Apollo Investment Corporation
Q3 2018 Earnings Call Transcript

Published: 7 Feb 2018

[Operator:]

Good morning. And welcome to Apollo Investment Corporation’s Earnings Conference Call for the period ended December 31, 2017. At this time, all participants have been placed in a listen-only mode. The call will be opened for a question-and-answer session following the speakers’ prepared remarks. [Operator Instructions] I will now turn the call over to Elizabeth Besen, Investor Relations Manager for Apollo Investment Corporation. Please go ahead.

[Elizabeth Besen:]

Thank you, operator. And thank you everyone for joining us today. Speaking on today’s call are Jim Zelter, Chief Executive Officer; Howard Widra, President; Tanner Powell, Chief Investment Officer and Greg Hunt, Chief Financial Officer. 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. Forward-looking statements involve risks and uncertainties, including, but not limited to, statements as to our future results, our business prospects and the prospects of our portfolio companies. You should refer to our registration statement and shareholder reports 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. I’d also like to remind everyone that we posted a supplemental financial information package on our webpage, which contains information about the portfolio as well as the Company’s financial performance. At this time, I’d like to turn the call over to Jim Zelter.

[Jim Zelter:]

Thank you, Elizabeth. Good morning, everyone. And thank you for joining us for our quarterly earnings conference call. I'll begin today's call by briefly discussing the environment, and how we are approaching this market; followed by an overview of our results as well as some additional business highlights. I'll then turn the call over to Howard, who'll discuss the progress we had made executing our strategy. Tanner will then cover our investment activity for the period and provide an update on credit quality. And finally, Greg will review our financial results in greater detail. We'll then open the call to various questions. Beginning with the environment, the private debt market remains extremely competitive for lenders. We continue to see issuer friendly conditions. And loosening of terms and general structures. The combination of our strong origination platform, broad product suite and sponsor relationships allow us to see a wide array of opportunities. We believe that given our size relative to our funnel of investment opportunities, we are able to find attractive opportunities in today's very competitive market. That said, we expect to only put capital to work if it makes sense for our shareholders in the long term. We remained focused on credit selection while patiently deploying capital. Next, moving on to an overview of results. During the quarter, we invested $198 million of which nearly half were investments made pursuant our co-investment order. Repayment activity was indeed strong. And net investment activity was a negative $6 million. Net leverage at the end of the quarter was 0.62x. Net investment income for the quarter was $0.16 per share. During the quarter, three separate events occurred which advanced our long-term strategic positioning. Our long-term earnings power and our book value stability but had a combined $0.09 loss per share. As a result, net asset value declined $0.12 to $6.60, or 1.8% decline. Excluding these three items, NAV per share declined to 0.5%. First, as mentioned in our last quarter's call, in mid October, we redeemed our 242 baby bonds and recognized $0.03 realized loss per share on the extinguishment of this debt. This redemption reduces our funding cost and has an approximate one year payback period. Second, given the reality in oil, there was $0.06 loss per share on our oil hedge, partially offset by $0.03 of unrealized gain per share on oil investment marks. As reminder, our oil hedges designed to protect us against the significant decline in the price of oil. The fair value of our hedge is based on quoted prices whereas the fair value of our oil investment is based underlying fundamentals. We believe that in a long term our hedges protected from downside of risk, while allowing us to participate in the upside of our investments. Third, we recognized a $0.04 unrealized loss per share on our investment in Solarplicity Group during the quarter. Subsequent to quarter end, we exited majority of our investment in Solarplicity Group, a non-core asset slightly below the fair value as of the end of the calendar quarter. Despite the loss, we are pleased with the exit, which we believe greatly enhances the quality of our portfolio as it reduces our PIK income, concentration risk and exposure to conditional or long-term non-core assets. Lastly, during the quarter, we continue to repurchase stock. And have continued to repurchase stock in the March quarter. Regarding the distribution, the Board approved a $0.15 distribution to shareholders of record as of March 27, 2018. In summary, despite the decline in NAV, we are pleased with the overall activity in the quarter. And believe that we have moved to the next stage of our repositioning, and we'll continue to focus on executing on our strategy, which we believe will yield stable and predictable returns for our shareholders in a long term. With those comments, I'll now turn the call over to Howard Widra.

