Good afternoon, and welcome to the Apollo Investment Corporation's Earnings Conference Call for the period ended September 30, 2020. [Operator Instructions]. I would now like to turn the call over to Elizabeth Besen, Investor Relations Manager of Apollo Investment Corporation. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us today. Speaking on today's call are Howard Widra, Chief Executive Officer; Tanner Powell, 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 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 most recent filings with the SEC for risks that apply to our business and that may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our SEC filings, please visit our website at www.apolloic.com. 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 our Chief Executive Officer, Howard Widra.

Thanks, Elizabeth. Good afternoon, and thank you, everyone, for joining us today. Before we begin, I'd like to say that we hope everyone is doing well and you and your families are safe and healthy. I'll begin today's call with an overview of our portfolio and a review of our financial results for the September quarter. Following my remarks, Tanner will review our investment activity for the quarter and will discuss the impact of the COVID-19 pandemic on our portfolio. Greg will then review our financial results and provide an update on our liquidity position. We will then open the call to questions. During today's call, we will be referring to some of the slides in our investor presentation, which is posted on our website. As we all know, the COVID-19 pandemic has been an unprecedented shock to the global economy. We believe our portfolio repositioning over the past several years has allowed us to enter this challenging period with a well-diversified senior corporate lending portfolio invested in less cyclical industries with granular position sizes. Despite the significant economic headwinds due to the pandemic, our corporate lending portfolio continues to perform well, and we continue to recoup some of the unrealized losses taken in the March quarter. Over the past 2 quarters, our corporate lending portfolio has recovered approximately $22 million or $0.34 per share of unrealized losses. We believe the performance of our corporate lending portfolio during this challenging period demonstrates its resiliency and quality. The corporate lending portfolio, which represents 79% of the total investment portfolio, is at 86% first lien, 100% floating rate and 86% sponsor backed. No investments were placed on nonaccrual status during the quarter. We continue to work closely with our sponsor clients and portfolio companies, and we have generally been pleased with how…

Thanks, Howard. Beginning with the market environment, credit markets continued to recover during the quarter. Although spreads are still somewhat higher than prior to the COVID-19 outbreak, they declined significantly since peaking in late March or early April. Additionally, covenant waivers and credit amendments have slowed down. The new issue market has also been gaining momentum as borrowers sought to complete deals ahead of the election. The use of proceeds has been expanding from mostly add-on acquisitions to buy out sponsor/sponsor sales and dividends. And while credit documents and structures have tightened, borrowers are seeking private credit solutions over broadly syndicated capital. Moving to AINV, given the composition of our corporate lending portfolio, which is primarily first lien loans to less cyclical businesses, we believe the credit quality of our corporate lending portfolio continues to hold up relatively well during this period. However, as expected, we saw a continued need for covenant relief for some of our borrowers during the quarter. During the quarter, we saw a 40% drop in the number of amendments in our portfolio. Given our focus on reducing leverage, new investment activity was limited, while sales and repayments were relatively strong during the quarter. New corporate lending commitments for the quarter were $18 million across 2 companies, sales were $13 million, repayments were $108 million and revolver paydowns were $87 million for total exits of $209 million. Net repayments for the quarter were $103 million, including $36 million of net revolver paydowns. As Howard mentioned, given the strong level of repayments, we are now in a position to make new commitments as market activity has begun to resume. Moving to Merx, our aircraft leasing portfolio company. As you know, the pandemic has had a significant adverse effect -- impact on the global economy with direct implications…

Thank you, Tanner, and good afternoon, everyone. Beginning with the statement of operations. Total investment income was $54.9 million for the quarter, comparatively lower due to the smaller portfolio, a slightly lower overall yield and partially offset by an increase in prepayment income. Prepayment income was $2 million for the quarter compared to $300,000 last quarter, reflecting the greater portfolio activity. Dividend and fee income remained below historical levels. The weighted average yield at cost on the corporate lending portfolio declined slightly from 8.1% to 7.9%. Expenses for the quarter were $27 million, down $1.4 million quarter-over-quarter, primarily due to lower interest expense and lower management fees. Interest expense declined due to net sales and repayments and as a result of a decline in the average interest cost by approximately 16 basis points due to a slight decline in LIBOR. Our weighted average interest cost for the quarter was 2.96%. Management fees declined due to the decline in the average portfolio size. There was no incentive paid during the quarter. Net investment income per share for the quarter was $0.43. As Howard mentioned, net leverage at the end of September was 1.56x, down from 1.66x at the end of June due to the $103 million of net sales repayments and an increase in net assets. The increase in net assets were driven by the $5.4 million or $0.08 a share net gain on the portfolio and approximately $4.4 million or $0.07 per share of retained earnings during the quarter. On Page 16 of the earnings supplement, we have broken out the net gain or loss by strategy. We continue to see some reversal of previously recorded unrealized losses, reflecting the further tightening credit spreads relative to the first and second quarters of 2020. Our corporate lending portfolio had a gain…

[Operator Instructions]. Your first question comes from the line of Kenneth Lee with RBC Capital Markets.

