Apollo Investment Corporation
Q3 2014 Earnings Call Transcript

Published: 6 Feb 2014

[Operator:]

Good afternoon, and welcome to Apollo Investment Corporation's earnings conference call for the period ending December 31, 2013. [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. With me are Jim Zelter, Chief Executive Officer; Ted Goldthorpe, President and 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 of companies. You should refer to our registration statement and shareholder reports for risks that apply to our business and 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've 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'd like to turn the call over to Jim Zelter.

[James Charles Zelter:]

Thank you, Elizabeth. This morning, we issued our earnings press release and filed our quarterly report on Form 10-Q. I'll begin my remarks with some financial highlights for the quarter, followed by some other recent business highlights. Following my brief remarks, Ted will provide an overview of the market environment and review our investment portfolio activity for the quarter. And finally, Greg will discuss our financial results in greater detail, and then we will open up the call for general questions. We are pleased to report strong results for the December quarter, including solid earnings, a meaningful increase in our net asset value, an increase in the overall portfolio yield and continued strong credit quality. We reported net investment income per share of $0.22 for the quarter, which reflects an increased level of recurring interest income and higher origination-related fees, offset by lower level of prepayment income compared to the September quarter. Net asset value per share rose 3.3% quarter-over-quarter to $8.57, driven by strong appreciation across most of our portfolio. Underlying fundamentals in the credit markets remain sound. However, as we said before, we believe that the persistent bid for yield continues to result in the mispricing of risk, and we see increasing signs that warrant us to be conservative, cautious and selective about investment opportunities. As always, we are focused on risk-adjusted returns not absolute returns. In addition, the banking industry continues to grapple with an evolving regulatory backdrop, which is having a direct impact on primary origination in the marketplace, and we are constantly evaluating the opportunities that this can present to our business. That being said, we believe the risk-adjusted reward is most attractive for senior -- for secured debt opportunities in the primary market, which account for 59% of our investments made during the quarter. In addition, the markets provided us with the opportunity to derisk the portfolio by monetizing select higher-risk assets, which Ted will cover. We are pleased with the current accomplishment of our portfolio, and we are disciplined in our approach and favor security over incremental yield as we deploy capital. Turning our discussion to the dividend. The Board of Directors approved a $0.20 dividend for shareholders of record as of March 21, 2014. Based on our closing price -- share price yesterday and annualizing the dividend, our current dividend offers in excess of 9.7%. With that, I will turn the call over to Ted to discuss the current market environment and our investment portfolio.

[Edward J. Goldthorpe:]

Thank you, Jim. Beginning with the market environment. Despite some economic uncertainty, the leveraged credit market strengthened throughout the December quarter as volatility remained low and credit spreads tightened. Mutual fund inflows into leveraged loan and high-yield were both positive, and CLO issuance rose as demand for high-yield assets remained strong. High-yield and leveraged loan issuance remain at elevated levels, and debt investors appeared to be increasingly tolerant of higher leverage and covenant-light structures. With this backdrop, we continue to find select opportunities in our pipeline that meet our strict underwriting standards and remain focused on covenants. Through the December quarter, we invested $630 million in and 21 new and 22 existing portfolio of companies. Since early 2012, we have been focused on investing in secured debt, which we believe continues to offer the most attractive risk-adjusted returns. Accordingly, 63% of investments made during the period were secured debt. And at the end of December, secured debt accounted for 51% of the portfolio, up from 32% when we started to reposition the portfolio. The December quarter was seasonally active, and some transactions from the December quarter have spilled into the March quarter. We have also received $293 million of proceeds from sales and $250 million from early repayments and revolver payouts. From a yield standpoint, our yields improved as we continue to both capture the illiquidity premium for our repositioning strategy and also sell lower-yielding assets. There is a positive spread between new and sold investments during the quarter, and the yield on new investments was up slightly quarter-over-quarter. Overall, the weighted average yield in our debt portfolio at cost increased to 11.4% at the end of December, up from 11.3% at the end of September. Next, I'll discuss our portfolio activity in greater detail. Nearly 90% of investments in the quarter were primary market originations, with continued contributions from our specialty verticals. Oil and gas accounted for 11%, and aircraft accounted for 5% of our gross investment activity. We made an investment in Crowley Holdings, a diversified marine solutions transportation and logistics company, to support their fleet expansion. And we've committed approximately $35 million to Reichhold Industries, which is a global manufacturer of resins for the composites and coatings market. Also during the quarter, our investments in both PlayPower and Garden Fresh were refinanced. Moving to sales. During the quarter, we used the strength in markets to monetize some of our higher-risk positions. Secondary sales accounted for over half of exits. Notable exits included the partial sale of our investments in First Data, Avanti, Magnetation and Avaya and the complete exit of our investment in Arysta LifeSciences. Investments that were repaid in whole or in part during the quarter included our investment in Amaya Gaming, Smart & Final stores and First Data. Moving to some general portfolio statistics for December 31. We continue to be diversified by issuer and industry, with 101 portfolio of companies invested in 34 different industries. The company's total investment portfolio had a fair market value of $3.18 billion, with 51% in secured debt, 32% in unsecured debt, 7% in structured products and 10% in preferred equity, common and warrants. Lastly, we believe the overall credit quality of our portfolio remain strong. The weighted average net leverage of the portfolio at the end of December was 5.2x, unchanged from the end of September. The weighted average interest coverage at the end of December was 2.3x compared to 2.4x at the end of September. No new investments were placed on nonaccrual status during the quarter, and in addition, the weighted average risk of our portfolio measured at cost and fair value was 2.2 and 2.1, respectively, unchanged from the prior quarter. With that, I will now turn the call over to Greg, who will discuss our financial performance for the quarter.

