Apollo Investment Corporation
Q2 2017 Earnings Call Transcript

Published: 9 Nov 2016

[Operator:]

Good morning and welcome to Apollo Investment Corporation's Earnings Conference Call for the period ended September 30, 2016. At this time, all participants have been placed in a listen-only mode. The call will be open 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.

[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 would 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 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 would also like to remind everyone that we posted a supplemental financial information package on our website, which contains information about the portfolio as well as the company’s financial performance. At this time, I would like to turn the call over to Jim Zelter.

[Jim Zelter:]

Thank you, Elizabeth. This morning we reported results for the quarter ended September 30, 2016 and filed our Form 10-Q. I’ll begin today’s call with some comments about market conditions, followed by a brief overview of the results and then some additional business highlights. I’ll then turn the call over to Howard, who’ll discuss the progress we’ve made repositioning the overall portfolio. Tanner will then cover our investment activity for the quarter and provide an update on credit quality. Finally, Greg will review our financial results in more detail. We’ll then open the call to questions. Beginning with market conditions, despite an increased in issuance in the syndicated corporate loan market, middle market activity remained sluggish during the quarter. Transactions led by non-banks have increased in size as yields have fallen underscoring a growing presence of non-bank lenders. A mid limited new issue supply increase competition for middle market deals has driven leverage levels higher and yields lower. Given the competitive market environment, we remain highly selective and disciplined as we seek to reposition our portfolio. In today’s market we’re finding that capital deployment in originated loans is less attractive and many of these investment opportunities do not make it past our credit filter. While the leverage lending market is currently frothy, we do not expect to deviate from our stated strategy and we’ll continue to be patient and disciplined investors. Given the environment, we chose to reduce leverage and repurchase stock during the period rather than to deploy capital. Our patience in deployment along with additional expected repayments in the December quarter provides us with ample capital to deploy in more proprietary assets when opportunities become more attractive. Lower leverage creates the potential for future portfolio growth. We continue to make steady progress executing on our strategy. We reduced our exposure to certain specialty verticals and expect further reductions in the December quarter, which Howard will discuss in greater detail. We also closed our first two co-investment transactions during the quarter and expect co-investments written in cap to be an important part of our strategy going forward. We believe the combined origination platform that we’ve developed will provide a differentiated benefit over the course of a cycle and make us more relevant to borrowers and our sponsor clients and we’re pleased with our progress to date. An established relationship between a sponsor and a lender is becoming increasingly important particularly in the middle market. Sponsors tend to return to a select group of trusted lenders for financing solutions which is why having a broad products offering is critical. Moving to our results, for the quarter we reported net investment income of $0.18 per share, which includes a benefit from previously accrued incentive fees, which Greg will discuss in greater detail. Net asset value increased $0.05 or 0.7% to $6.95 per share during the quarter as a result of net earnings, accretive stock buybacks and a slight net gain in the portfolio. Moving to stock buybacks, during the quarter we continued to execute on our share repurchase program. As you saw in a previous announcement, in mid-September, the board expanded the company’s stock repurchase program by 50 million to 150 million. We are pleased to have expanded our share repurchase program. Since the inception of our share purchase program and through the end of September, stock buybacks have added $0.12 to NAV per share Moving to the dividend, the board approved $0.15 dividend to shareholders of record as of December 21, 2016. With that I turn the call over to Howard.

[Howard Widra:]

