Apollo Investment (AINV) CEO Tanner Powell on Q1 2023 Results - Earnings Call Transcript

Apollo Investment (AINV) Q1 2023 Earnings Conference Call August 2, 2022 8:00 AM ET

Company Participants

Elizabeth Besen - Investor Relations Manager

Howard Widra - Executive Chairman

Tanner Powell - Chief Executive Officer

Greg Hunt - Chief Financial Officer

Conference Call Participants

Kenneth Lee - RBC Capital

Kyle Joseph - Jefferies

Melissa Wedel - JPMorgan

Ryan Lynch - KBW

Robert Dodd - Raymond James

Derek Hewett - Bank of America

Finian O'Shea - Wells Fargo

Operator

Good morning, and welcome to the Earnings Conference Call for the period ended June 30, 2022, for Apollo Investment Corporation. [Operator Instructions] I will now turn the call over to Elizabeth Besen, Investor Relations Manager for Apollo Investment Corporation.

Elizabeth Besen

Thank you, operator, and thank you, everyone, for joining us today. Speaking on today's call are Howard Widra, Executive Chairman, Tanner Powell, Chief Executive Officer, and Greg Hunt, Chief Financial Officer. Few members of the management team are on the call and available for the Q&A portion of today's call.

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. You should refer to our most recent filings with the SEC for risks that apply to our business and that may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law.

To obtain copies of our SEC filings, please visit our website at www.apolloic.com. In connection with today's announcement, we will be launching a new website next week, which you will be able to find at www.midcapfinancialic.com. The two presentations on our website, our standard quarterly supplemental financial information package and a second presentation, which details today's announcement.

At this time, I'd like to turn the call over to our Executive Chairman, Howard Widra.

Howard Widra

Thanks, Elizabeth. Good morning, everyone. Earlier today, we issued press releases, our quarterly earnings press release and a second press release, which details several important strategic announcements, which we believe greatly value for our shareholders. Following my review of each of these announcements, I'll provide an overview of our results and discuss today's distribution announcement and discuss the market environment, review our investment activity and provide an update on the portfolio. Lastly, Greg will review our financial results in detail. We'll then open the call to questions.

Let me begin with today's announcement, which underscore Apollo Global management's commitment to investor alignment, product innovation and being at the forefront of the democratization of finance. These announcements reinforce the BDC's position as a secure play, senior secured middle-market BDC providing public shareholder access to institutional quality private credit at a best-in-class fee structure, among with the BDCs.

The BDCs will continue to invest almost exclusively in senior secured loans sourced by MidCap Financial, one of the world's leading middle market lenders. As you know, over the last several years, we have shifted the BDCs - going to first lien corporate loans primarily sourced by MidCap Financial and away from junior capital and non-core positions.

At the end of June, investments made pursuant to our co-investment order, which are primarily loans originated by MidCap Financial, represented approximately 85% of our corporate lending portfolio at fair value.

Let me take a minute to remind everyone about MidCap Financial which I cofounded in 2008. MidCap Financial was privately held by institutional investors and managed by Apollo Global. Over the last 12 months through the end of June, MidCap Financial originated over $21 billion in new commitments, including $4.7 billion in the June quarter. MidCap is headquartered in Bethesda, Maryland, has 12 offices globally with approximately 250 employees. MidCap is lead by an experienced senior management team that has worked together over 20 years and with 27 years of average industry experience.

The BDC is fortunate in unique position to have access to loans sourced by MidCap Financial, given the strategic relationship between MidCap Financial and Apollo Global. Historically, MidCap Financial and Apollo as its manager, have predominantly originated assets on behalf of the U.S. than other global institutional investors.

To support new security strategy, our Board and advisers have established what we can do to be the industry-leading structure among listed BDCs. The new fee structure reduced fees by approximately 50% to the lowest rate among listed BDCs.

In addition, the risen fee will now be calculated on that instead of assets, which provides a greater alignment and focus on net asset value. The new fee structure reduces the BDC's cost of capital, thereby expanding the universe of MidCap originated loans that will meet the BDCs well required asset yield.

MidCap Financial origination significant amount of senior first lien loans that were previously below BDC's target yield, which will now make sense for the BDC, given its lower cost of capital. Specifically, the BDC's base management fee has been permanently reduced to 1.5% on equity, down from the equivalent of approximately 3.4% on equity. In other words, the base management fee expressed in terms of gross to assets has been reduced approximately 1.4% on assets which is equivalent to approximately 75 basis points on assets. The incentive fee on income has also been permanently reduced from 20% to 17.5%.