[Gregory William Hunt:]

Thank you, Ted. Beginning with operating results. Total investment income for the December quarter was $94.6 million, up 1% from last quarter and up 14% from the year-ago quarter. Net investment income was $49.7 million or $0.22 per share for the quarter. This compares to $49.6 million or $0.22 per share for the September quarter and $42.1 million or $0.21 per share for the December 2012 quarter. In comparing both quarters, the decline in prepayment income was offset by higher origination-related fees and an increase in dividend income. Specifically, interest income for the quarter included $2.5 million of prepayment income compared to $9 million in the September quarter and $2.2 million in the December 2012 quarter. As of today, we expect prepayment income for the March quarter to be roughly in line with the December quarter. Origination-related fees rose commensurate with the increase in investment activity. The increase in dividend income was attributable to higher dividend income from structured product investments, as well as a special dividend from our Booz Allen investment. Expenses for the December quarter totaled $44.9 million, up slightly from $44.1 million last quarter and $41.1 million 1 year ago. For the quarter, the net gain on the portfolio totaled $56.1 million or $0.25 per share compared to a net gain of $26.8 million or $0.12 per share during the September quarter and a net loss of $64.8 million or $0.32 per share for the year-ago quarter. The net gain in December 2013 quarter was driven by an appreciation within both our quoted and non-quoted securities, including inVentiv Health, Magnetation, Gryphon Colleges, Generation Brands and Energy & Exploration, partially offset by minimal declines from a handful of positions, including Allied Nevada, Univar and LVI. In total, our quarterly operating results increased net assets by $100.7 million or $0.47 per share compared to an increase of $76.4 million or $0.34 per share for the September quarter and a decrease of $22.7 million or $0.11 per share for the year-ago quarter. Our total investment portfolio had a fair market value of $3.18 billion at the end of December compared to just over $3 billion at the end of September. Net assets totaled $1.93 billion, with a net asset value per share of $8.57 at the end of December. This compares to net asset values totaling $1.86 billion and a net asset value per share of $8.30 at the end of September. On the liability side of the balance sheet, we had $1.26 billion of total debt outstanding at the end of the quarter, up from $1.08 billion at the end of the prior quarter. And the company's debt-to-equity ratio was 0.66, up from 0.58 at the end of September. The net leverage ratio, which includes the impact of cash and unsettled transactions, was 0.65x at the end of December, up slightly from 0.62 at the end of September. With that, operator, we'll open the call to questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Arren Cyganovich of Evercore Partners.

[Arren Cyganovich:]

The deal activity you had was obviously strong, but it was also pretty granular with 21 new companies and 22 existing. Is that something that signal that you're kind of going towards smaller companies or it just happened to be what was coming to you during the quarter?