[Howard Widra:]

Thanks, Jim. As Jim stated, we are pleased with our progress executing on our portfolio repositioning strategy. And we believe from a quantitative perspective, we are now more than halfway through our repositioning plan. More importantly, from a qualitative perspective, we have exited or sold the vast majority of non-core positions we were looking to exit, or we have hedged our exposure to those asset. We continue to deploy capital in our core strategies which include middle market corporate loans sponsor backed companies, sourced by Apollo direct origination platform, as well as opportunity in life sciences lending, asset based lending and minor finance. In addition, we continue to take advantage of our ability to co-invest with other funds and entities managed by Apollo. At the end of December, core asset excluding marks were approximately $1.3 billion with a weighted average yield of 10.5%. Since commencing our repositioning strategy in July 2016, we have funded approximately $1.08 billion into our core strategies excluding Merx, all floating rate with an average deal size of $16 million. The current weighted average yield of these core assets is 10.4%. All of these assets are accruing and none are on the watch lists. Coinvestment opportunities represent $511 million or nearly half of this amount. To give you a sense of the benefits we are seeing from scale and our ability to coinvest today, AINV has represented approximately 29% of total capital committed by Apollo and its affiliates to coinvestment transactions. As mentioned, we've made great progress in reducing our exposure to non-core and legacy assets. Pro forma for the exit of Solarplicity, non-core assets are approximately $416 million or 19% of the portfolio, down by $493 million from when commenced our repositioning strategy. Approximately 39% of the remaining non-core assets are two oil names which have improved in value significantly and have been hedged to reduce the volatility of their potential outcome. And approximately 27% are in shipping asset. Further, we continue to make steady progress to improve the overall risk profile of our portfolio by increasing our exposure to first lien and floating rate loan, and decreasing our average for our exposure. At the end of December, first lien debt had increased to 50% of the total portfolio. The floating rate portion of our corporate debt portfolio had increased to 92%, and our average borrower exposure decreased to $27.4 million, all at fair value. Pro forma for the exit of Solarplicity, our concentration risk will improve as our average borrower exposure will decline to approximately $26.1 million. With that I'll now turn the call over to Tanner who will discuss investment activity.

[Tanner Powell:]

Thanks Howard. In this competitive environment, we are focused on opportunities to capitalize on Apollo's scale and areas of expertise that can also take advantage of our ability to coinvest with other funds and entities managed by Apollo. During the quarter, we deployed $198 million in eight new portfolio companies and 12 existing companies. The weighted average yield of debt investment made was 9.9%. $94 million or approximately 48% of total deployment was in coinvestment across eight companies. Of the $94 million, we deployed $77 million in the corporate lending; $15 million into lender finance and the balance was in life sciences and asset base. Apart from coinvestment activity, we deployed capital into a few other proprietary transactions, as well as few syndicated transaction. Consistent with the broader market trend, repayment activity was elevated. During the quarter, Investment sold totaled $48 million and repayment totaled $157 million per total exit of $2.5 million. Debt investment activity before payment was $150 million and net activity after repayments was negative $6 million for the quarter. The weighted average yield on debt sales was 10.2%, and the weighted average yield on debt repayment was 10.2%. Sales for the quarter included our investment in two IV-held CLOs repayments included the full repayment of our investment in Appriss, Poseidon Merger, SunEdison, Velocity and a partial repayment of Teladoc, among others. We also received the partial payment on our investment in Craft 2014 reducing our exposure to structured credit and non-core assets. Turning to aircraft leasing, as of the end of December 2017, AINV investment in Merx was $407 million representing 17.3% of AINV's total portfolio compared to $429 million or 18.2% at the end of September at fair value. During the period, we deployed approximately $5.8 million into Merx, and we repaid $26 million resulting in a net repayment of $20.2 million. Merx's underlying portfolio continues to perform well. And team has been able to successfully monetize certain assets. Because of the strong performance, Merx paid $4 million dividend to AINV during the quarter compared to $2.25 million last quarter. Regarding our energy portfolio, at the end of December, oil and gas represented 7.4% of the portfolio at fair value or $173 million across three companies. During the quarter, we funded $2.3 million in Spotted Hawk, we continue to work closely with respected management team and we may deploy some additional capital into these names during the coming quarters to support accretive development project. Recall in the September quarter, we hedged our oil exposure by entering into 2 costless collars on WTI. We entered into a third and fourth costless collar in the December quarter. These hedges are designed to protect against a significant decline in the price of oil, more specifically AINV purchased put options with to strike price of $45 per barrel, and so call options with prices ranging from $54.30 to $62.75 per barrel. The options were structured so that the premium paid for the put options offset the premium received by selling call options producing the costless collar. If oil prices decline, the gain on our hedge should partially mitigate losses on our underlying investment. If oil prices rise, the loss on our hedge should offset as we partially -- should be offset at least partially by an increase in the net asset value of our underlying investment. Given the increase in oil, we recognize a loss of $12.7 million or $0.06 a share on these contracts during the quarter and unrealized gain of $6.8 million or $0.03 per share on our oil and gas investment marks. The value of the oil hedge is a function of current option prices while the value of underlying company is function of long-term oil curves and other items. As a result, the oil hedge only partially offset expected losses and gains in the portfolio despite the short-term mark mismatch; we believe that the hedge in place is designed to protect us against significant drop in the price of oil, while allowing us to participate in a long-term price realm. Now let me spend a few minutes discussing credit quality and the overall portfolio. During the quarter, our second lien debt investment in Elements Behavioral Health was priced on non-accrual status due to poor performance, and near-term liquidity shortfall. No other investments were placed on or removed from non-accrual status. At the end of December, investment on non-accrual status represented 1.5% of the portfolio at fair value and 2.4% at cost. The risk profile of our portfolio as measured by the weighted average leverage and interest coverage for portfolio companies was relatively unchanged compared to the prior quarter. The current weighted average net leverage of our investment remained at 5.5x. The current weighted interest coverage remained at 2.7x. With that, I'll now turn the call over to Greg who will discuss financial performance for the quarter.