The performance threshold remains 7%, and there is no change to the total return requirement or catch-up provision. The incentive fee on capital gains has also been permanently reduced from 20% to 17.5%. The changes to the fee structure will be best effective for the period beginning January 1, 2023.

Moving on, we're pleased to announce that MidCap Financial has made a $30 million Primary Aligning Equity investment in the BDC at net asset value, representing a significant premium to the current trading price. The BDC will issue approximately 1.93 million shares in connection with this transaction, which will be subject to a minimum 2-year hold period.

This investment serves to first validate the value of BDC senior investment strategy; second, provide the BDC [Technical Difficulty] loans sourced by MidCap Financial and third, create a strong alignment of interest at MiDCap Financial and the BDC's performance. Pro forma for this investment, MidCap Financial will own approximately 3% of the BDC's common stock.

In connection with today's changes, the BDC has elected to change its name from Apollo Incorporation to MidCap Financial Investment Corporation, which reflects fees investment strategy of primarily investing in loans originated by MidCap Financial. For the sake of clarity, Apollo Global will continue to manage both MidCap Financial and the BDC.

Throughout today's call in order to avoid confusion we will refer to the BDC as either the BDC or as MFIC and we will use MidCap Financial to refer the letter - the lender headquartered in Bethesda. The BDC's ticker will be changing to MFIC and particular changes will be effective on or around August 12.

Moving on new leadership promotions. I'm pleased to announce that Tanner Powell, who has served as President of the BDC since 2018 has been promoted as Chief Executive Officer, in my place in that role. I've been named Executive Chairman of the Board, John Hannan, who has served as Chairman since 2006 will now serve as Vice Chairman. I will continue to serve as Apollo's Global Head of Direct Origination and remain involved in the day-to-day management of MFIC. Ted McNulty, who was a Managing Director in Apollo's Direct Origination business has been promoted to President of the BDC and Chief Investment Officer for our investment adviser. Ted brings a well experience and expertise to the role. He joined Apollo in 2014 and over the last several years has been instrumental in the successful monetization of the BDC's legacy assets.

Last but not least, Kristin Hester, who has been a senior member of our legal team since 2015 has been promoted to Chief Legal Officer. Joe Glatt, who served as BDCs Office – Chief Legal Officer since 2007 [ph] was promoted to a new role as a partner in Apollo's United States Financial Institution. These promotions recognize the value – the valuable contribution is made by Tanner or Ted and Kristin over the years. We are very excited about today's announcements, which will allow us to capitalize on the benefit of MidCap Financial leading middle market around the platform and which we expect will generate attractive risk-adjusted returns for shareholders.

Next, moving to a summary of our results, net investment for the June quarter was 37,000, which reflects lower fee and prepayment income, partially offset by recurring interest income. Results also reflect a higher incentive fee compared to the prior quarter.

We recorded a net loss of $17.8 million or $0.28 per share on the portfolio during the quarter. We ended the quarter with net asset share of $15.52, down 27% or 1.7% quarter-over-quarter. We repurchased some stock during the period below [Technical Difficulty] at $0.01 accretive impact.

Now switch our focus to our distribution. Given the progress we have made to rebuild the portfolio, combined with the - combined with the forthcoming reduction in our fee structure, we are raising our quarterly base dividend from $0.31 to $0.32 per share payable to shareholders of record as of September 20, 2022. We believe this dividend level is appropriate at this time. Future supplemental distributions will be declared as appropriate.

With that, I'll turn the call over Tanner Powell to discuss the market environment and our investment activity.

Tanner Powell

Thanks, Howard. Beginning with the market environment, the public credit markets continue to experience volatility during the quarter, as elevated inflation, rising interest rates, concerns about a possible recession, supply chain issues and geopolitical uncertainty weigh heavily on market sentiment.

Negative fund flows contributed to the volatility in the liquid loan market. Credit fundamentals, however, have remained relatively stable as leveraged loan default rates continue to hover near historical lows. Against this uncertain macro backdrop, we saw a reduced level of M&A activity. This type of broader market environment can benefit providers to private credit who offer borrowers fully underwritten solutions at agreed upon pricing and terms with certain execution irrespective of broader market conditions.