Just wondering whether you could just provide any further details behind the visibility into additional repayments for the December quarter? And whether you could see any additional gross paydowns beyond the ones that were mentioned in the release?

Yes. Well, so gross paydowns, we have visibility of deals that we know are in the process of being sold or paying down of about another $100 million, whether any of those creep over to the -- over the new year, we don't know. But about another $100 million, that's gross paydowns. We do expect to do, as I mentioned, some new business. And so our leverage, Greg said, at 1.47x today and probably below 1.45x in the next week or so based on stuff that's paying off in the near-term and then probably starting to tread water around there on the lower side of our range.

Great. Very helpful. And just one follow-up, if I may. Wondering if you could just provide any update on thinking around potential funding mix changes in the near term.

On then not in the -- yes, not in the near term. We continue -- we have a very supportive bank group with over 24 banks, and we're constantly monitoring the market. And so we will, at some point, but not at this time.

Your next question comes from the line of Kyle Joseph with Jefferies.

Apologies, I was on mute. Anyway, I'll get right on the questions. So deployments have been light, not surprisingly, over the last few quarters as you guys have focused on delevering, but I think it sounds like you've gotten to a point where you're comfortable at evaluating new transactions. Tanner, I think, can you give us a sense for how the pipeline looks in terms of size? And then, in terms of terms, how it looks versus kind of pre-COVID deals?

Yes, sure. Thanks, Kyle. Thanks for the question. So I think you're spot on. That has certainly been the focus, getting back within our targeted leverage level, and you saw some deployment in the September quarter. I would expect that to increase in the December quarter. As it relates to pipeline, it's something we've stressed in the past, and I'll stress it once again. The good news is, when you look at the middle market platform in its totality, including MidCap, that origination continues to be strong and our participation in that origination does not dictate whether or not we're able to provide those solutions to clients. So even while we have not been able to make as many deployments or do as much deploying, the deals are still getting done. As it relates to pipeline more broadly, look, as we get further from the nature of COVID, you definitely see an increase in activity, not surprisingly. Also you've seen a bifurcation and a better understanding of those sectors that will be affected and those that won't. And not surprisingly, the M&A has increasingly gravitated or has gravitated to those that haven't. In terms of terms, I think as we said in the prepared remarks, we're still seeing -- we still see an increase relative to pre-COVID. So that, owing to continued robust competition in the private capital markets, private debt markets, has seen that spread compress. And so I would say if I were to try to generalize, it's probably 50 wider and in general, maybe a half-turn, quarter to a half-turn better than what you would have seen COVID. But obviously, that is a more generic term. And then generally speaking, a little bit better documentation. I would also note, as it relates to documentation, certainly, we've seen less delayed draw and revolver availability, especially in light of what we're grappling with as well as the rest of the market in terms of those unfunded commitments getting funded proactively by borrowers at the onset of COVID. So that's how I capture it. A little better, definitely, tightening relative. And importantly, AINV having done some sufficient deleveraging, would expect us to participate more in the origination coming off the MidCap platform and the broader Apollo platform.

Got it. That's very helpful. In terms of the portfolio yields in the quarter, obviously, there's a little Q-on-Q pressure. Obviously, that -- I would guess it's not rate driven. Is that more of a mix shift in terms of the assets that are being paid down?

Yes. I'll mention that. You've got a little bit of that dynamic where your highest yielding investments are not surprisingly the ones that are most targeted for repayment from the borrower side. So that was 1 dynamic. But then so too also you have where LIBOR contracts are set prior to the period. And so some of that was also a function of those finally kind of rolling through to the system, right? The those -- the LIBOR kind of came down steeply earlier in the year, and it takes time for those -- some of those contracts to roll off, and then that was contributing, to a lesser extent, to what you saw in terms of yield movement.

Got it. And then last question for me, just from a modeling perspective, probably for Greg. But just based on the losses in the earlier part of the year, when would you -- if we can assume that status quo no more losses, no more gains from here, when would you expect the incentive fee to be ending paid out again, just to check my math.

Yes. I think based on your assumptions, it would be December of '21.

Your next question comes from the line of Matt Tjaden with Raymond James.

Tanner, maybe first one for you. I know you said last quarter on the call that through July, cash flows at Merx were tracking at or above expected levels. Did that hold throughout the entirety of calendar third quarter? And any commentary you can give on what you're seeing thus far through November?

Yes, sure. Happy to. So that was what we were seeing through July, I would say that, that held through September. That forecast is based on the deferrals granted and what we had expected to kind of come back online. You had a dynamic where, obviously, while unfortunately, this has affected all parts of the world, it hasn't necessarily been equal. And so in Asia, you've obviously seen a return or a greater return or pickup in air travel. And then also in the U.S., while air traffic still remains very, very challenged, obviously, capital markets and the government support had been very, very robust. And so in general, we are still seeing a modest outperformance relative to our expectations in terms of lease cash flows. I would caution, and I think we remain appropriately cautious as if you think about a lot of those deferrals that were granted, Matt, they were in that April to June period, and were typically 6 to 9 months. And so it is during this period we're kind of real-time on those coming back online. And so while we are encouraged by kind of relative to expectations, what we've seen to date, we remain cautious, inasmuch as not all of those borrowers, not all of those lessees have been scheduled to come back online as of now.

