 per barrel.

James Shanahan - Wachovia

Okay, excellent. And one more question, Patrick. Have you ever disclosed the final capital stock of the end-keepers deal? In other words, how much debt preferred equity in common that was subsequent?

Patrick Dalton

I'm not sure that we've actually not disclosed it. I'm not sure we disclosed. We can go through, there is, I think we mentioned one of the callers we've got fixed rate 10-year money in five-year floating rate money and we've got the protection preferred of $145 million in our common equity and junior capital investments in our balance sheet. The combined debt of the (inaudible) adjustable $1.4 billion, between the fixed and floating rate debt capital.

James Shanahan - Wachovia

Is there just one series of preferred or is there more than one?

Jim Zelter

There is just one series of preferred. We also have deferred security, which is different than the existing perpetual preferred.

James Shanahan - Wachovia

Got it, okay. Thank you.

Operator

Thank you. (Operator Instructions). Your next question is from John Stilmar with FBR.

John Stilmar - FBR

Good morning. I hate to reverse it going back to the CLOs, but just in terms of the macro thought itself or is it merely a micro issue. Why now, I mean certainly CLOs, there has obviously been a lot of CLO paper that’s been out there. What is it about the time that you guys have chosen to move into that type of asset class or was it more of you just saw a specific opportunity? I am wondering if there is any sort of more macro thought that we might be able to apply to the actions that you've taken.

Jim Zelter

Sure. Thanks, John. We purposely had avoided this whole structure credits base for a long time. We had watched it, we understood the benefits, we understood the issues and certainly by our not participating we were boarding with our feet that we were not getting compensated appropriately, because it has been on the headlines and it's been such a target situation.

Right now, as Patrick said there is tremendous supply demand and balance in the sense that there are no providers of some trenches of new CLOs. And we believe right now that when these assets have been massively reprised and one is getting compensated to a great degree, now is the time to very selectively add to our portfolio.

I can't tell you if this is a market opportunity we are taking advantage or overall business, but certainly we want to be, we are relative value investor and we didn’t compensated dramatically as a mezzanine lender into a high quality loan manager in this environment it's spreads that have been never seen before in that space and really putting draconian stress on the portfolio and getting very, very good returns. We want to take advantage of that.

What I would say to you is, there are some folks out there that are now telling, talking about how CLO equity is a very, very interesting investment and we've look at that as well, but we don’t believe in terms of the mandate that we have right now in terms of the risk reward that we’re getting paid for that in this vehicle. However, mezzanine right now in a few selective opportunities at very, very, very high LIBOR spreads, at low discount prices, we believe that overall package fits in what we're trying to accomplish.

John Stilmar - FBR.

And it must be CLOs fully ramped by the time that you provide the capital or sort of how much…

Jim Zelter

Yes. There….

Richard Peteka

Yes.

Jim Zelter

These are new advantage and they are virtually fully ramped. We can see the entire portfolio. We know about these names as Patrick mentioned. So we believe that the -- again, the whole structure of credits CLO market has changed dramatically in the last year. Certainly, now, it’s a desert in terms of new capital coming in. And the ones who can provide capital, you can price them appropriately.

John Stilmar - FBR.

Great. That’s very helpful. And then the second thing is as we start looking at opportunities fund and, I hate to come back to that, but how do you guys, I mean buyer’s definition, it's opportunistic. But should we start to think about Apollo maybe seeking other types of invested funds itself in its evolving strategy? Or was this just sort of an opportunity that presented itself given the time period and we really should start thinking about more direct corporate investments that are held on the balance sheet rather than investments directly in funds?

Jim Zelter

Yeah. Certainly, the quarter we do is holding investments on balance sheet. What was really opportunistic was not just the asset themselves, which we have also purchased these types of assets on balance sheet was the financing that came with that here to increasing our debt capacity. That was really optimistic because we could buy these assets for cash on our balance sheet will be accretive, but when you get the access to additional debt capital; we are always looking at every opportunity in the market to improve value to our shareholders.

We don't have a business plan that lays out a series of funds going forward. If something comes up that's accretive and attractive and complements the core of what we do? We absolutely will look at it and potential do something. But then this not a new business that we're looking to move out series of funds tomorrow.