Moving to investment activity, MidCap Financial, which as Howard mentioned, sources investments for the BDC, it was very active during the June quarter with $4.7 billion of new originations.

For the BDC, new corporate lending commitments totaled $195 million across 18 companies for an average new commitment of $10.8 million. New commitments made the quarter by product were $100 million in leveraged lending, approximately $80 million in life science lending and the remaining $15 million in lender finance.

All new commitments were first lien floating rate loans with a weighted average spread of 622 basis points and a weighted average net leverage of 4.9 times. 97% of new commitments were made pursuant to our co-investment order.

Excluding revolvers, gross fundings for the quarter totaled $165 million, and sales and repayments totaled $121. Net revolver repayments were $1 million. In aggregate, net fundings for the quarter totaled $43 million.

We ended the quarter with net leverage at the high end of our target range given our visibility in the paydowns post quarter end. Net leverage at the end of June was 1.58 times. Adjusting for net paydowns post quarter end, including a $15 million cash paydown from Merck's and including the impact of the $30 million investment from MidCap Financial, which is expected to close in the next week, net leverage is currently approximately 1.45 times.

As discussed on our last conference call, we intend to accelerate the reduction of our investment in Merck's by selling aircraft and deemphasizing its servicing business. As you know, Merck is a successful global aircraft leasing management and finance company established in 2012 and led by Gary Rothschild, Head of Aviation Finance for Apollo.

At the end of June, AINV's investment in Merck's had a fair value of $284 million, representing 11% of the total portfolio. During the June quarter, Merck's sold three aircraft, reducing the number of planes in the fleet from 65 to 62. We expect our investment in Merck's, as well as the income we received from Merck's to decline each quarter going forward.

At the end of June, two additional aircraft were under a purchase agreement, including the freighter in the fleet, which was sold in early July. Despite the uncertain macroeconomic environment, there are no signs of a slowdown in daily global flight activity, and we feel constructive about our plans to sell the planes owned by Merck's.

Turning to the overall portfolio. our investment portfolio had a fair value of $2.55 billion at the end of June across 140 companies in 27 industries. Corporate lending and other represent 80% of the portfolio and Merck's represented 11% of the portfolio.

94% of the corporate lending portfolio was first lien. The weighted average spread on corporate loan was 611 basis points as of the end of June. Our portfolio companies generally continued to experience strong fundamental performance, while from the impact of inflation, we believe our companies are generally able to pass through most, although not all of higher input costs they are seeing. Our portfolio is generally weighted towards industries that are less impacted by inflation and supply chain issues.

Moving to credit quality. Our credit metrics remain very favorable. At the end of June, the weighted average net leverage of our corporate lending portfolio was 5.45 times, a slight increase quarter-over-quarter, repayment of lower assets and the impact of funding delayed draw term loans.

The weighted average attachment point was 0.2 times, and the weighted average net leverage - weighted average interest coverage ratio was 2.8 times. No investments were placed on non-accrual status during the quarter and our investment in - oil and gas was restored to accrual status and also repaid $4.5 million to the BDC during the quarter.

Glacier continues to generate strong cash flow to support the small loan balance which is now at $4 million. At the end of June, investments on non-accrual status totaled $9 million or 0.3% of total portfolio at fair value.

With that, I will turn the call over to Greg to discuss our financial results in detail.

Greg Hunt

Thank you, Tanner, and good morning, everyone. Beginning with AINV statement of operations. Total investment income was $53.4 million for the quarter, down 2.4% quarter-over-quarter. Recurring interest income rose due to the impact of higher base rates, along with returning Glacier oil to accrual status.

Prepayment income was $1.9 million, down from $3.8 million last quarter due to lower quarterly prepayments. Correspondingly, fee income was approximately $500,000, down from $1.3 million last quarter. Dividend income was flat for the quarter.

The weighted average yield at cost on our corporate lending portfolio was 8% at the end of June, up from 7.7% at the end of March. The increase in the yield was primarily due to higher base rates, as weighted average spread on the portfolio remained at 611 basis points.

Net expenses for the quarter totaled $29.9 million, up $2.1 million quarter-over-quarter, primarily due to higher interest expense related to our credit facility which bears a floating rate interest - floating interest rate.

As a reminder, AINV's incentive fee on income includes a total return hurdle with a rolling 12-month look back. Given the net loss of $17.8 million for the quarter, incentive fees totaled $1.4 million, up slightly from last quarter. Net investment income was $0.37.