[Edward J. Goldthorpe:]

Yes, this is -- it's a good question. I mean, we have taken up the number of our portfolio companies in our -- the average position size has gone down pretty materially over the last 2 years. I think there's a big focus by Jim, myself and Greg and the entire management team on just reducing the overall position sizes so if there's an issue with one of our portfolio of companies, it doesn't cost shareholders undue losses. I think there is a concerted effort from us, a, to focus on smaller companies than we've historically focused on; but number two, sizing positions very differently. So not only do we invest in a lot of new companies, you'll also see that our -- so we will reduce the size of some of our large positions not necessarily because we don't like those positions, we just prefer them to be smaller.

[Arren Cyganovich:]

And then the -- my other question is on the prepayments and exits that you had. Obviously, the exits are somewhat elevated right now. What are your thoughts going forward? It sounds like, from the prepay guidance, that you don't have a lot coming back to you at least as of now. What are your thoughts on continuing to kind of rotate out of some of your positions in the portfolio?

[Edward J. Goldthorpe:]

Yes. So what I'd say is we continue to have a large amount of liquidity in our portfolio. If you look at our exits and repayments over the course of last quarter, there was a lot of sale activity. So we were -- when the credit markets are strong as they are now, it's a good opportunity for us to either sell certain positions or shrink certain positions, which I think is just a very prudent thing to do. The benefit that we have -- there's a massive wave of repricings in the loan market today. I think one of the benefits that we've had is that, obviously, all of our -- almost everything we own has pretty significant call protection. So the call protection makes it very costly just to do a drive-by repricing of a lot of our assets. So we haven't been really seeing anything abnormal in terms of repayment activity. But obviously, if the credit markets continue the way they are, obviously, repayments are still going to be an issue for us for the next 12 months. We really haven't seen a big, big pickup in repayments.

[Operator:]

Our next question comes from the line of Terry Ma of Barclays.

[Terry Ma:]

Can you just maybe talk about how your originations are shaping up and what the investment environment looks like for your specialty verticals quarter to date?

[James Charles Zelter:]

Well, let me start it out, and I'll toss it to Ted. We feel as if that the progress that we've made and the head roads we -- inroads we've made into our origination verticals have been very beneficial to our shareholders. Certainly, there are dynamics in each one of those markets that, in time, competition heats up or competition changes. But I don't think there's any one vertical where we're spending all of our time, neither do I think any vertical is drying up right now. I think that there is -- as Ted and I both mentioned, there is an elevated activity around the senior secured syndicated market, but smaller companies are afforded sometimes less options. And as I mentioned earlier, I think there's been a lot of headlines, a lot of articles written about the changing regulatory backdrop, but I think traditional underwriters' ability to underwrite and distribute second lien and subordinated paper is a little bit more challenged these days. So I think that we are -- there's a healthy knowledge of the challenges in a rich environment, but we're still finding idiosyncratic investments. So I wouldn't expect a tremendous historic pace, but I -- it's not dried up entirely either, so we're somewhere in the middle.

[Edward J. Goldthorpe:]

So I'll get a little more specific, which is there really isn't a lot of opportunities for us in either the liquid markets or just the regular way primary issuance. Spreads have come down quite dramatically. Sponsor activities picked up pretty dramatically for us as well. And I can't -- we can't tell if that's seasonal or a bigger trend, and I think it's a bit of both. We always are very, very active with the December 31 deadline. So I think a bit of it's seasonal, but I also think a lot of it is sponsor activities picking up. And we've also seen yields beginning to stabilize a little bit in the sponsor-financed channel, which is a very positive thing for our business. You can see that in the numbers. And if you look at our book and you bifurcated between our specialty verticals and our sponsor finance or other, what we call, generic verticals, you see that there's a big spread differential between where we're booking stuff in our specialty verticals. So we think the investment we've made in the breadth of the platform is -- has been a very good thing for us. And we think we've increased the size of the funnel so we can make decisions around being more selective on what's coming in.

[Terry Ma:]

Okay, great. I appreciate the color. Can you maybe just give a little color about how much more opportunity there's left to maybe high-grade the portfolio?