[Greg Hunt:]

Thank you, Tanner. Our revenue for the quarter was $64.8 million, down slightly quarter-over-quarter due to a slightly lower recurring interest income, lower prepayment income and lower fee income, partially offset by higher dividend income. Recurring interest income declined primarily due to lower average portfolio and placing our investment in Elements on non-accrual. Dividend income increased quarter-over-quarter primarily due to a higher dividend level from Merx. We received a $4 million dividend from Merx compared to $2.25 million last quarter. Prepayment income was $2.89 million in the quarter compared to $4 million last quarter. Fee income was $1.5 million in the quarter compared to $2.6 million last quarter. Expenses for the December quarter totaled $30.9 million compared to $32.3 million in the September quarter. Expenses were down slightly quarter-over-quarter primarily due to lower interest expense. The incentive fee rate for the quarter was 15% and incentive fee also included a small reversal of previously accrued incentive related to PIK income from our Elements Securities. Net investment income was $34 million or $.16 per share for the quarter. This compares to $34.2 million or $0.16 per share for the September quarter. For the quarter, the net loss on a portfolio totaled $22.3 million compared to a net loss of $2.4 million for the September quarter. The oil and gas options contracts from our hedging strategy are measured at fair value. We recognized a $12.7 million or $0.06 per share loss on the contracts during the quarter. As mentioned, subsequent to quarter end, a significant portion of our first lien debt investment in Solarplicity group was repaid at a price slightly below the fair value as of December 31, 2017. The repayment reduced our exposure to Solarplicity group by partially $106.4 million based upon the fair value mark as of December 31st. And including estimated escrow amount, the retain portion of our investment in Solarplicity group is approximately $16.4 million. In addition, we still hold our investment in Solarplicity Group UK Holdings, which had a fair value at the end of the quarter of approximately $7.9 million. In mid-October, we redeemed $150 million of our 6.625% unsecured notes due in 2042. We recognize a realized loss during the quarter of approximate $5.8 million or $0.03 a share on the extinguishment of those notes due to the acceleration of the associated unamortized debt issuance cost. It is our current intention to redeem our 2043 notes when they become callable in July of this year. In total, our quarterly operating results increased net assets by $5.8 million or $0.03 per share compared to an increase of $31.8 million or $0.14 per share during the September quarter. Net asset value per share declined $0.12 or 1.8% to $6.60 per share at the end of the quarter. Turning to the portfolio composition, at the end of December, our portfolio had a fair value $2.4 billion and consisted of 86 companies across 24 industries. First lien debt represented 50% of our portfolio; second lien debt represented 32%; unsecured debt 5%, structured products 4%; and preferred and common equity interest of 10%. The weighted average yield on our portfolio at cost increased to 10.52%, up 20 bps during the quarter. And the liability prior to balance sheet, we had $875 million of debt outstanding at the end of the quarter. And net leverage, which includes the impact of cash and unsettled transactions, was 0.62x at the quarter compared 0.59x at the end of the September quarter. Regarding stock buybacks during the period, we purchased approximately 778,000 shares at an average price of $5.97, inclusive of commissions, for a total cost of $4.6 million. We also continued to repurchase shares subsequent to quarter end under our $10 million 10B5-1 plan, which we fully utilized on post quarter end. Since the inception of the program and through yesterday, we have repurchased 20.2 million shares or 8.5% of the initial shares outstanding for a total cost of the $119 million, leaving approximately $31 million available for future repurchases under our current Board's authorization. This concludes our prepared remarks. And, operator, please open the call to questions.

[Operator:]

[Operator Instructions] And your first question comes from Jonathan Bock of Wells Fargo Securities.

[Fin O'Shea:]

Hi, guys. Fin O'Shea in for Jonathan this morning. Thanks for taking our questions. Just to start with a couple of portfolio companies on the energy side. Maybe Tanner, can you explain the delta between or just kind of walk us through the components of that the delta between the portfolio company performance and the oil price derivatives understanding that understanding the hedging is an imperfect science.