During the quarter, we recorded a net loss of $17.8 million or &0.28 per share portfolio. The vast majority of our corporate lending portfolio is valued using a yield approach. Changes in market spreads are incorporated into the quarterly valuation of our investments in addition to other factors.

On Page 16, in the earnings supplement, we disclosed a net gain or loss by over the past five quarters. NAV per share at the end of June was [Technical Difficulty] decrease quarter-over-quarter. The decrease was primarily attributable to the net loss on the portfolio, partially offset by $0.01 from fee income relative [Technical Difficulty]

We were pleased that [Technical Difficulty] outlook in July. Our liquidity position remains with undrawn revolver capacity, well in excess of unfunded commitments to borrowers. Consistent with our historical cadence, we expect to amend our revolving credit facility in the third quarter [ph]

We are well positioned to benefit from rising interest rates, based on quarter end rates, we estimate that 100 basis points and a 200 basis point increase in reference rate to result in annual incremental earnings of approximately $0.02 [ph] $0.25 respectfully.

Regarding stock buybacks, during the quarter, AINV repurchased approximately $1.6 million of stock, which leaves $29.2 million of available under our authorization for future stock repurchases.

This concludes our remarks, operator. And please open up the call to questions.

Question-and-Answer Session

[Operator Instructions] Our first question from Kenneth Lee with RBC Capital. Go ahead. Your line is open.

Q - Kenneth Lee

Hi, good morning. Thank you for taking my question. In terms of the announcement on the strategic initiatives [ph] as well as potentially shifting investment strategy. What are your expectations for future ROE or expected targeted returns based on what you seek for secured loan investments? Thanks.

Tanner Powell

Yeah. So first, I'd say like, it's not really a shifted investment, it's really sort of a demarcation point where we think the investment strategy is the - really the story going forward as we exit out of non-core and sort of moving away from Merck's. So I mean that’s just is the same. It's just - there's a broader set of loans that may meet our criteria.

The ROE, I would say, if you just took an apples-to-apples approach and said the fees and everything else stays neutral, you'd have an increase in ROE of like 2%. So as you assume some reduction in yield and some reduction in leverage from where we were now, you're talking about an increase of the ROE from the low 8s to the low 9s, 10% increase in ROE, sort of like as a base case.

Obviously, there's moving parts right now, including rising interest rates, which should raise every thing- but just post-apple-to-apple basis, it should be around a 10% increase in the ROE.

Kenneth Lee

Got you. Got you. Very helpful there. And one follow-up, if I may. You talked about having some visibility in terms – in your paydowns. Just wondering if you could just give a little detail behind that? Thanks.

Tanner Powell

Yeah. I think - Kenneth, thanks for question. I would point to the guidance we give in terms of the you know, approximately 145 [ph] leverage. We have a number of things slipped. And then also, as we alluded to, knowledge of the strategic investment, aligning equity investment being made were a little bit higher at the end of the quarter. But used that 145 million as guidance there.

Kenneth Lee

Great. Very helpful. Thanks, again.

Operator

And our next question is from Kyle Joseph with Jefferies. Please go ahead. Your line is open.

Kyle Joseph

Hey, good morning. Thanks for taking my questions. A lot going on, so apologies if I asked anything you guys said it [ph] Just that I'm focusing on repayment activity. Obviously, that came down, impacted fee income. Can you give us a sense and I know you talked about near-term repayments there, but just for the kind of the remainder of the year, is that really a function of - volatility, recognizing those go hand in hand? And would you expect repayment activity to be kind of muted given the macro backdrop going forward?

Tanner Powell

Yes. I think you said it, at the end there, Kyle, is objectively M&A volume - activity is down and that certainly affects us in terms of level of repayments. And so all things being equal, I would expect more muted activity in the back half of the year, absent some of the prepayments that we alluded in our prepared remarks.

Kyle Joseph

Got it. And obviously, credit remains down right now. What's the outlook here in terms of with inflation? How are some of these adapting to rising rates? And kind of what are - what expectations for credit remainder and then more broadly into ’23?

Greg Hunt

Sure. As we never to do in every quarter, we look at all our portfolio - sorry, both at MFIC and MidCap more broadly and in the most recent quarter, when we take a [Technical Difficulty] roughly 90 companies that we have in our leveraged loan book, it was showing us high - sorry, low digit revenue growth and kind of mid-single-digit EBITDA growth, indicating what we saw in the last quarter as well, supply change challenges and labor cost and resin costs going up have affected our companies.