[Edward J. Goldthorpe:]

Yes. It's something we talk about a lot. I mean, if you bifurcate our portfolio, there's still a decent amount of our portfolio -- or I'd say a significant amount of our portfolio that yields sub-10%. So we have an opportunity to -- we originate 12% assets. We have an opportunity to what I call -- I use the word high-grading, I don't know what the right term is, but enhance yield for our shareholders. So we've said this in every earnings call. We don't feel there's a pressing need to grow, and we think there's continued organic opportunities to reposition our existing portfolio.

[Operator:]

Our next question comes from the line of Ryan Lynch of Keefe, Bruyette, & Woods.

[Ryan Lynch:]

inVentiv Health accounted for about $14 million of your guys portfolio gains this quarter. And I was just wondering, would those be due to the underlying strength of that portfolio company. Or was it more of just a mark-to-market kind of issue?

[Edward J. Goldthorpe:]

Yes. I mean, so that's obviously the largest -- I mean our gain -- so just taking a big step back because I'm assuming we're going to get this question. Our gains are pretty broad-based across the portfolio. So I think a lot of people are surprised that they are NAV increased, but it was very broad-based. Obviously, the larger -- largest amount is inVentiv. I think -- listen, I think the company is doing fine. I think a lot of it was market-related, to be honest. But there is a -- it's a -- there's some technical factors to it, which kind of throw the bonds lower earlier in the year, and this is a position that, obviously, has risen. I think we benefit obviously on this specific position by people -- a bit of this reach for yields by the market.

[Ryan Lynch:]

Okay. Then also in the calendar first quarter 2014, I see you guys entered into a $175 million credit facility with Miller Energy. Will that new position cause your position that you guys had in the fourth quarter to be repaid?

[Edward J. Goldthorpe:]

Yes. So our existing yields -- Miller -- we said at a press release earlier this week, we were refinanced out of our Miller Energy position. We obviously did not do the whole $175 million. We actually partnered up with somebody who we think is a very, very smart, sophisticated counterparty. And so that was just announced this week. So the answer is yes, there'll be a -- it got refinanced but with a bigger facility. I mean, the company has done very, very well and grown -- they've tripled production since we made the initial loan. So we just feel we're growing with the company.

[Ryan Lynch:]

And then one last one. I see you guys provided -- a lot of people are asking about interest rate exposure to the BDCs, and you guys provided a nice slide in your deck about how that affects your guys earnings if interest rates go up. Have you guys done any kind of analysis or thought about what effect of rising interest rates will have on the underlying portfolio of companies that you guys lend money to?

[Edward J. Goldthorpe:]

You mean -- are you asking about credit quality?

[Ryan Lynch:]

Yes. I mean, obviously, if interest rates go up, it might cause stress on your portfolio of companies as they're going to be -- the interest expense is going to go up. Have you guys kind of done analysis on that or thought about that in any way?

[Edward J. Goldthorpe:]

Yes. I mean, when we're underwriting all the credits -- I mean, one thing I'd caution people on is the fixed charge coverage ratios in a 0 interest rate environment look pretty good. In a rising interest rate environment, those will get worse. But that being said, we obviously focus on that pretty closely with all of our underwritings. I don't think we've actually rolled it up and published it on a portfolio basis. But it's definitely a consideration when we're underwriting our credits.

[Operator:]

Our next question comes from the line of Doug Mewhirter of SunTrust.

[Douglas Mewhirter:]

I guess I had 2 questions. One is more of a big-picture question. If the equity markets continue to correct for a little bit, how does that -- or in your experience, how do you think that would affect your world? Would that maybe increase M&A transactions because maybe the targets go cheaper? Or would that actually disrupt the market because risk aversion is higher so maybe your deal flow -- maybe you get better terms, but your deal flow dries up? I mean, have you ever sort of played around with scenarios in a down public equity market environment?