[Howard Widra:]

No. I'll do it. It's Howard. The hedge is a value you know obviously by current market price that takes into account to a far greater degree than the underlying companies, short-term volatility. So while the fluctuations are great, the underlying oil companies although performing much better because of the higher oil price, we don't change the methodology to sort of to take into account that changing volatility. And so it just doesn't -- although its long-term value goes up presumably more than those hedges do, that the mark doesn't change as much because the methodology doesn't change. So put it one other way, if oil prices stay stable at these levels over the long period of time, the hedge would become -- would have a lesser loss because the volatility to be washed out and the company would go up more.

[Fin O'Shea:]

Makes sense, thank you. And then just looking at some of the mid-cap names, we are worrying what kind of percent of the portfolio we can expect going down the line as you reach targets. What sort of the allocation policy for the platform I think you know mid-cap has priority on steals, it looks like --are there a lot of other funds on the platform competing for the life sciences healthcare names?

[Jim Zelter:]

Well, you have to remember, we have talked about this before when we described what the mandate is of mid-cap and what the mandate is of the AINV. A variety of activities that mid-cap does on a day-to-day basis when they underwrite a senior loan structure and yield of that does not merit economic considerations for the BDC because of the yield. The activities that do constitute the overlap things like life sciences and a variety of other maybe some potential second means, those do run into the ZIP code where the BDC doesn't does indeed care, and it knows the allocation system is a well-documented process where the vehicles that can purchase those assets do, and as the team said in today's dialogue or in our presentation, you can see how much is actually been taken up by AINV as part of that. So, again, the breadth of mid-cap is not overlap to a great degree. There is a portion of it which does and those which do, there is a process that goes in and we have a legal allocation process for those. But as Howard I have expressed in the past, our long-term objectives are to have less concentrated risk within our portfolio. So to date, the appetite of AINV has been able to be handled by the size of the transactions. And we are very comfortable that's the appropriate mandate of AINV going forward.

[Fin O'Shea:]

Thank you, Jim. And just one more question for you given Apollo's leadership on the regulatory items we are seeing go through in Washington. Can you give us a sense on how the BDC and BDC bill are being perceived these days? And any of your other views on pending legislation as it introduced into the senate? Thank you.

[Jim Zelter:]

I would say - give couple of comments and handed it off to Greg. I would say as an industry and as a the company, we are fairly aligned with what our objectives are in terms of getting legislative changes that would affect the leverage test and shelf filing ability. We are very well coordinated as an industry and well coordinated as lobby. A lot of time spent myself and Greg and Joe at Apollo and many of our peers. Listen, a lot going on in DC right now. I think we are making great positive effort and good momentum. But that being the case, there is a lot of intricacies what's going on, with getting legislative passed in this environment? But I know Greg was there last week. And maybe he can get some granular update that may make some sense.

[Greg Hunt:]

Yes. I think it's important to note that for the first time as we have been working on improving on where we fit in the spectrum of financing vehicle, that when we have very slimmed down bill, simple bill that is supported by both the House and the Senate. You have a House bill HR4267, which was introduced by Congressman Stivers and Congressman, more Congresswomen more which is very well supported in the House. Also in the Senate, Senator Heller and Senator Manchin both bipartisan support of a bill, Senate Bill 2324. So for the first time, we have two bills in both houses that are supporting where we are going. And I think also last week we were down on you know met -- several BDCs were down in conjunction with the SBIA and looking at scoring the bill. I think with the new tax on legislation, I am hopefully that will be positive moving forward. So there is a lot of momentum. But as Jim said, getting things done in Washington isn't very easy.

[Operator:]

Your next question is from Terry Ma with Barclays.

[Terry Ma:]

Hey, good morning. Do you guys have a sense of how the tax legislation will impact the cash flow profile of your portfolio companies, given the lower tax rate and then also the lower interest deductibility?

[Greg Hunt:]

Yes. I'll take it. And I don't think we have any -- to be quite honest, I don't think we have any more unique insights than the analysis that has been circulated in the market. Clearly, our focus on increasing number of first lien companies' kind of floating rate with lower leverage, the math would suggest that they should be less affected. And clearly, there's also a benefit from the acceleration of capital expenditures, expensing. So our insights would not be unique. I think one of the things that we look at in our company, frankly is not only in as much as what is the effect of the specific company but being cognizant of industries with competitive dynamics with un-levered players. Because obviously un-levered players are in a better place. So I think it goes to a full spectrum but our analysis is not just similar than that which -- have been kind of published more broadly by the market and the industry, and an analysts like yourself.

[Terry Ma:]

Okay. Well, have you seen any or expect to see any changes in demand for debt going forward or longer term?

[Greg Hunt:]

Certainly not to date. Often times in the context of an LBO which and supporting sponsors, the use of debt is a function of levering equity returns not just for that tax arm. And so there has been no kind of mitigation and demand to date. It certainly has affected our model and how we model our cash flow and how sponsors think about cash flow. But it is not resulted in a material change in demand, demand for debt capital.