John Stilmar - FBR.

Perfect. And very last question. As I look at your portfolio, how should we find about, you guys continue to invest in, for instance, it's senior debt, and obviously, the implied either discount or spread that’s attached to it is pretty significant given a senior debt right now is priced right around, according to your press release, right around 10%.

Jim Zelter

Yeah.

John Stilmar - FBR.

But a 10% on the marginal investment, it doesn’t seem like that in and of itself covers the dividend. Am I thinking about that too myopically, like a self-side analyst or is there more of a portfolio theory behind, sort of, having some of your investments up market? And how should we be thinking about that?

Jim Zelter

John, it’s a great question. I think the one of the things that to be clear about, we show you yield, it's on the yield on our cost basis of these assets. So I am seeing a secure portfolio secondly and closely. That market today -- and when we purchase those assets several years ago, they maybe up 650 or 750. An accruing assets today would not price that market really close, but should if it were to be open, he will price at much large spread than that.

We don’t show you the weighted average yield based on fair market valve. We show based on what we pay for those assets. So it doesn’t necessarily mean that that senior market today is at a 10% market. It's going to be a much more expensive market for the issuer. But that market really is not open today. We may do a deal that have a second lean on it, maybe a private mezzanine structure we like the lean and therefore be a secured investment for us. But that’s really a reflection of when we acquire those assets, what the spreads were at that point time and what we pay for those assets.

John Stilmar - FBR

Thanks a lot. Thank you very much.

Operator

Thank you. Your next question is from Greg Mason with Stifel Nicolaus.

John Baugh - Stifel Nicolaus

This is John Baugh filling in for Greg. Just a quick question on just overall the portfolio and underlying EBITDA trends, could you break out maybe on a percentage basis how many companies are reporting higher EBITDA on a year-over-year basis?

Jim Zelter

We don't disclose that. I can give you some general things if it's helpful. We definitely are seeing some companies report below, we're seeing some companies report above, and some companies doing really well above. But for the majority of the portfolio, it's really more on a slow growth, if any. We're not expecting much growth this year.

John Baugh - Stifel Nicolaus

And in that same thing, could you provide a little bit of additional detail on just the underlying trends that are affecting the Innkeeper Investment in light of a slower economy?

Jim Zelter

Sure. Sure. That's a great question and one; we also spend a lot of time on from an investment perspective. Innkeepers, we go into the year, like I say, at the end of last year, we sat down with our management team and spend a lot of time about what could happen in the environment and what could happen to this company.

When we did the investment, extended-stay hotels have generally been more resilient than past cycles that were fundamental to our approach. The hotel business without food and beverage are generally more resilient as well. Either, the upper end of the middle market, if you will, hotel given the Marriott's Residence Inn brand and some of our other brands, which are considered very attractive brands, but these are not the high-end luxury nor the low-end economy.

If you're looking at what happens in those markets today, it's bit of a barbell. We were seeing performance most recently deteriorate significantly in the economy end as well as in the luxury end. In the middle it's more resilient. We're encouraged by that.

Specifically, at Innkeepers, we do expect this year will not be a growth year on RevPAR. But fortunately, we began our cost-cutting programs late last year and we're seeing in the June quarter. The result of that comes through to the bottom line, that's encouraging for us.

Year-to-date, we have performed better. RevPAR is up. We don't expect that to be the case going forward just given the environment that we are operating in. And the management team is doing a great job managing the business as if we're not going to have any growth in business and potentially some decline.

We are outperforming not only our comparable set year-to-date. We are outperforming as well as all the Marriot Residence Inn brands nationally, the ones that we don't own would outperform them. But we are very, very focused and we are really bringing bottom line cost savings to bear here because we don't expect that we're going to have growth in RevPar this year.

John Baugh - Stifel Nicolaus

It's great color. Thank you. I also noticed that you've reduced some of your cyclicality's through the sale of the Amercian Asphault associated as well as Yankee Candle, probably Yankee Candle being more like the company I am interested in. Natural Products Group are on barn, which is on your investment. Can you give us a little bit more color as to why you would not maybe consider or what’s driving you to hold that investment if you are worried about some cyclical exposures considering their high-end cosmetics?