We would know in a lot of cases, there's a lag to recover. And then also the data, Kyle, as you know, relates more to the March quarter. And so we expect those challenges to continue.

That said, in aggregate, do feel in terms of our underwriting, our detachment on where we're financing these companies and the equity cushion that we have from the sponsor behind us that the credit will hold up and that we rated the credit risk at a good place to weather any continued or more pronounced volatility going forward.

Kyle Joseph

Got it. Thanks very much for answering my questions.

Operator

And we'll take our next question from Melissa Wedel with JPMorgan. Please go ahead. Your line is open.

Melissa Wedel

Thank you. Appreciate you taking my questions today. A few of them have already been asked, but I was hoping that we walk through more perhaps on how you thinking about leverage in the current environment, an increasing shift, you know, the first lien strategy might have a bit of a lower yield. It sounds like you're not in target range on leverage.

But I'm wondering if I guess, one is I think that the case. And then two, do you have - is there any shift in your thinking around where you'd like to run within that range in the current environment and more alignment with the MidCap strategy?

Howard Widra

Yeah. Look, I mean - so a couple of things. Like - our leverage, as we talked about, sort of, I think, on the - repeatedly over the last few years, we felt like it was not particularly as aggressive as proceeds, sort of like the first lien focus of our book and then the attachment point and obviously, we expect to even go further in that direction, given our cost of capital.

That said, I think feedback we've gone from all the constituencies is that, that is not you know, is sort of not a complete agreement with that. And so I think you know, whether we’re moving our range or not, I would say, either you can look at it as moving our range down some or expecting to operate like in the 135 to 15 range as opposed to what we articulated before is 14 to 16.

And so our expectation is to operate around that 1.4, 1.45 range, which is Tanner said before. So I would say that we are leaning towards lower, even though the profile of our book will get more conservative. And look, we've made a lot of changes here with a goal towards this being a - hopefully, a relatively unique investment for individual investments available among the BDCs.

And one of the keys to that, obviously, is to have a structure that all the constituencies feel really strongly about. And so we're focused on all parts of that and the reduction in the fees gives us a lot of room to be able to do that.

Tanner Powell

Yeah. And the other point in emphasis there would be that with our new cost structure, which is on our management fees on equity, we think that also enhances the alignment. But Howard's about taking the feedback from all constituencies are well understood and then also go to our thinking as we approach leverage going forward.

Melissa Wedel

Okay. I appreciate that. Thank you. And I guess as a follow-up, it would be helpful to understand if there's any real change in the way that your team will interact or engage with the MidCap, could we dig a little bit deeper there. Is this just additionally leveraging or opportunities from that platform? Or are there some sort of inside baseball changes in terms of the team vetting, selection and things like that?

Howard Widra

No, no inside baseball changes to the way things will operate. And just to sort of understand how it operates. Apollo is the manager of MidCap and is the manager of MFIC? And I am the primary portfolio manager for MidCap and happen, since really sort of since inception and Tanner is effectively the primary portfolio manager for AINV [indiscernible] and will continue to be.

Obviously, like Ted will take a larger broader role, but he's already had a pretty important and broad role before. And the only inside baseball sort of there is as Tanner move to Bethesda about 18 months ago, 12 months ago, 18 months ago. And so is you know, day-to-day connection to everything we do at MidCap has been more since then, but that has nothing to do with these changes.

Melissa Wedel

Thanks, Howard.

Operator

We'll go next to Ryan Lynch with KBW. Please go ahead. Your line is open.

Ryan Lynch

Hey, good morning. The first question I had was, I just like to hear because I know you work closely with MidCap in the past. I would just want to hear kind of ballpark of what percentage of deals historically at AINV could participate in kind of the MidCap deal flow because I knew there were some lower loans that would necessarily fit into AINV. What sort of deal flow percentage rough ballpark could you guys participate in historically with MidCap. And then with the new structure, what sort of change to expect from more access from deals from MidCap?

Howard Widra

Well, so generally, overall, like MidCap originates to a variety of assets, some of which are still fit BDC mandate anyway like real estate. So a percentage of the overall MidCap deals. But so let me just sort of narrow if you had a little bit and say the percentage of deals related to the product which is a lot of products that have originated. That said, [Technical Difficulty] on asset-based lending. And effectively, and there's in the ballpark of 100 or 120 deals a year that closed in those categories.