Thanks, Jim. As described in our last call, we implement focus on senior secured corporate loans sourced by Apollo’s direct origination team with a focus on floating rate assets, providing additional exposure in first lien loans in life sciences, asset based lending and lendor finance, areas with significant buyers to actuate [ph] and which may cut financial expertise. We continue to reduce our exposure to oil and gas renewable construction credit, areas which we believe are not appropriate for AINV going forward. As we reposition the portfolio, we expect the overall portfolio yield to decline with the reduction of risk. Given the liquid nature of many of our investments, repositioning will take time, although we may think to celebrate [ph] the disposition of certain of assets which are not core to our strategy. We expect that our target portfolio will be approximately 50% to 60% in traditional corporate loans, approximately 20% to 25% across life sciences’ asset base and lender finance, approximately 15% in aircraft leasing and the balance in existing verticals and other legacy positions. We’ve already made some good progress toward achieving our target portfolio. We continue to work through oil and gas exposure. At the end of September, oil and gas at fair value represented 9.7% of our portfolio, down from 11.6% at the end of June. During the quarter, Extraction oil and gas formed 101 [ph], as the company successfully issued high yield bonds. Tanner will later provide an update on our remaining oil and gas exposure. Second, we’ve made progress reducing our exposure to structured credit. During the quarter we actually made an investment in a credit linked note generating an IRR of 13.5%. Accordingly, structured credit declined 7.8% of our portfolio at fair value, down from 9.1% at the end of June. Subsequent to quarter end, we exited another structured credit investment, our equity investment MCF CLO 1, a middle market CLO, further reducing our exposure. Combined these two positions reduced our exposure by over $70 million. Third, we expect our exposure with Noble Energy to decrease in the December quarter. Since the end of September, we completed our third Golden Bear commercialization [ph] on excellent economic terms which reduces our exposure by approximately $7 million. Also, [indiscernible], which constructed its portfolio on an unlevered basis is adding some of the expected leverage towards completing the portfolio and therefore expect that our exposure should decrease in the near term. Finally, we’ve been actively working on a number of co-investment opportunities. During the quarter we participated in two life sciences lending transactions along with MidCap. We believe life sciences lending’s offers disproportionate risk. We are focused on low loan to value loans made of product development or early commercialization, we do not underwrite science. During the quarter we invested approximately 8.6 million in the first lien term loan and committed an additional 6.4 million to Aptevo Therapeutics, a biotechnology company with four commercial stage assets and a strong pipeline. We also committed $5 million for a senior revolving facility to Endologix, a public company that develops, manufactures, markets and distributes minimally invasive devices for the treatment of vascular diseases. We currently have a strong pipeline of life sciences co-investment opportunities. We look forward to reporting our progress over the coming quarters. With that I’ll now turn the call over to Tanner, who’ll discuss our investment activity and credit quality.

[Tanner Powell:]

Thanks, Howard. During the quarter as Howard discussed, we focused on executing on our strategy. Given the competitive market environment repayments were elevated and we remained disciplined in terms of deployment and as a result net leverage declined. During the period we invested 128 million in six new portfolio companies and ten existing companies. Our deployment is focused on corporate lending and a couple of co-investment opportunity. We exited 215 million of investment which was predominantly repayments. Accordingly during the quarter we experienced portfolio contraction in investment activity with a negative 87 million in the quarter. The weighted average yield on investments made during the quarter was 10.3%, the yield on sales and repayments were 10.7%. During the quarter we invested in six new portfolio companies, we invested 17.6 million in the second lien debt of Sequential Brands to support an acquisition. Sequential Brands is a publicly traded brand management company engaged in the licensing and marketing for a portfolio of consumer brands. We also invested 10 million in the second lien debt of WCI-Infinite RF to support an acquisition. Infinite RF is a leading supplier of engineering grade radio frequency technology products to technical and engineering customers. We invested 10.7 million in the first lien term loan of American Media and committed 1.7 million to the revolver. We invested 18.1 million in the second lien term loan of Landesk Software. As Howard mentioned, we also co-invested with MidCap in two life sciences companies, Aptevo Therapeutics and Endologix. Additionally, we also invested in several existing portfolio companies, including 16.3 million in Golden Bear and 19 million [indiscernible]. The payments for the quarter totaled 197 million, which included the full repayment of Extraction loan gaps, a credit linked note and premium trailer. Sales for the quarter totaled 18 million, which included the complete sale of our investment in Belk and partial sale of our investments in Aventine and Tibco Software as we chose to pare back these positions given strength in the market. Aviation continues to be one of our larger industry exposures and we continue to be pleased with our investment in Merx Aviation, at the end of line [ph] portfolio continues to perform well. Our aircraft portfolio continues to be well diversified by aircraft type, plus fee and country. Let me give a brief update on our energy exposure. At the end of September, oil and gas represented 9.7% of our portfolio or 246 million across five companies, down from 11.6% or 304 million at the end of June on a fair value basis. The decline was primarily due to the exit of our investment in Extraction. We continue to work through our remaining exposure and we’ll likely invest some additional capital in Glacier Oil and Gas during the December quarter to support accretive development. Two of our oil and gas positions remain on non-accrual, Pelican Energy and Spotted Hawk, in both of these case we’re working closely with the respective management teams. Regarding Pelican Energy, an entity financing participation in certain wells of Chesapeake Energy, the company’s liquidity remains tight and is elected to pick 100% of its most recent interest payment. Regarding Spotted Hawk, the company is currently undergoing a recapitalization, post recapitalization the company is expected to service a portion of its reinstated debt. I would also like to briefly comment on Venoco, another one of our oil and gas investments during the quarter. Venoco emerged from bankruptcy under the RER plan our first and second lien investments were exchanged for equity and warrant and therefore are no longer on non-accrual status. The company continued to differ all non-accrual [ph] spending, the valuation methodology was consistent quarter-over-quarter, but the value was negatively impacted during the period, largely due to the certain timing surrounding the resumption of operations by a third party pipeline operator and the associated operating cost. Let me spend a few seconds discussing credit quality in the overall portfolio, no investments were places on non-accrual status during the quarter. In aggregate, at the end of September we had 12 investments on non-accrual status across six different portfolio companies, investments on non-accrual status represented 3.9% of the fair value of the portfolio and 11.1% on a cost basis, compared to 4.5% and 11.8% respectively at the end of June. The current weighted average net leverage of our investments was 5.5 times, up from 5.4 at the end of the last quarter and the current weighted average interest coverage decreased to 2.6, down from 2.8. With that I’ll now turn the call over to Greg, who’ll discuss the financial performance for the quarter.