[James Charles Zelter:]

Sure, we -- as investors in the credit space for a long, many decades, we think about this all the time. I mean, certainly, a year or so ago, it didn't surprise us that the equity market have a lot of room -- run room. When we looked at relative risk/reward, that's probably changed. And this whole EM market concern of refinancing in many countries and currency issues is putting a bit of volatility in the market. And we like -- actually, as an investor with this pool of capital, we like that because whenever there's uncertainty, it brings some of the more aggressive folks back to the sidelines. And so a little bit of volatility in the credit markets, we would not be -- we will be supportive of. We're used to it. If equity prices go down a little bit, it might bring a bit more strategic M&A, it might. I think that we are -- if you said, what are our top-down views here from Apollo, certainly, I think that we feel that some of the economic numbers in the U.S. are stronger than we would have felt a year or so ago. And so through the course of '13, some positive numbers. That being the case right now, the U.S. consumer is in better shape than it has been, the Detroit's in better shape. So we -- at the same time, we realize we're 5 years into a credit cycle. So that's why we're not afraid to invest. We're just afraid -- we want to make sure we're investing in a better attachment point. But it's -- we don't predict multi-quarter volume based on equity flows or where other flows. They're just -- they're too precarious to do that.

[Edward J. Goldthorpe:]

Yes. I had one thing, which is volatility, typically, is very good for us because we compete in 1 of our leading -- and this is all the BDCs. All the BDCs provide certainty of execution. And oftentimes, no one -- this is like a -- oftentimes our biggest competitor is the syndicated markets. And so in June of last year, when there is a bit of a pullback in credit and equities, we had a huge origination month because, again, we typically are more expensive than the regular way deal that gets syndicated. So all that being said, any pullback is usually good for us. We have not really seen the big pullback in credit, but we've also really not seen a big pullback in syndicated market activity. So the equity market today, as of today, we have not had a real material pickup in origination activity due to volatility.

[Douglas Mewhirter:]

Okay. Another -- my last question is a specific question. Give me update on Gryphon Colleges or Delta Educational Systems. And also, if you could clarify, is the investment made in Gryphon Colleges Corporation or in the underlying Delta Educational company?

[Edward J. Goldthorpe:]

I'll answer the first question. I'll let Greg answer the second question. We feel really good about this one. I mean they had a maturity -- obviously, they're in a sector that is shrouded with uncertainty. And the business -- and you've seen this across the whole industry, not just in Delta, which is Delta is the -- the holding company is called Gryphon, but the company is called Delta Education. Delta, so we feel very good about this investment. I think a lot of the compliance costs that these guys had to spend in their business are behind them, and I think you've seen a stabilization in enrollments. So I think the whole sector has actually done much better. And so we feel cautiously okay about this one as we sit here today. I'll let Greg answer the specific corporate structure question.

[Gregory William Hunt:]

Yes. And we're in both the Gryphon securities and the Delta, in various parts of their capital structure.

[Operator:]

Our next question comes from the line of Jonathan Bock of Wells Fargo Securities.

[Jonathan Bock:]

Ted, real quick, maybe just a point of understanding. As I look at Slide 5 in your deck, it refers to new investments. As I look at the first and second lien securities, obviously makes sense that there's opportunity in both classes. Yet, I noticed that the yields at costs are effectively the same. And so maybe could you provide a little color on either the strong yield or risk-adjusted return opportunities one is getting in first lien to allow an outside spread or perhaps more pricing competition in second lien, which is pushing it down? Because one would imply that between first and second lien, there's a difference in terms of all-in leverage yet the yield there or the return to the investor appears the same.

[Edward J. Goldthorpe:]

Yes. That's great question. So I think number one 1 is it's hard to measure it quarter-to-quarter because either you're talking about $158 million of first lien on a business with a lot of originations. But the answer to the question is most of our first lien senior secured risk is originated and illiquid. So there's -- as we've mentioned in the past, there's still a big, big premium for illiquidity in the market. The second lien, we do, do a lot of originations in second lien as well, but the yield gets dragged down a little bit by certain positions that are a little bit more liquid. So I think it's a, driven by certain originations that we've done. And I think number two is our first lien senior secured basket is typically a lot -- is less liquid than our second lien basket.

[Jonathan Bock:]

That's fair. And then maybe a question on the illiquid and liquid opportunities. So looking at the illiquid opportunity in today's environment, would you be perhaps a bit more enthused in light of the additional economic strain that you can use to -- could be pressed on the market? Or do you just see those deals as very idiosyncratic and generally it's very hard to kind of postulate where they'll come in as it relates to general market?