Jim Zelter

Yeah. I think what's driving that is worth at its value, which is a quoted security. We believe its worth more that that ultimately. And so we are exiting investment either with a gain or with the losses because we think that there is some deterioration coming in that. The value that we could sell for today is better than the value we will get tomorrow.

We are spending a lot of time with the sponsor and what they are doing with the management team of this company. We are encouraged by this team and some stability in that company. We think that they have some opportunity, but we don’t think that the price reflects in appropriate exit price for us.

John Baugh - Stifel Nicolaus

Okay. Thank you.

Operator

Thank you. Your next question is from Jon Arfstrom with RBC Capital Markets.

Jim Zelter

Hi Jon.

Jon Arfstrom - RBC Capital Markets

Just following up on that question that was the first half of my question, but is it the same answer for something like Eurofresh and Lexicon?

Patrick Dalton

Yeah, Lexicon is valued at zero. Certainly, we've taken an appropriate evaluation on that. It takes time to exit so many situations, should we choose to exit those situations. So Lexicon is a bit of a different animal given where it's carried and some of the processes that that company is going through. On Eurofresh, as publicly disclosed, they've made their interest payment. This company makes on the wine tomatoes. It has benefited significantly by the salmonella which affected the grown tomatoes that come out of the ground. Pricing is up; the company is doing a very good job of getting through some of its issues; we are encouraged by that. And again we would now look to sell an asset for a value that we think we will ultimately get a higher value.

Jon Arfstrom - RBC Capital Markets

Okay. And then just a question on primary versus secondary market. As we roll through this credit crunch, do you think that we are going to eventually see more primary market activity out of Apollo or do you think there's still enough in the secondary market for you guys to peck away and to have that be a big chunk of your origination?

Patrick Dalton

You know certainly -- you know, it's our view that there will be, with what's going on, taking a step back and seeing the risk profile of many institutions and other investors that provided mezzanine capital and seeing their vision being either much more diminished because what's going on, we certainly see a very active role for primary at some point in the future. What we do know from our past experiences, when it comes back, it will be a great vintage period from which to be a primary lender. What we don't know is where that's going to be in the fourth quarter this year or the second quarter next year. It always comes back; once you have a credit wash out like right now, the folks that had been the incremental providers of capital at non-economic terms, they go back to their core business and then it allows those who are really focused on the product like we are, and can write the significant commitment for the appropriate terms, we will get great terms and pricing. So for us to say it’s happening right now, we're seeing signs of it, only the best companies are getting access to market, and we are participating, but certainly for us to say its happening in massive size right now that its our primarily focus, it would be a bit too early, but it will come.

Jon Arfstrom - RBC Capital Markets

That's great. That’s helpful, thanks.

Operator

Thank you. Your next question is from Adrian Day with Adrian Day Asset Management.

Adrian Day - Adrian Day Asset Management

I am sorry, I try to withdraw; my question has been asked. Thank you.

Jim Zelter

Thank you.

Operator

Thank you. Your next question is from Sanjay Sakhrani with KBW.

Sanjay Sakhrani – KBW

Hi, guys. Just a quick follow-up. Patrick, you mentioned potential – there may be opportunities to kind of exit certain investments. Could you just talk about the visibility on that end? I know Prysmian is on restriction, I'm not sure kind of where we are with that as well?

Jim Zelter

I could talk about it broadly. Specifically, we have some confidentialities that we have to go through. I think when we look at -- given that a significant portion of our portfolio are coded securities that do trade in liquid markets, like a Yankee Candle or Associated Materials, we have the benefit to when we think that either it’s a better time to sell -- but we actually can get liquid. If you have a truly liquid portfolio, then you take a very significant haircut and/or you can't liquid at all. So those are always available on the debt side of the business; and on the equity of the business, it was announced that preferred securities of Exco were converted by the company to public stock. That’s an opportunity for us. GS Prysmian, we are obviously subject to a larger partnership group there controlled by Goldman Sachs Capital Partners, and we will tag along with them at the appropriate time. Now the company's performing well, so there's no rush.