[Greg Hunt:]

Thank you, Tanner. Total investment income for the quarter was 59 million, down 9.7% quarter-over-quarter. The decline is primarily attributable to a lower asset base and a decrease in prepayment in fee income. The lower asset base was anticipated as we repositioned the portfolio and continued our share buyback program. Fee and prepayment income was $4 million in the quarter compared to $6.9 million in the June quarter. Dividend income for the quarter was 8.5 million, down slightly quarter-over-quarter, lower dividend from our shipping investments is offset by a higher dividend from Merx and structured credit investments. Expenses for the September quarter totaled $29.5 million, compared to $40.4 million in the June quarter. Incentive fees were lower due to the reversal of previously accrued incentive fees related to Picking Tom [ph]. As a reminder our manager is not paid incentive fees on pick until such income is collected in cash, this provision has been part of the investment advisory agreement in 2012. During the period it was determined that approximately 6 million of previously accrued incentive fees from fixed income related to our investments in Garden Fresh and Delta should be reversed. Given the year to date performance of AINV, the performance incentive fee would normally have been 15%, but due to the reversal it’ll be essentially eliminated during the quarter. In addition interest expense decreased during the quarter due to lower average debt outstanding balance. Net investment income was $39.5 million or $0.18 per share for the quarter. This compares to 36.1 million or $0.16 per share for the June quarter. For the quarter the net gain on the portfolio totaled 1.6 million, compared to a net loss of $78.2 million for the June quarter. Positive contributors to the performance for the quarter included Golden Bear and our investments in MCF1 and MCF2. Negative contributors to the performance for the quarter included our investments in Venoco, Garden Fresh, Maxus Capital, and LVI. In total, our quarterly operating results increased net assets by $41.1 or $0.18 per share compared to an acute decrease of $42.1 million or $0.19 per share in the June quarter. Net asset value per share increased five times or 1% to $6.95 per share during the quarter, driven by earnings in excess of the dividend, as slight net gain on the portfolio and $0.02 per share accretive impact to NAV through stock purchases. Turning to portfolio composition, at the end of September our portfolio had a fair value of 2.5 billion and consisted of 82 companies across 24 industries. First lien debt represented 42% of the portfolio, second lien debt represented 22%, unsecured debt 9%, structured products 12% and perforating common equity represented 15%. Weighted average yield on our debt portfolio head cost was 11%, unchanged quarter over quarter. On the liability side of our balance sheet we had 1 billion in debt outstanding at the end of the quarter. Company's net leverage which includes the impact of cash and unsettled transactions stood at 0.63 times at the end of September, compared to 0.66 times at the end of June. Company's debt equity ratio was 0.6 times at the end of September and 0.71 at the end of June. Regarding stock buybacks, we continue to see the stock market is camping out [ph] attractive opportunities to increasingly repurchase stock. During the period we repurchased approximately 3.1 million shares. Since the inception of the program a year ago until yesterday, we repurchased approximately 17 million shares or 7.2% of our initial shares outstanding essentially across the $100 million authorization. This concludes our prepared remarks and operator would you please open the call to questions.