[Edward J. Goldthorpe:]

Yes. I mean, I'd say a slow growth environment is not terrible for our debt portfolio because, typically, it means if companies are growing really, really quickly, we typically get repaid a lot faster. So it's good for repayments. And then number two is I'd say the big impact on our business has been there's been a lot more -- Jim mentioned it in his remarks. There's been a lot more clarity on regulations that have been put out in the last 3, 4 months, the Volcker Rule, the CLOs get in the game [ph] rule. This is having profound implications on our origination business. So we're definitely a beneficiary of a lot of these rules that are coming out, and we think that will continue for the foreseeable future.

[Jonathan Bock:]

And maybe a few more questions, if I may. Talking about the liquidity that you have from other, we'll call it, liquid. I think you mentioned loans 10% and under, Ted. Would you give us a sense of maybe the amount of, we'll call it, churn-able liquidity that you currently would look at as available to you today?

[Edward J. Goldthorpe:]

Yes. So I'd say the total amount of our portfolio yielding below 10% is 26%. So when we look at the different levers we have in our business, we have couple of different levers. There's obviously -- and one of them is this. So we also have -- we still think we have over $1 billion of liquidity in our portfolio. So we feel like to the extent that the origination environment picks up or we see really, really good opportunities come to us, we feel like these have a very, very -- we have very good ability to be able to reposition our portfolio.

[James Charles Zelter:]

The other thing I'd say, Jonathan, is we've talked in the past about our comfort range on leverage from 5.5 [ph] to 7.5 [ph]. And right now, we feel that's like the one of the levers we can pull for shareholder returns, and we're comfortable operating in this zip code right now. So we're not at all -- between the liquidity that Ted's mentioned, between the quality of our book, we like having that operating leverage in the business to generate incremental returns, which we think is appropriate.

[Jonathan Bock:]

That's very much appreciated. And then maybe just a few more smaller items. I noticed that PIK income picked up slightly from $6.6 million last quarter to about $8.4 million. Can you outline perhaps what this was due to?

[Gregory William Hunt:]

Yes. Jonathan, one was -- one of our investments in just our Wind Holdings. We also moved our PlayPower investment down to a preferred stock position in order to assist the company in their refinancing. We didn't change, basically, the amount of leverage in the company. We just swapped it down so they would get actually a better rating from the rating agencies. So that impacted the balance also.

[James Charles Zelter:]

But I don't think -- Jon, there's no material view -- we don't want to outlaw PIK but PIK should be a portion of our portfolio. So it's about -- whenever you get longer in a cycle, there will be some more PIK opportunities, but we're going to look at them on an idiosyncratic basis.

[Jonathan Bock:]

No, you're right. And I guess, I'll juxtapose that in light of the Penton [ph] gain, obviously, that those can offset over time. And it's good to see additional value being realized. Ted, Jim, guys have you seen additional opportunities for upside NAV, perhaps as it relates to LVI, I guess, over the long run, right, or other investments that might perhaps give an additional boost to NAV as Penton [ph] or maybe a few others have just recently?

[Edward J. Goldthorpe:]

Yes. I mean, listen, I'd be very cautious in guiding in terms of additional NAV upside for certain private equity positions. But what I would say that there's a huge focus on them, so things like LVI and PlayPower. We've got multiple people here who spend the vast majority of their time trying to maximize the value of those for shareholders, and we are doing a lot of things for those companies to try and create net asset value for our shareholders. But I think it'd be inappropriate for me to paint a positive NAV upside story through those 2 positions.

[Operator:]

Our next question comes from the line of Chris York of JMP Securities.

[Christopher York:]

As a response to leverage lending guidelines in May, have you guys seen more bank start to shop loans with special mention? Also, have you been looking to buy some of these assets given that BDCs have been in place for more illiquid assets?

[James Charles Zelter:]

That's particular -- if only it makes sense to comment on any particular activity. But we're not, broadly speaking, seeing banks shop assets that would be special mention. I think my sense is they're trying to curtail the amount of new volume that accrues to that category. And there's been some noteworthy articles that are talking about some firms underwriting assets and other firms backing away. But I'm not seeing a wholesale desire to rid themselves of those loans. I think in the multitude of dialogues that we're having, every firm has a different perspective on how they want to interpret the rules for their own platform. There's a lot of very thoughtful time being spent and a lot of resource being spent on it. And as I said earlier, I just think that subordinated credits will have a narrower window of acceptance in the broad regulatory categorized institutions. And with that being the case, not sure how it's going to play out, but I believe we will be a beneficiary.