And so we can slice it in a bunch of about double the amount of deals available in those categories that are sort of now available. And so really, almost everything they kept out in those categories on the ones that don't end up being sort of relevant or the smaller ones because there's some asset-based loans that are too cheap, but part just smaller deals once they're divided out the allocations based on sort of the size of the relative balance sheet is small that it doesn't make sense from what could cost valuation of that perspective. But its the vast majority of what kept down in those categories.

Ryan Lynch

Okay. That's helpful. And then what are you thinking in terms of - I don't know if the best way to think about it is yield or spread because obviously your rate has been accelerating higher. But is there a meaningful change of what you guys are expecting or willing to put on the books going forward or when this new fee structure goes into effect from spread point versus what you've done historically [Technical Difficulty] new loans that you have done historically. So I’d just love to hear if there is - what sort of changes we should expect from that standpoint?

Howard Widra

So as we started first penciling this out, I guess what I would say is - and I'll caveat this afterwards is that you know, having the overall spread go down about 35 basis points, what is got meaning like from [indiscernible] or something like that would have basically split the difference between the shareholders and the lower spread and that seems to make sense. And so that's average spend on the portfolio.

That said, we don't expect that to happen right now because spreads are widening a lot. So forget the base rate going up, that's a separate issue. That's widening. And if we go into a recession or even like a contraction, we would expect rates to continue to worse - continue to be higher, especially because there'll be more asset-based loans with higher yields and we'll have an opportunity to grow that category.

So I think right now, what we would say is we expect spreads to stay pretty stable, meaning the increase in spreads in the market will be offset – like our reduction, but we originally been comfortable with about thinking that the book would sort of average down 25, 35 basis points.

Ryan Lynch

So it could have wind down 25, 35 basis points, which is where spreads are going, that probably won't happen in the year?

Howard Widra

Right.

Ryan Lynch

And then just lastly, it doesn't sound like this change as much logical or maybe MidCap’s position actually to metal market has then or really grow base would be participating in that marketplace. Obviously, broader [indiscernible] solutions, which participated in that area a lot.

Does this change of the decrease your willingness to participate in that upper middle market space and co-invest with like power debt solutions? Or is that something that we don't expect to change. Is that something that MidCap is not really interested in?

Howard Widra

No, I don't think you'll see a change, I mean I think there is overlap synergy, something, whatever you want to call in deals between $50 million and $125 million of cash flow. The origination with sponsored track channel is combined between sort of Apollo's focus on the very largest sponsors and sort of the big team on almost all the rest of the sponsors.

And so the execution in the middle of those ranges depending on sponsors. We know there can be shared underwriting. There's certainly the option for each PDC to participate in the deal that the others might do. So for example, at ADS, if there is a company with $70 million of EBITDA on the deal is 5 times, that's a $350 million deal, and that's being done by MidCap and AINV and a bunch of our managed accounts. There's a very good chance ADS will be part of that.

By the same token, if there is - so we have a strong relationship with, especially if it came to our channel, and it's got $100 million, six times, I don't know, say, $750 million deal that is more core to ADS strategy, we could potentially do a portion of that in AINV as well. But we will tend not to not for any reason other than it's not sort of core strategy.

Actually, I'll say there are always loans very many that grow, that are capping AINV then grow to this bigger and refi, they always can grow with the company as well because those are sort of profitable and sort of generally, you know the credit.

So nothing is changed, you know communication and sort of overlap, the brands overlap. But from that part that will be separate. And I think you'll see - I'm totally making this up scope [ph], but 10% overlap of assets.

Ryan Lynch

Okay. All right. I appreciate you taking my questions and also very much appreciate the reduction in fees and the overall just federal line with shareholders to execute this track.

Howard Widra

Thanks.

Operator

The next question of Robert Dodd with Raymond James. Please go ahead. Your line is open.

Robert Dodd

Hi. Thanks and good morning. And Ryan just asked most of my question. So I do have another one. The dividend program, you did obviously base dividend this quarter. Looking at expanding ROE hope you are already covering the base dividend, I think you're going to have it certainly. Can you give us any color? Obviously, no sub prepared this quarter, you said the 32-ish is appropriate at this new fee structure back until January. But any color on what the plan would be with any excess earnings of the dividend under fee stock you had kind of previously the supplemental program, is that likely to be reinstituted or any color there?