[Operator:]

Thank you [Operator Instructions] Our first question comes from Jonathan Bock of Wells Fargo.

[Jonathan Bock:]

Good morning and thank you for taking my questions. How well do you know - we will start with the new investments clearly the 128 or 130, if you look at costs I guess, secondly some follow-on’s, it is the sharing arrangement that I am interested in learning more about with MidCap right because they are - I know you are moving to a very proprietary driven strategy that offers, certainly upside based on kind of MidCaps reach. And so I'm wondering what is the total size of AptevoTherapeutics right, how much did the BDC take down and how much did the MidCap fund hold or on the balance sheet MidCap how much did they take down, what was the split amongst those direct investments in life sciences?

[Jim Zelter:]

The split on Aptevo was about two thirds, one third and based on sort of commitments and the funds employed for Aptevo and that would generally be about the expected as we are going forward based on the relative sizes of the two companies. So it was a $35 million term loan overall, not all of which was strong. So that’s sort of correlates and in this case AINV the flight we more than its one third amount just based on MidCaps appetite, but generally two thirds and one thirds.

[Jonathan Bock:]

Okay, so in that case do you - we talk about kind of the split of two thirds, one third, how should we look at what we will expect the mix to be of direct origination on Apollo’s balance sheet on the go forward basis from what we call the MidCap strategies that you have or can kind of translate. Because there is one question, I was always under the impression that MidCap did loans - MidCap had loans that they couldn’t do and the strategy was well now, we are moving this great MidCap leader over to the BDC and he is going to do the loans that MidCap couldn’t do in the first place. So why is there some sharing agreement between the two I guess is the question?

[Jim Zelter:]

Right, so that’s not totally right, what you just said is a small aspect, but still let me go in order. First, in our sort of - when we’ve done our complete repositioning, we hope and expect that asset share with MidCap will be 20 to% 25% of the overall AINV portfolio and so we will be moving towards that overtime, that’s the first answer. When I talk about what those assets are, those are assets that are shared with MidCap and the only assets that will be shared with MidCap will be the assets that need AINVs investment criteria. As you now, MidCap originate across a senior dead spectrum on a wide variety of assets, many of which don’t need the yield criteria for the BDC universe generally. But some do and the ones that do are the ones that are in these proprietary niches which we view as relatively unique for the BDC, most specifically sort of asset based loans fully secured by receivables in transitioning companies one and two life sciences loans. And those happen to be areas that have higher yields because of a proprietary nature to a senior debt lender and AINVs opportunity, if you take advantage of that origination to be part of those bigger companies in those sectors. So that's the 20% to 25%. Separately, not really sort of part of what we’ve laid out, but what we’ve talked about informally is that because MidCap has so much origination out there, from time to time it will also see opportunities that will be proprietary that don’t make sense for MidCap because it is first lien or because it is deeper in the capital structure than it wants to do that do make sense of AINV that will be proprietary by itself, that category of loans would fall outside the 20% to 25% of the ultimate portfolio and it is really just a proprietary access of our corporate book.