[Jim Zelter:]

Yes. I would just add, in analysis that we've done as a firm, typically the leverage multiple where really impacts the deductibility is higher than we would normally like to underwrite anyway. So if our taxing points are 4x, 5x, 5.5x, what we in this current rate environment, when you get to be north of 7x or 8x which some buyouts are because of the enterprise value being 12x to 15x, that's really where it's going to impact the small amount, but it doesn't really affect our ability to underwrite debt securities nor is it impact a broad array of sponsors desire to use that as part of the acquisition currency.

[Terry Ma:]

Okay. Got it. And I think you mentioned in your prepared remarks that you are about 50% to your repositioning. But I imagine most of the low hanging fruits already picked, so can you just kind of talk to next steps in a timeline for completing repositioning?

[Jim Zelter:]

Sure. I mean one of the reasons I said, it was qualitatively largely done is because I think you're right much of low hanging fruits has got done. And one very high-hanging fruit just got completed. And so what remains is some shipping assets which are -- we don't expect to exit in the short-term because of how they are producing cash ad where we think their long term value is versus today. And then oil and gas names, which you know we will exit when the time is right and in a market like this it becomes more likely as oil prices move up. And after that it's just sort of bits and pieces of things which will come out over time for sure, but it will just happen in a natural course of things. So we feel like in terms of sort of almost as a focus for us and for people looking to invest in the company, it's a lot clearer picture so and it's a lot easier to understand because it's just few investments. So we think it's largely done. And we think the impact it has to our long-term P&L based on what those asset are worth and what they are returning currently is in relatively neutral for what -- depending --regardless when we exit them

[Operator:]

Your next question comes from Rick Shane with JP Morgan.

[Rick Shane:]

Hi, guys. Thanks for taking my questions this morning. Really two things. One is I'd like to talk a little bit of about what's going on with Elements, I think, you look you had written it down modestly before about the impairment you took this quarter in the historical context of this company is pretty severe and very rapid. Really curious to hear what's happening there? And what you think the potential recovery value is and then also one of the things that everybody thematically is talking about the spread compression in the states. I am curious if you see any opportunity on the liability side given the brand to reduce your funding cost to potentially offset some of that spread compression?

[Tanner Powell:]

Yes. Sure. I'll do the Elements quickly by way of background, this is substance abuse treatment and this company is a provider of substance and abuse treatment and services operating across the US. The company's been plagued by number of operational issues, long-standing including problems with census and various other problems related to billing. It is still an attractive space, and over the last year or so the sponsors including the new third-party came in to contribute over $20 million to the company, to give the fund losses and give the company time to try to rectify some of those operational issues. The problems proved to be more acute and so more recently you the sponsors have chosen to stop funding those operating losses. And as a result, the prospects for the company were significantly less, the first lien is now evaluating option and I think as it relates to your question about prospect I think are mark reflects likelihood of the recovery for us. But really we kind drilled into it, it goes the discontinuing of the equity support to pick the operational issues that having catalyzed their current predicament.

[Rick Shane:]

Before we go to second element of my questions I wanted just got back in this little bit, that's actually very intriguing what you're describing is an operational and billing issue. If you said to me it was a reimbursement issue related to policy changes that would have almost been made more sense, presumably that something that's fixable. If it is an operational issue?

[Jim Zelter:]

Well, so, yes, so the company, new capital is invested as Tanner said pretty recently towards a strategy of sort of driving things better operationally. And in this case, operationally means census right. And so you're right, it's not -- normally you think of it operationally it is just to get to streamline, get it running more efficiently. It wasn't that operational, it was operational from the revenue side. And so their ability to drive census which on the margin of census is really, really valuable because there is high fixed cost here. They believe strongly which is why the market where it was. And they spoke with their capital including third-party capital that they can drive census on a number of sort of new strategy especially on 600 facilities facility that were particularly well positioned. And they just were not able to. So in this case, operational is not something as easy to fix as just totally in their control, if you will.

[Rick Shane:]

And again to -- again remember the breadth of what we are doing, when you say census you mean patient enrollment.

[Jim Zelter:]

Yes.

[Rick Shane:]

Okay. Just wanted to be clear rather ask the dumb question.

[Jim Zelter:]

No. That's a good question.

[Rick Shane:]

And then can you talk about funding and opportunity to offset some of the spread compression that we are seeing industry wide.

[Jim Zelter:]

Yes. I mean I think, Rick, as we indicated so if you just -- if you look at the 2042 notes that we took, there was probably 300 bp improvement there just looking our credit facility, but I think if you then look at our 2043, around the same amount if you use our credit facility, but I think the opportunity in the marketplace is probably to do some unsecured on notes and without opportunity you probably say 200 bps instead of the 300. But we think that's probably better long-term strategy. And as you noticed historically, we've tried to use 40% secured and 60% unsecured will be a little bit out of balance as we may redeem our 243, but other than that to help us on to reduce some of that spread compression going forward.