Patrick Dalton

So John, I want to add one more point to Jim. What we have done also, as Patrick talked about earlier is, if we just think it's an asset has some mark-to-mark volatility to it, but we are convinced long-term of the -- getting paid back our original investment, we're agnostic to that. Where we do want to take proactive action is if we think that there is a fundamental change in the underlying risk metrics of a credit, and therefore we've heightened -- there's a heightened degree of potential impairment. Those we are not going to mark things down continually. If we have an exit, we will react proactively like we have done selectively in the past.

Sanjay Sakhrani – KBW

Okay. Fair enough. Thank you.

Operator

Thank you. Your next question is from John Stilmar of FBR.

John Stilmar - FBR

Hi guys. Just a quick follow up maybe going back to the sort of the competitive landscape. Obviously there's a tremendous amount of money in private equities still -- yet to be deployed, and there -- even there's still a decent amount in sort of the mass market. Can you talk to me about the psychology of the buyers or sponsors that you have out there, and sort of your view for, as we start seeing private equity start to become more meaningful part of this, sort of financial workout over the next several years, what is your long-term view over the next two years as sort of that capital being consolidated and your role and sort of where we are in the capital structure?

Jim Zelter

Let me take a shot at it first and Patrick will have some additional comment. You mentioned a lot of things that you've got; private equity on one side, you've got companies that are M&A valuations on the other, and then there's the litany of the capital structure from the senior debt to the mezzanine and obviously the equity, and it all has to work together. I think there's a general view up there, yes; there is a fair amount of private equity that's been raised, our target clientele have capital to which to invest. I think they would say to you that they don’t believe that a lot of prices have reflected some of the current cyclical concerns that they have, and also the ability to put together the appropriate capital structure, whether that's senior bank debt at the right leverage and the right terms and mezzanine, its an evolving opportunity.

And we are very bullish in the sense that when those pieces all align properly, that the mezz will be able to get a very, very well-structured return, as some of the private equity will as well, and most likely that new bank debt will reflect the risks as well. And so we look at it as an evolving opportunity; it will happen. I mean certainly, bottom line is, we do not -- there were many, many providers of the large institutions that were underwriting the incomplete capital structure for smaller and smaller companies. We believe that those institutions will be much more reticent about doing so going forward, and that really is the opportunity for ourselves and a few select under -- other mezzanine investors.

Patrick Dalton

Yeah, I would just add to Jim’s comments. We, we've canvassed and spoken to our all of our sponsor relationships and they are in their mind open for business. I think they are looking for high quality companies. Gaining the certainty that they need in the capital structure is a little challenged on the senior side. I think coming to a partner like us, (Inaudible) which is an investment did close this week. We are fortunate to have a partnership with Lehman Brothers Merchant Banking, where they went the [ABL] route – (Inaudible) is lending where I am senior to get certainty on the capital structure, and what we believe is very attractive defensive company, certainty was very important. So you don’t need a lot of those transactions to put some growth on your portfolio – its going to be very selective, and they got to be good companies or good sponsors, and our sponsors have capital, and they are looking for good properties at attractive valuations.

John Stilmar - FBR

Perfect. Thanks guys.

Patrick Dalton

Thanks Jon.

Operator

Thank you. Your next question is from [Lee Author with Hammock Investors]. Please go ahead.

Lee Author - Hammock Investors

Good morning. Thanks. Most of my questions have been answered, but going back a little bit on Innkeepers, are you allowed to buy back the preferred on that? And have you thought about that as -- considering the discount?

Jim Zelter

We have the flexibility to do that. Should we choose to right now, we think it's, you know, not something that we are actively pursuing.

Lee Author with Hammock Investors

Fine. Thank you.

Jim Zelter

Thank you.

Operator

Thank you. That does conclude our question-and-answer session. I would like to hand the floor over to Mr. Jim Zelter for any closing remarks.

Jim Zelter

Well, this -- and certainly from my partners and all the partners and employees at Apollo Investment Corporation, we want to thank everybody for participating today. We take this role very, very seriously and we are very encouraged by the participation today in our call and look forward to a continued dialogue and your support. Thank you very much.

Patrick Dalton

Thank you.

Operator

Thank you. That does conclude today's Apollo Investment Corporation Conference Call. You may now disconnect your lines, and have a wonderful day.

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Source: Apollo Investment Corporation. F1Q09 (Qtr End 06/30/08) 2008 Earnings Call Transcript
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