[Jonathan Bock:]

Got it. Thanks for that. That answers it and I appreciate you kind of putting the fine point on it. Looking past 3Q and certainly into this quarter, your stock repurchases, I mean without a doubt one has to respect that, respect the forward view in terms of what confidence you’re placing in your portfolio as you work out and number of loans et cetera. Curious so looking at repurchases we have already seen in the fourth quarter which is sizeable, should that give us an indication just of the vast preponderance of we’ll call it - opportunities outside today really aren’t going to necessarily meet the muster of the value that is created through buying back your own stocks. Should we see continued set of just deleveraging or more importantly just shrinking size of the portfolio for the time being and maybe perhaps the originations fall a bit as well just based on that share repurchases amount this quarter to date.

[Jim Zelter:]

I mean Jon, I think we want to be measured, I think what you are hearing us say is, there is a floppiness in the market and when transactions are marginal in credit quality and we have the optionality to delever or buy back stock, we find that to be appealing as we sit here right now. And we have longer term objectives of finishing on our buyback program, but I think we feel like we - our book - I don’t want to have this view that we are trying to shrink the book. We feel like our book is in a good spot right now, and we want to continue these trends. But I think we are trying to be very balanced and being intellectually honest about the returns and the accretive nature of where our stock was trading vis-à-vis are now and the discount and we want to balance all of those constituents out to get the right spot. The other thing that Howard and Tanner both mentioned is, we look at being a bit delevered right now is being a potential advantage over the coming months and quarters. And so it is a little bit of macro overview, but I think that we are very focused on, we outlined a handful of objectives several months ago and we feel like we are slowly ticking them off in order a couple at a time and it is going to be a lumpy but we are really trying to be very consistent in achieving those objectives.

[Jonathan Bock:]

Look clearly you are and Jim I appreciate the color and we also saw like just the highlight of the successive legs at extraction oil and gas and I guess one of the questions are - that’s a big success I don’t know how many energy investments today can kind of get a high yield bond issue done, so certainly that’s one the highlights. I am curious on a go forward basis given spread compression et cetera just as we have seen, how should we look at the future repayment picture, more importantly some of the more ancillary kind of fee benefits that can continue to come off of that for maybe investments of [indiscernible] might have had a little bit of tainted and like extraction turning out to be much more successful than we would have originally thought .On a go forward basis, how do you look at payments and specifically some of the fee income that comes off of them as we enter in the next two quarters, Jim.

[Jim Zelter:]

I think that we have - in terms of the model we have internally, we expect it to be a portion of our income, but not t is always lumpy. If we budget a certain amount for a quarter in terms of payments and premiums, it’s a small amount for overall net income, but it is not an overriding amount, I mean certainly we would expect that momentum to slowdown as the market place gets a little bit quieter and a lot of our credit that could come market have come to market. That’s the sort of the term I would give in that response.

[Jonathan Bock:]

Appreciate that, thank you for taking my question.

[Jim Zelter:]

No problem.

[Operator:]

Our next question comes from the line of Rick Shane of JPMorgan.

[Rick Shane:]

Hello, guys. Thanks for taking my questions. I think when we think about the history of AINV, two things. One, along the way there have been some mistakes that have been made strategically, but the flip side of that is that I think you guys have been readily willing to acknowledge them and frankly engage in behaviors to do the right thing, whether it was the capital infusion at book from your manager four years ago or the decision right now to buy back stock. And I think those are probably trends that we will expect to continue. I am curious, there was a comment made related to oil and gas about it not necessarily being appropriate within the portfolio. Perhaps I'm taking a little bit of a contrarian view, but isn't this the time given the distress and the opportunity that there are going to be chances to deploy capital there going forward? And I understand look, you're going to have to weed out some of the stuff in the portfolio now, but shouldn't you actually long term be willing to be there?

[Jim Zelter:]

The answer is yes and no. As a firm we would agree with your premise that the time to be an investor is after there has been a variety of destruction in a business. So we conceptionally agree with that. However, when we look at the BDC model in terms of predictability NAV and ROE we are not of the view that this is the right vehicle to take those contrarian value opportunities. Now, I want to assure that we are not saying we are never going to make an oil and gas senior or second lien loan, but when you have a credit that is predominantly determined based on one input the commodity price that’s not the type of credit risk you want to take in this business and so I just think that Howard and Tanner laid out, those strategies where you are really determined one or two key variable to credit, that’s something make a good match in this vehicle.