[Operator:]

Thank you. Our next question is from Ryan Lynch with KBW.

[Ryan Lynch:]

Good morning. I just want to talk about kind of the portfolio growth outlook and opportunity sets. So if I think about your two main businesses, you have the fee sponsor backed business, which has a very big opportunity set, but has a lot of competition. And then we look at all the strategies within mid-cap which seemed to be more niche businesses, maybe less competitive or maybe smaller opportunity set for the deals that can actually flow into an AINV. So when I think about the portfolio growth going forward, do you guys expect to do that for that growth to be funded more by the traditional fee sponsor back investments or more growth coming from that the mid-cap strategies?

[Howard Widra:]

So the longer-term portfolio we guided too which we still think sort of fits about right to say about 52 maybe slightly higher percent of portfolio will be leveraged deal, if you will, either first lien or second lien and another 20% to 25% will be the other mid-cap strategies, the remainder being Merx and some legacy stuff that we keep that we are comfortable with. So that's our guidance for when it's long-term. As a result, more of the growth comes from the mid-cap stuff right now because mid-cap stuff is only about I think 6% of the portfolio. So you would expect more of the short-term growth to get to that that level, that level of playing field to come from the niche areas. But in terms of leveling out long-term, we still sort of think that's a reasonable and achievable goal.

[Ryan Lynch:]

Okay. That's helpful. And then you guys share repurchase certainly accelerated in the calendar first quarter of 2018 quarter to date. Should we expect it if they continue at that pace throughout the remainder of the quarter is that a slowdown?

[Jim Zelter:]

We've been pretty consistently. We know our company. We know our portfolio and we think it's accretive and to our shareholders we will. So as Tanner and Greg said, programs in place, it's accretive and you should expect us to continue that.

[Ryan Lynch:]

Okay and then Craig I believe you mentioned dividend income increased significantly in the quarter due to the larger Merx dividend of $4 million increase from I think $2.2 million or so. Should we expect kind of $4 million run rate from Merx going forward and dividend income to kind of remain in the level we saw on the calendar fourth quarter?

[Greg Hunt:]

No. I would guide you more towards maybe $2 million a quarter. It's really a function of activities in inside of Merx and the trading of the assets.

[Ryan Lynch:]

Okay. So this quarter it was kind of -- a portion of it was nonrecurring dividend.

[Greg Hunt:]

Yes

[Ryan Lynch:]

Okay. And then just one last one as far as modeling goes. Looking at portfolio growth in the near term with a large exit of Solarplicity in first quarter, calendar first quarter. Should we expect portfolio growth to be flat to negative in a quarter?

[Jim Zelter:]

Obviously, that's large position running off. So I think, yes, I mean that's a reasonable expectation. We do have a good pipeline right now. You know we partially way through the quarter already. So we feel like it will be in - so we'll ultimately end up in the band of where we've been. Over the past year in terms of -- by the end of the quarter but obviously it's better thing to absorb and there is still some other things in the portfolio that you are getting paid off as well. So I wouldn't say it's just --it won't be replaced at all but obviously it's a little bit of hole to fill in, we are not filling it with $100 million position as any more. So it takes a bunch of transaction.

[Operator:]

Your next question is Kyle Joseph with Jefferies.

[Kyle Joseph:]

Good morning, guys. Most of mine have been answered. I just wanted to touch on portfolio yield trends given the increases in short-term rates, the spread compression that Rick alluded to and combined that with the year ongoing strategy shift, not, well, yes I am actually try to ask you to predict the future a little bit here. But if you could give your outlook for portfolio yield for the sort of near-term and intermediate-term?

[Greg Hunt:]

Well, if you give us a particular date anytime in the future I can tell you exactly what our yield will be.

[Kyle Joseph:]

That would be great.

[Greg Hunt:]

No. I mean I think we have guided that we think long-term we are projecting you know or we are building our business based having 10% yield on the new assets we originate. And then we have been asked the question, well, LIBOR's increasing; you know how is that factored in. And we said, that should be positive for us but don't give us credit for it. Let that you know balance out what would be yield compression. By the way you know the yield compression is two issues. Yield compressing some, although frankly I think in the market terms we are getting more aggressive in yield compressing. But it's also us moving with the capital structure. So let say those things roughly net out or closely then what you have, we are meeting is where we are today. We are around at 10.5% with the refinances Solarplicity which was lower yielding really sort of running as 10.7% or something like that. So we have room in the portfolio to absorb more that compression. So the way we think of it rather than saying, we would think of it and say continue to model at 10%, and we think we have quite a bit cushion there, given the LIBOR increases and the fact that we are above that right now.