[Edward J. Goldthorpe:]

Yes. I mean, the only thing that I'd add is it's early days. So I think banks are trying to interpret some of these rules. So I think, as Jim said, it'd be -- we're not seeing a lot of activity, but I don't think that means anything because it's still very early days.

[Operator:]

Our next question comes from Robert Dodd of Raymond James.

[Robert J. Dodd:]

Just a quick one first. On the structure fee dividend income or origination fee income, how do you -- can you give us any color on the sustainability of the level you expect to see? I mean, obviously, you disclosed on the prepayment fees. It looks like -- and the Booz special dividend, which I guess is about $1 million. It looks you got maybe $4 million in structuring fees when you restructured maybe PayPal [ph] and Merx or changed the structures there. I mean, there's about $5 million. I mean is that in the ballpark? Or do you think the levels this quarter are sustainable on the dividend side and structuring origination fees side?

[Edward J. Goldthorpe:]

Yes. I mean as a component of our business, that is unpredictable and I call that recurring nonrecurring items. With us, we have 100 portfolio of companies. So we're constantly getting dividends and repayments and amendment fees. And as we originate new deals, we obviously get origination fees and so there's a certain level to our business where we get a constant stream of what I call noninterest income. And I think -- I don't think this quarter was an aberration vis-à-vis the run rate of our business.

[Robert J. Dodd:]

Okay, perfect. Just one follow-up. On Merx, looks like you changed the structure of that to, essentially, a single revolver versus piece by piece financing. Can you give us any color? Was that just to give it more flexibility and nimbleness in the marketplace? Or has there some change in the market that necessitated the change in structure?

[James Charles Zelter:]

Yes. There has not been any change in the market or how we're financing Merx. We just thought it was an easier structure as Merx needed capital and they repay capital. It was an easy way for us to have a facility available for them should they need it.

[Edward J. Goldthorpe:]

Merx is of sufficient size now, where it's generating cash, a lot of investments. And so this is the way that you'd capitalize a normal company. And again, making one-off loans every couple of months to one of our entities, this, for us, just felt a lot cleaner and more straightforward.

[Operator:]

Your final question comes from the line of J.T. Rogers of Janney Capital Markets.

[John T. G. Rogers:]

You guys touched on a little bit earlier on upside in NAV from appreciation in existing investments. But I was wondering what your thoughts are on structuring new deals to specifically generate capital gains. You guys have about $5 per share realized losses, and it really looks like there's an opportunity to grow book value pretty significantly in tax benefit way, if you guys were to focus on capital gains.

[James Charles Zelter:]

We agree. I think whether it's what we're trying to do at Merx or other areas, we wholeheartedly agree. That's an asset that we think we've got to figure out how to monetize and accrue to our shareholders' benefit. We have a bunch of ideas we're working on right now in our book, but I think any discussion in greater detail would be premature. But we wholeheartedly agree and want to make sure we monetize that asset long term for our shareholders.

[Edward J. Goldthorpe:]

One thing I just want to caution people on is we're -- first and foremost, our investment team here is focused on downside protection, and we're folks that are generating income for shareholders and a stable dividend. So I don't think -- one of the things under consideration, for example, is not us moving wholeheartedly into the private equity business. I don't think you're going to see us do regular way LBOs. You're not going to see us buy operating companies. And I know that some of our peers are doing that. We just feel like our shareholders really want us to be focused on downside protections, making -- covering our dividend comfortably. And as Jim said, listen up, there's ways we generate NAV. We will try and do that. And we have a lot of things under exploration. I just want to caution people that we're not going to wholeheartedly change our business model.

[James Charles Zelter:]

Well, with that, folks, we appreciate all the questions. We appreciate the attendance on the call and until next quarter. We look forward to hearing from you, and call in the interim if you have any questions. Take care.

[Operator:]

This concludes today's conference call. You may now disconnect.