[Howard Widra:]

Let me just add two more things, one is the concentration we have in oil and gas right now as a percentage of portfolio is higher than we would want it to be than a normal, regardless that we were sort of bullish on the industry or not. And so part of the goal is to bring it down even if we were to invest on. Secondly, we do have five investments in oil and gas and some are leveraged to the upside and we made selectively investment in them, we certainly look to sort of monetize some of that upside, so we feel like we have some exposure to that upside without investing new capital.

[Rick Shane:]

Got it and so what I am hearing is as we think about NAV and ROE, the emphasis going forward is going to be to potentially give up some ROE but mitigate that through lower volatility.

[Jim Zelter:]

We want to focus on NAV stability and do so we are going to make sure we are prudent with the risk we take and our credit asset. So if one picks that next step and say okay if there is a 15% ROV asset but it has great volatility we are probably going to be little bit more conservative while adding that portfolio if we already have exposure of that sector.

[Rick Shane:]

I don't disagree with that view given the nature of BDC assets and investors, thanks guys.

[Operator:]

Our next questions come from the line of Kyle Joseph of Jefferies.

[Kyle Joseph:]

Good morning, guys. Thanks for taking my questions. Most of them have been answered. I just have some specific modeling questions if you don't mind. Greg, I know you touched on the dividend income in the quarter but can you give us an idea of the run rate going forward here given some of the structured sales and whatnot?

[Jim Zelter:]

Yeah, I think it is going to be probably on - in probably 7 million to 9 million depending upon the capital needs that we may have let down in some of our investments will be [indiscernible] on a quarter basis.

[Kyle Joseph:]

All right and then on cost of fund; sorry go ahead.

[Jim Zelter:]

But as we do change our structured product investment to go down and that will just be a function of that going forward.

[Kyle Joseph:]

Got it and then in terms of your cost of funds outlook varying the credit facility, are you looking to turn that out or are you happy with that outstanding? What are your thoughts there?

[Jim Zelter:]

When we look at the kind of right side of our balance sheet today right, 60% is made up of fixed rate debt, two are on two baby bonds that don’t come due until September ‘17 and June of ‘18. And we will consider that the environment of the time to see if we change to more floating rate under our distinct credit facility.

[Kyle Joseph:]

Got it, can you guys provide any update on Garden Fresh? I know I saw some articles in the quarter recently about the company progressing through bankruptcy. What is your outlook for any potential recoveries there?

[Jim Zelter:]

It is sort of going through its process right now which will be a 350 resale and the prospects are consistent with the mark right now, not significantly different.

[Kyle Joseph:]

Got it, thanks very much, sorry?

[Jim Zelter:]

I was just going to say the performance has leveled out just when we declined, so it doesn't change - the outlook doesn’t change that much.

[Kyle Joseph:]

Great, thanks very much for answering my questions.

[Operator:]

Our next question comes from the line of Ryan Lynch of KPW.

[Ryan Lynch:]

Good morning. Thank you for taking my questions. When we look at the kind of the three unique buckets that the MidCap, you guys can co-invest with MidCap, the life sciences, the asset lending and lender finance, you obviously closed two life sciences investments this quarter with MidCap. So out of those three buckets, though, is life sciences kind of where you guys see the most opportunity or out of those three buckets, where do you guys see the most opportunity with co-investments with MidCap and why?

[Jim Zelter:]

No, I mean again like ultimately I think life sciences and asset based will have sort of equal sizing over portfolio lender finance, potentially a little bit less. There will be a number of loans for most life science opportunities, but the larger opportunities are in asset base, when they make sense. So lender - and lender finance actually also are larger size and in all cases they are very low [indiscernible], so it’s easier to do some larger size, but the challenge with lender finance asset is a lot of 30% asset so you are constrained in your focus there. So I think all of them have a lot more - there’s a lot more opportunity in certainly the general corporate market and expect all of them to be relatively equal size of the ultimate portfolio. So that’s really the - in each case the competitive market place is relatively unique, meaning it is not the same competitors in each space and it doesn’t necessarily move with the capital market. So things change a little bit up and down, but over a cycle we think there is a fairly a good opportunity in all.