[Operator:]

Thank you. Our next question is from Doug Mewhirter with SunTrust.

[Doug Mewhirter:]

Hi, good morning. I had a question about that hedging program. Could you remind me why you hedged to BDC level and not the entity level? I would think that might be a bit -- maybe a little more efficient to dial in specific production numbers if you went to the entity level. Is it a capital issue at the subsidiary?

[Jim Zelter:]

No. There is some hedging done at those levels but we don't own -- we don't own all these companies and so the decisions aren't always tied in. And there may sometime for different reasons what they want to hedge. So it sort, it is definitely what we have done is informed by what the company has done.

[Doug Mewhirter:]

Okay, that makes sense. And continuing the oil and gas theme, they looks like, in your opening remarks you said you had a downstream to little bit of capital for maybe a further exploration. And with oil prices being relatively elevated, I would imagine that the assets that these companies owned are getting more valuable so how do you balance or and have you -- do you guys just pay any interesting offers or have they receiving more offers for those assets and how do you balance their desire to maybe capitalize on the higher oil prices operationally versus selling them at an attractive price or I realize you don't always have full control of the entity?

[Greg Hunt:]

Yes. Sure. A couple of things there. So we try to hit each one of them. So, yes, there small investment into Spotted Hawk in the particular period. Spotted Hawk has a portion of its asset where it is operated and a portion where it is not operated where we supported the drilling programs of others and our percentage ownership of the particular wealth that they are part --that those partners happened to be drilling. What interesting is you are exactly right, the level of activity is expected to perk up? Interestingly, obviously the underlying companies are said they should have increased cash flows from where they can draw so disbursement will be a function of kind of obviously cash balances within those companies and the activity level of the company themselves as well as in the case of Spotted Hawk, the activities of the partners. As it relates to exit, I think consisted with the themes of the repositioning; we are looking to reduce the non-core exposures over time including oil and gas. One would expect in this sort of environment there to be more interest in assets, but we'll remind you that these are like and not only are they illiquid asset but so too also the dynamic that you alluded to which is relevant, there are other partners in this. So we are encouraged by the increase in oil prices and irrespective of oil prices, the things that these companies have done to enhance value and hopefully drive increased salability and long-term value but that the sales are function of partners as well as the M&A environment as well.

[Operator:]

Thank you. Our next question comes from Robert Dodd with Raymond James.

[Robert Dodd:]

Hi, guys. Going back to the hedge question. When you are looking at oil and gas investment either to originate proprietary or to purchase. Are you aware of -- I presumed you are aware of what are the hedge positions they've taken within the borrower? How much impact does that play into whether you actually take part in the loan or originate the loan?

[Jim Zelter:]

Let me answer this because I want to make sure you guys understand what we did. Obviously, it's a very critical aspect. And if a company that we invested in and known capital too was broadly hedged on a variety of productions, we were probably not need to do so with the portfolio. What Howard and Tanner and the team did when they sat back as we repositioned our portfolio over the last year and half, they made a decision that the downside risk would have an impact on our portfolio over and above what the companies were doing themselves. And so we pay for some downside protection insurance. And because of the lagging nature of the hedge which is a very active speculative commodity market and the underlying valuation process which was longer-term, we have basis issue. The hedge went down and the value of our companies did not go up to the same degree in this calendar quarter. We believe over time they have greater value than the loss of our hedge, but certainly this was something that was done at that point in time. I would not expect the long term we have a broad hedging policy in place. Our goal would be to invest and lend money to companies that have a successful, sustainable production and therefore have a pretty good hedging methodology in place. So that would not necessitate us to do it in the future but it was one-time, very supportive of it. It's got a little of calendar timing issue right now. But we are comfortable with long-term investments we have.

[Robert Dodd:]

Okay. I appreciate. I just if I can, to get you say that it may be an even more pointed way, obviously the hedge on oil is essentially hedging for an industry issue more so than it is company specific issues right, those components. What can stop you hypothetically, you start lending to restaurants. For Chuck E Cheese's, you can hedge cheese prices. You can then you can create synthetic hedges on consumer brick-and-mortar retail sale to hedge retail. Does any number of industries you can hedge that if you did in the manner you've done oil and gas here to a degree, would change the kind of the character of the business in a way. Can you just be clear, that is the intention or is that something you would actually consider?

[Jim Zelter:]

So I would say this that is not our intention. That is not, NOT our intention. We have been in business for long time. We've done a couple of currency hedges in rare circumstances but we have multi currency revolver. I would not expect this to be for future activity that we engage into any great degree. One time event, make sense, do not look at us to engage in active hedging at AINV of our underlying portfolio dynamics.

[Robert Dodd:]

Okay. I appreciate that.