Howard Widra

Yes. So previously, we had said we will declare a supplement, pretty much equal to the amount of our base dividend each quarter. With these changes, as well as the interest rate changes, we [Technical Difficulty] overall dividend and real over time, I think over time, we - as Merck’s plays through and these changes until we have the ability and to raise dividend over time and that’s our goal to continually do that.

And we also think there will substantial evidence, whether they're declared once a year and paid over 4 quarters or declared over each quarter will sort of depend on both our - where our spillover is in which we have a substantial amount right now and where the earnings were.

So the answer really is, yes, we expect there to be meaningful supplemental dividends paid because there's - we're covering - we're not going to pay the excise taxes. We're going to distribute to stay in compliance. So you're right, there's quite a bit of room, but we just - effectively, what we did is we raised the base dividend and we got rid sort of our standing promise that we will distribute at least $0.05 of supplemental each quarter. But if you look at our earnings power, where we have substantially more than that once that these chances kick in.

Robert Dodd

Got it. Thank you. Thank you.

Operator

[Operator Instructions] And we'll go next to Derek Hewett with Bank of America. Please go ahead. Your line is open.

Derek Hewett

Thank you. Congratulations on the promotions and the enhanced shareholder alignment. My question revolves around credit. So based on the forward curve, and kind of given the comments on the overall - and I think you had mentioned the MidCap portfolio EBITDA growth. Could you comment on interest coverage and how high benchmark rate would need to rise before debt service coverage, I guess, where interest coverage would trend closer to one time versus 2.8 times today?

Greg Hunt

Yes. Sure. I might need to follow up with the specifics. But as we said in our prepared remarks, we're at 2.8 times. And then that cash when we run through our portfolio companies, we're actually using actual interest expense historically. And as you probably know, the LIBOR contracts you know, kind of - especially in a rising environment, rising rate environment like we've seen, they're in advance of the particular period.

And so right now, we're at 2.8 times, and that reflects kind of probably, on average, 3 months ago LIBOR, which was as opposed to the 28 that we see today, something more like sub-2 or kind of in the mid-1s. And it has to be in excess of 100, 100 basis points, but we can do that math and revert.

But a lot of cushion there, which is the good news. And one of the aspects of our more stretched senior strategy on the MidCap side is that on average, we are deploying into lower-levered enterprises and thus better equipped to deal with the increase in interest rates.

Derek Hewett

Okay. Thank you for that. And then just in terms of - I might have missed this earlier. But in terms of the portfolio, the BDC portfolio overlap, excluding Merck’s, what portion of the BDC portfolio was also kind of co-invested with MidCap?

Greg Hunt

97%, 98%.

Derek Hewett

Okay…

Howard Widra

Darn near 100.

Derek Hewett

Okay, great. Thank you.

Operator

And we'll take our next question from Finian O'Shea with Wells Fargo. Please go ahead.

Finian O'Shea

Hi, everyone. First, a follow-on to the earlier question, I think you said there's no changes on the inside. But can you bridge us to the sort of material concession that MidCap has made by investing at NAV, I think there are third-party investors there, right? So how do they look at it? Any color you could provide there?

Howard Widra

Sure. I mean, MidCap has an economic relationship with Apollo as its manager. And so as part – its part of that aligning investment, we take into account economic relationship with Apollo, which is sort of adjusted all the time. As an example, we have taken great pains to ensure that all origination that's done anywhere Apollo, including MidCap, AINV and you know, MFIC now gets full economics on those deals, despite the fact that there have been other BDCs that have kept profits as a manager.

The way that has been trued up before is that Apollo has paid for some of that origination, paid MidCap as the manager. right? It's like something that would be irrelevant effectively to the AINV shareholders other than they're getting full economics.

And so we are sort of the strategic and economic relationship with MidCap and Apollo as sort of broaden implicated and what - this is an important strategic investment for MidCap because the growth of AINV is really important to growing MidCap’s footprint and Apollo’s footprint across the whole middle market. And so our goal is really for AINV to grow. And so it's sort of like it makes sense strategically, but there's also lots of economics that are unrelated to this investment between the two parties.

Finian O'Shea

Great. That's really helpful. And then just expanding on some there I was going to ask about future growth potential and in the event this - and future better performance might drive you above net asset value. Can you talk about what your capital formation or raising plans would look like?