[Ryan Lynch:]

Okay, understood. And then your guys' non–sponsor transactions, they've actually increased over the last couple of quarters from the mid 50s to - this quarter it was up to 61%. Is that just more of a function of you guys kind of transiting your portfolio around or - because I would've expected the non-sponsor transactions start going up and –sponsor start going down and the sponsor transaction as a percentage of your portfolio to start going up. Where do you guys kind of see that leveling out? Do you expect the sponsor backed transactions to start increasing in the future?

[Jim Zelter:]

Yeah, we do this is just a result of summer delivering, some marks which is not sponsored kind a bigger percentage of portfolio, but I think your expectation for what the trends are on the future are correct and it’s what we will as we - we’ll invest more and more in transactions that will be sponsored and the competition will change, I think this was just part of the repositioning and sort of mathematical anomaly.

[Ryan Lynch:]

Okay. And then just kind of a broader question but with the changes in management that you all made as well as the changes in some of your strategies as well as you guys mentioned some unified sponsor calling efforts with MidCap. What has been the kind of reception of the sponsors in the marketplace for your all's changes and outreach going - you guys changed in strategy as well as your outreach. What has been the reception from the sponsors in the market?

[Greg Hunt:]

Yeah, I'm jumping here, I think it gone extraordinarily well I think as we alluded to in our comment in the script and we talked about previously one of the challenges or one of the competitive differentiators just to have as many arrows in quiver when you and talk to these sponsors and the combined sponsor effort and the ability to do think kind of across the capital structure and address different client needs, address different sponsor needs has been very well received, that of course is against the backdrop of the current market environment which both Howard and Jim alluded to as being pretty profit and hence last show in terms of actual activity but as far as the messaging and far as the right activity it is going on very well and we look forward to executing on that strategy in the near term.

[Ryan Lynch:]

Great, those are all the questions for me.

[Operator:]

Our next question comes from the line of Robert Dodd of Raymond James.

[Robert Dodd:]

Hi, guys. On the target, I mean life sciences you said 20% to 25%, that is the co-invest with MidCap, and then I presume the other deals that MidCap would invest in would fall into the other traditional lending bucket at 50% to 60%. If you could break it down another way, how much of your target portfolio mix whenever you get - next quarter obviously, would you expect to be coming through the MidCap channel. Obviously, it's going to be bigger than the 20% to 25%, but is it one-third, or 40%? Can you give us any color on just how much you expect to get through that origination platform or relationships?

[Jim Zelter:]

I guess we have answered and I think we needed to educate this group, just because something may come from MidCap, it can come from MidCap, but they might not be the actual co-investor of it. So we have a unified front end and certainly if you think like the world there’s a MidCap, there’re certain assets that go into the MidCap, there’re assets that go into AINV and there’s an intersection in the middle. So certainly we want to have a unified platform and a unified calling effort and whether it’s a quarter to half, our product ends up in AINV may be assets that we actually source through that dialogue of that channel along with sourcing along with MidCap in the balance sheet. So that’s the vision which we have and I think it’s important. Not every asset is the same, there may be certain assets like life sciences, as Howard has described in the past, that’s a vibrant business for MidCap, but certainly the ability to speak for larger pieces enhances that commitment to MidCap mix and we do together. So there is no separate synergies, but certainly we want to see more and more of the dialogue that results in sponsor activity landing on our balance sheet, the AINV balance sheet coming from that unified approach.

[Robert Dodd:]

Okay great thank you. I appreciate it. Going back to kind of following up to one of your responses to Jonathan’s questions and you said being delevered could be an advantage over the coming quarters or years. I mean I recognize that in the sense that obviously in a frothy market, you can chase income yield today, leverage get more income yield and more income ROE at the expense of losing money later and having a lower long-term GAAP ROE, so I totally respect the focus on generating returns over the long-term and taking advantage later of liquidity that you build today. The question is, to miss coach someone, I’m sure the market can remain rational longer than you want them in seeing that liquidity, so if the market continues frothy, our leverage models with lower yields, how long are you willing to sit on the sidelines that the low your target leverage the forward that becomes a problem for how you want to manage the business long term.