[Jim Zelter:]

Or to take directional risk either way by our underlying investments being exposed to that type of volatility. That's the core of the whole repositioning. So this hedge is meant to sort of advance that cause by being less exposed to volatility of commodities of any kind, it happened to be in them, so we are trying to mitigate it.

[Robert Dodd:]

Right, got it, thank you. If I can just one quick on Element. Obviously, in the rehab business, that's a national issue right now, it had its problems, it does look your second lien always marked down substantially, what you likely to go through the due process as to whether you want to take that over and kind of make a play on the US needs of rehab and fix the business yourself. Because you have some experience there, or are this just going to be see what happens to the second lien and then be done with it.

[Howard Widra:]

I mean when any of the situations obviously we will evaluate what the best alternative for us is to maximize value. But I will say one of the other tenants of repositioning was minimizing as much as possible investing into situations which we've already created some downside. And so that will inform how we will -- the likelihood of us doing that.

[Robert Dodd:]

I remember that component of the strategy, yes. Thank you.

[Operator:]

Thank you. Your next question is from Christopher Testa with National Securities.

[Christopher Testa:]

Hi, good morning, guys. Thank you for taking my questions. Most have been asked and answered. Just curious on the structured credit book, obviously it's become pretty small but still a non-core asset. Should we expect the sales that to be able to pick up steam given that this is probably one of the best times to be selling that asset class or the remaining things within that portfolio a bit tougher to market and sell?

[Howard Widra:]

Yes. I mean there are few of them not easy to sell but you would still expect-- you should still expect them to come off the relatively quickly because they are subject to refinance and underlying holders are going, our equity holders or controlling parties will likely refinance. So you should expect those to continue to dissipate in the near term.

[Christopher Testa:]

Okay. Got it. And I appreciate all the color on the originations and the co-investment portion of them specifically. Could you give us a sense of what the weighted average EBITDA the borrowers were for your originations for this quarter? And the kind of how that compares to any quarters past and whether there has been a material change in that along with your change in strategy?

[Howard Widra:]

I would say the average EBITDA is a little bit lower because the EBITDA on a first lien loans were doing it a little bit lower because that's where we think the right market opportunity is. So the average EBITDA for second lien loans that we do is generally higher bigger companies that you want more sort of stability and for the first lien, feel that we are doing the ballpark is $25 million to $35 million EBITDA Company. And we do that because those deals have covenants and have better structure, I think have better risk-adjusted returns right now in the market. So it's hard to give you -- if I give you a mean it would be meaningless, right. Because it's just -- there could be $100 million Company and $15 million Company, but by and large the sweet spot is $20 million to $40 million of EBITDA.

[Tanner Powell:]

And I'll make another quick comment. Howard is spot-on with respect to the first lien investment. But so too if you look across our book of second lien we've talked in past syndicated still a part of our strategy but over time we hope for it to be less a part of our strategy and clearly those syndicated deals have can and at times EBITDA in excess of $100 million and actually if you look at our average EBITDA $70 million that reflects that the influence of the syndicated. So we would expect over time as we focus our origination efforts or deploying efforts more specifically on our origination platform that to come down and maybe a bit.

[Christopher Testa:]

Got it. And last one for me just I know you guys mentioned obviously the Solarplicity being exited is obviously a large investment and might expect some modest portfolio contraction, but after that given that it seems that that you've really recycled out of a lot of the kind of non-core assets. Do you guys think that from fiscal 2019 that your pipeline is adequate enough that we should start seeing some net portfolio growth for them?

[Howard Widra:]

Yes. I know it's -- already given an unequivocal answer. So let me equivocate for second. Obviously, any short-term pipeline, we don't know -- but we believe that we have origination far in excess of the amount necessary to sort of keep the necessary growth of AINV. Or just any objective measures, the amount of stuffs we see, amount of originators we have those type of things. So we are very comfortable on our ability to get there.

[Operator:]

Thank you. Our final question is coming from Casey Alexander with Compass Point Research.

[Casey Alexander:]

Hi. And this is just real quick. On Solarplicity, you mentioned in the footnote that the disposition of Solarplicity was slightly below the fourth quarter fair value mark. Can you give us some sense of that I mean are we talking a penny a share, two pennies a share, and three pennies a share? I would think that's a number that you would know.

[Howard Widra:]

Yes. I mean it's around a penny a share but we also received -- a portion of the proceeds that are kept at escrow. So if you receive a 100% of the escrow, it's evaluate, it's been under evaluation. So we'll revalue the whole pool of assets at 331. Bu you know right now it's about that.

[Jim Zelter:]

So on behalf of all in Apollo, we want to thank you for your time today. And your continued support. Please reach out to Elizabeth or any of the team if you have any further questions. Have a great day at.

[Operator:]

Thank you. This does conclude today's conference call. You may now disconnect.