There are a lot of models out there on periodic secondaries, on private to public - or sorry yes, private to public and some keep their shareholder base is very - just sort of where you would fall on the spectrum, any sort of initial thoughts?

Howard Widra

Yes. I mean I think there - we think the opportunity to invest in assets of this quality is much larger than AINVs capital base right now. So we think that there is opportunity for people to drive good returns for the capital that would invest at NAV or well above NAV, meaning we're confident in our dividend and ability to sort of cover that well and grow it in a supplemental as we've talked about before.

Obviously, we're also conscious though of our current shareholder being able to sort of drive upside for them as well. The interesting thing is, for us, those things don't conflict right now. And that's because we still have a little bit of a drag on our earnings to sort of some of old assets and are still not generating interest income.

And so raising money at NAV or above NAV, spreads that out over a broader base, and it's itself - even to the existing shareholders. So the answer is we would expect to grow our capital, if we traded enough above NAV sort of to support that because we just think there's - the opportunities there. As you can see from the amount of origination coming through MidCap and now the amount of…

Finian O'Shea

Sure, very helpful. Thanks for taking the questions. And appreciate all the progressive moves you all made.

Operator

And the next question will come from Steve with Rider Investments [ph] Please go ahead.

Unidentified Analyst

Hi, thanks for the question. And congrats on the overall positioning resets. So two questions. First on leverage and second, kind of following up on that broad within the Apollo ecosystem and growth goals. is 1.35 to 1.5 versus 1.4 to 1.6, really just plotting errors [ph] given how MidCap leverage its own loan portfolio at a very - as of sort of level and one could argue maybe something at 1.75 to closer to 2 would be even comfortable given where the loan book is heading?

And then second, given the dependency you mentioned on trading at both NAV to raise equity capital, the best vehicle to [indiscernible] to third-party investors, given ADS, I think around $2 billion within 6 months in the non-traded REIT channel and -- how is though around that limitation have always trade at NAV to grow and align with AA yield through Apollo?

Howard Widra

So the first question with regard to bridge is that our discussion with regard to risk related to lever that 1.5, 1.6 times, 1.4, it is on splitting hairs. It's all based on within the AAA or AA of the CLOs of this pool of, loans if we see a loaded and right in MidCap levers higher. And so from a risk perspective, we always felt like that's very safe.

The issue is we can't lever more than two times under the BDC rules. And in fact, you have to have enough headroom because you can't control how sort of markets move and things get marked. And so that what we're talking about outside constituencies like the rating agencies and the analyst, investors are comfortable with more room.

So from that perspective, in splitting because our discussion is fine. We get - we agree, there has to be headroom. We believe we have less volatile assets, and we've also taken great pace to have a very diversified portfolio, like the concentration risk of those type of marks. So we can be at the high end of pain that people are comfortable with for BDCs. So moving that range down, I think, is meaningful, it shows that like we're - we want to be at the point where everybody is comfortable. So that's the first answer.

With regard to being the best vehicle, there's pros and cons of every vehicle. Private BDCs are - have liquidity but less. They raise money at the NAV as mark at each quarter with fees. They have different fee structures, which are better in some ways and not better than others.

And so this is, I would say, it's a [indiscernible] overall, the theme of democratization of finance and making the assets probable as broadly as possible. And these changes make this an investment, I think, for individual investors who want access to these type of assets. Given the pros and cons, the daily liquidity, it gives people another option, which is actually fairly good because you compare it to fees, but if you compare to investing in MidCap individual and invest in MidCap period. You visuals actually can then sort of either co-mingle the rest to take those assets. You need and need to be traditional.

The ability to get these assets at these fees is not terribly is to the fees that institutions are paying in those different structures. And so I think it actually is pretty meaningful. And I think if you look at Apollo overall and said, what's Apollo's focus over the next 5 to 10 years, it's to grow assets and grow assets, obviously, always assets want to grow assets, but grow assets in a way that allows on a set of people to access them. And this is a really sort of good way we think. So hopefully, that answers your question.

Unidentified Analyst

Yes, perfect. Thank you so much. And thanks for the good work.

Operator

And there are no further questions at this time. I’ll turn it over to the management for any closing remarks.

Howard Widra

Thanks. And thank you everybody, for listening to today's call. On behalf of the team, thank you for your time today. Feel free to reach out if you have any questions. Have a good day.

Operator

Thank you. And this does conclude today's call. Thank you for your participation. You may disconnect at any time.