[Jim Zelter:]

I agree with your premise although it’s not like we’re sitting on the sidelines. We did have a good quarter, we made our dividend, we bought back some stock and we deleverage. So it’s just a question of how we’re spending our time, where it’s not idle time, it’s just time doing with our balance sheet where they’re making investment. So you’re right, I mean we are not suggesting that the market’s going to return all of a sudden, but maybe just because we have been in these seats for a long time and have seen a bunch of cycles, it just feels to us right now that the breadth of activity you’re seeing is probably pointed more towards an extreme than a traditional mainstream period and we just prefer to wait for what we think are broadly speaking better opportunities. Not going to happen tomorrow, I’m not sure the turn out that I don’t expect, but I think we’re just trying to make sure that we really are in this business for the long term having lived through a few cycles and reaching probably at the wrong time.

[Robert Dodd:]

Got it, thank you.

[Operator:]

Our final question today will come from the line of Chris Testa of National Securities.

[Chris Testa:]

Hey good morning guys. Thank you for taking my questions. Just looking at the portfolio going forward, how much do you anticipate aircraft leasing comprising as a percent of the portfolio?

[Jim Zelter:]

Yeah, currently as we alluded to we’re at 18.9% that having ticked up has to more to do with the rest of the portfolio declining and continued very good strong performance out of Merx. Over the longer term what we’ve guided to is 15% or mid-teen, so you would expect a modest decrease from here as we continue to think it’s very attractive risk award asset class force.

[Chris Testa:]

Got it and just on - you guys have obviously been disciplined this year and have passed on some opportunities, just a question on - have most of the opportunities you passed on been on the sponsor or non-sponsor arena. And the second part of the question, are most of those from pricing, which you guys seem to be willing to accept lower pricing for lower risk or is this from the structure thing pushed by the borrowers?

[Jim Zelter:]

So the answer to the second question is yes. When the market get frothy the pricing goes down and the structures get more aggressive though. And so - and I think you’ve heard this from some of our competitors as well, so you just see a lot more transaction that just from a like balances risk reverse perspective seem off. Certainly you’re never going to invest in any credit where you feel like there’s not the underlying value to get in, but certain things are - certain ones are more aggressive than others and those deserve higher pricing. But right now the balance between the structures available to the borrowers and the pricing that the market allows are just not balanced. So we like believe are - the better parts competitors that have big broad pipelines and see a lot of things are just turning down more deals at very early stages in the process or just quoting outside the market and therefore not funding as many deals. So the answer in that regard is it’s sort of both, sort of credit and yield.

[Chris Testa:]

Thank you and just to be attachment points roughly around 5.5 tons, you guys are now focusing on less cyclical industries, should we expect that to remain stable as a function of you focusing on less cyclical industries or to trend down a bit as you’re seeing more senior secured and first lien going forward?

[Jim Zelter:]

Yeah, I would say, when evaluating new credit, we consider it holistically and there’re certain sectors that can accept higher levels of leverage and in fact one of the things we look at very closely is CapEx adjusted leverage, as certain industries are less capital intensive. And ramping up your comment, as we do less cyclical all things to being equal, your leverage might otherwise tick up because certain of those names are capable of having higher leverage levels, so I’d answer your question by saying, it’s hard to project a specific direction, but less emphasis on cyclical outing being equal probably doesn’t bring that number down substantially. And again each time we underwrite a credit, we’re thinking holistically, we’re thinking about CapEx adjusted leverage and risk award.

[Chris Testa:]

Great, that’s all from me. Thanks for taking my questions.

[Jim Zelter:]

Thank you very much for joining us today and we look forward to talking to you in the near future.

[Operator:]

Thank you ladies and gentlemen. This does conclude today’s conference call. You may now disconnect.