Apollo Investment Exec Insights: Investment Footprint, Leverage
On Wednesday, Apollo Investment Corp (NASDAQ:AINV) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.
Arren Cyganovich – Evercore: If you could talk a little bit about the rotation out of the subordinated debt positions; in your release you talked about expanding your investment footprint. Can you talk about the footprint side of it, what does that mean exactly; geography, where you’re at in the capital stack, that kind of information would be helpful?
James C. Zelter – CEO: Sure. Well, geography is really focused really on the U.S. I’ll have Ted talk a little about some industries, but what we’re really trying to do is we have with the breadth of subordinated debt in our portfolio. Even though we have larger companies with large EBITDA, we are trying to, for the most part, take our attachment point where we start to have exposure to the leverage of the Company up higher in the capital structure. So, if your typical mezzanine or subordinated paper today was starting in the mid-4s going to the mid-6s, we’d like to bring that up higher in the capital structure, and I’ll pass along to Ted, but Aventine is a good example of that. So, we’re just – we think that the marketplace is going to remain choppy and the high-yield market world continue to open and close sporadically, but we really in terms of just taking our current portfolio trying to trade equal yield for a better risk-adjusted yield which is higher up the capital stack.
Edward J. Goldthorpe – President and Chief Investment Officer: I think just to echo Jim’s comments. I think the big (ramp up) in the high-yield market in the first quarter, I think our view is that subordinated debt, particularly to the secondary market, probably offered less attractive opportunities then moving up the capital structure. So, as just Jim alluded to, a big focus for us right now is focusing on companies – focusing on attachment points that are much higher in the capital structure; and number two is focusing on companies with more hard assets or hard collateral for us to (indiscernible) against.
Arren Cyganovich – Evercore: So, is this shift more of a longer term shift that you mentioned about getting lowering the sub-debt to about half of the portfolio over time? Is this a longer term view, or is this just in light of the current environment?
James C. Zelter – CEO: No, no. We’ve been pretty clear with a variety of the changes we made over the last quarter or so, which are broad. We’re even very clear about over time diversifying our portfolio away from the reliance on subordinated debt, and subordinated debt is going to play a big part as Ted mentioned. As Ted mentioned, we foresee it over the next 24 to 36 months playing – going from 85% of our portfolio to approximately around half of our portfolio and there’s many examples where you want to be an opportunistic investor in that space. Names like Univar, names like Altegrity, those are good situation where you can really price appropriate risk and as we’ve been consistent in saying that whether it’s what we’re doing with Madison, what we’re doing in the energy space, trying to have a greater exposure to senior secured credit or a greater exposure to collateralized or enterprise loans that have a higher attachment point; that’s a strategy that we want to have a consistent message, not only last quarter and this quarter but I would just say in the next eight to 10 quarters you should expect that to be part of our continued effort to give you examples of how we’ve been able to express that in the portfolio.
Richard Shane – JPMorgan Chase: What’s going on here is a portfolio rotation is the way you’re describing it and that totally makes sense. On a practical basis what that means is you were both a buyer and a seller in the market, and we saw that in the first quarter. And I think it’s interesting and noteworthy that in the first quarter when spreads were tight and it was an attractive time to be a seller for both the fundamental and technical reasons that you described, you were effectively net sellers into the market, and you were net sellers of about $200 million. And I apologize for this long prelude to the question. Being in a position where you were both a buyer and seller there’s always this timing differential, which is that there are going to be periods where it’s more attractive to be a seller and that’s going to reduce your interest income and create – delever the balance sheet and then there are going to be periods where you can build that back up. What do you think when you look at this is the Company’s tolerance? I mean is $200 million plus or minus net on a quarterly basis a rough place of where you will be? Now we are in a market where spreads wind back out a little bit and I think you’ve – from an investment perspective described it as a little bit more attractive. You’re now within a leverage limit that makes sense. Should we be looking in environments where spreads are wider, you might reduce exposure $200 million a quarter and carry that drag and then in periods where spreads tighten or widen back out add a $200 million a quarter?
Edward J. Goldthorpe – President and Chief Investment Officer: I think, I mean to answer your question, I think right now we feel great about how we’re positioned. We took our leverage down quite a bit this quarter. With Apollo putting money and it takes our leverage down even more. I think we’re able to still (adhere our) NII targets. So from our perspective I think we’re very well positioned and so we’re going to continue to opportunistically look to sell low yielding investments on our portfolio or things we don’t like the risk reward of. And quite frankly over the last couple weeks it’s become a little bit more of a buyer’s market out there and so we’re opportunistically looking to add stuff where we see appropriate.
James C. Zelter – CEO: I think you are honing in on a really accurate assessment of what we’re trying to do. If we can in a quarter like this last quarter get our leverage down, make our NII, but sell $200 million of what we think our assets that don’t hit our hurdle, if you would, that’s a great quarter for us. So as Ted said, we’re really happy, but yes we’re not trying to become market timers by any means, but certainly we want to use the permanence of our capital and our leverage as an advantage, not as a disadvantage, and we’ve talked in the past about going from 0.5 to 0.65. It’s now where we’ve essentially delevered the book a little bit or it can be playing offence. But I think your number is probably a good number. Do I see this doing more than 200 or 300 on a net basis where we’re going to be selling? The numbers get more challenging if we really have our objectives of NII. So, I think we really hit a sweet spot there in the first quarter, and certainly there are things that when we think about prepayments, and Ted alluded to it, I don’t suspect that we’re going to be on pace of having a prepayment anywhere near we had in 2011 or this past fiscal year. I believe when we run some numbers that we’re going to be a much, much smaller number to that. So, you’ve honed it out exactly we’re trying to do, and that’s – if we can maintain that with a little bit of a balanced market, and if we can’t, we’ll be a better buyer.
Richard Shane – JPMorgan Chase: Then just one quick housekeeping question, I scanned through the K, and I didn’t see the recent developments or recent development section. Is the way we should look at the $50 million offering or $50 million investment now take the $50 million divided by 8.55 which is now the stated NAV for the quarter and that’s the number of shares that we should be adding in?
James C. Zelter – CEO: That’s correct, yeah.
Eileen Patrick – EVP of Corporate Strategy: That’s correct.
Richard Shane – JPMorgan Chase: And there are no other costs, no other noise with that?
James C. Zelter – CEO: That’s correct.