Great. That's helpful. And then last one for me, just a quick one. I know you said 40% drop in amendments during the quarter. Any commentary you can give on the seriousness of those amendments compared to the prior quarter?

Yes, sure. I think -- so you were right to recognize that I think this is -- it makes sense as -- in the midst of the pandemic, and the worst of the downdraft, you saw a lot of borrowers reaching out proactively. And then as that activity is past, you've been in a phase where we were, especially in light of, or coincident with sponsor support for transactions, we obviously gave the runway for those transactions. In terms of the activity we saw, it was down 40%. You had about 8, about 9 amendments in the quarter, about half of which were what we would consider more substantive. Again, many of which entailed equity contributions from the sponsor. And then the other half would be more kind of strategic and less substantive. So in terms of your specific question, I would say those were substantive, sort of very much dealt with underperformance or COVID effects. But in terms of volume, as we mentioned in our prepared remarks, definitely less activity. And importantly, where there were those more COVID-affected names, saw good sponsor support in those particular amendments.

[Operator Instructions]. Your next question is from the line of Finian O'Shea with Wells Fargo.

Tanner, appreciated your color on Merx this quarter. Just sort of a 2-part -- first of all, question on the valuation, going down 1.8%. You said there was an offset from the collateral value versus the servicing contract. The first part is like was the magnitude of those swings, were they large or were they both pretty modest given the net impact was pretty modest? And then second part, to the extent the servicing business increased for your servicing business, what was sort of level of collateral or assets that the business want to service to Apollo, presumably generated maybe in the quantity of airplanes or capital invested if you understand how we prefer the answer, if you can? That's the first question.

Yes, sure. And Greg might have the specific numbers. So I'll jump in first and answer. They're relatively modest in terms of the up and the down. And obviously, the net down $5.9 million in terms of collateral value versus the servicing. And then in terms of your other question related to the servicing platform. We mentioned in August, our August call, we've done a big transaction for Delta. The pipeline remains very, very robust in terms of other opportunities as well as also the servicing platform also benefits to the extent that transactions are harvested. And part of the write-up was related to some of that harvesting. And so not as much a specific quantum that I can point to in terms of what drove that increase, except to say, though, we do have -- we have successfully raised a dedicated fund, which is -- still has available capital to it, to undertake these transactions and also have the benefit of the broader Apollo platform and their potential demand for aircraft leasing transactions as well. And I don't know, Greg, if you had the specific numbers, but relatively modest, up and down.

I think I have the -- I think the ballpark of the numbers were, there's a total write-down of 5. And I think the servicing platform was written, was increasing value between, like, the sort of the medium single digits. So between something like 5 and 10. And so that took the -- and that means the collateral part was down 10 to 12. It's like that ballpark. So -- and the servicing platform went up for a couple of reasons, both because there were more transactions done on the platform and also because there was some explicit fees generated that are now receivables of disposition of some claims. So that's even more direct value because there'll be cash coming.

Right. And Fin, the other directional thing that you can get is the metal, the way that we look at it, has been written down, and these are based on cash flows, residuals and all that, over 18%, okay? So that's kind of the magnitude that we have written down, the metal side of it. And that's pretty reflected in kind of, if you look at market comps and stuff.

And that's from March, right? Or as we...

Yes, that's from March through the September quarter. Yes.

That's helpful. And to that matter, assuming things, as we've talked about, a lot of these aircraft are tied to government sponsored or major airlines around the world, maybe they were -- some were being renegotiated and such. I assume now you have -- I assume now that you've been through most of that. What kind of, like, top line impacts overall for the business did Merx experience? And how far along do you think you are in that process?

Well, you want me to -- let me take a shot first. So yes, but we've worked through and have initial agreements or agreements with all of the airlines. Of course, they have to live by those terms going forward, right? And so if there's other challenges, that could change going forward, but we feel like we have a reasonably good view on sort of what the cash flows are going forward. Previously, prior to all of this, the cash flows from Merx generally was in the $40 million to $45 million range between debt payment and dividends coming out of Merx to AINV each quarter. Now it's $20 million of interest. So it's less. So the answer is, that once those cash flows -- if people perform under these leases, we will generate significantly more -- between that $45 million and $20 million per quarter, but significantly more than the $20 million. The issue in the short-term is that there's some catch-up to do in some of the securitization structures. So the cash that's initially produced that month is -- that quarter is paying down debt. But under these new lease contracts, it's sufficient to generate cash flow well above the income we're recognizing off Merx every quarter, which gives us further cushion into sort of the value we have as well as pulling our servicing platform. And so -- does that make sense, Fin?

Yes, very helpful.

And that's sort of how we're looking at it. And so the key is keeping these lease, these -- we now know what to expect. It's not as good as it was before. But it's -- but effectively, when you look at AINV, you're paying for that through the lower return we have off Merx, but we've modeled our dividend off those lower returns off Merx. And we believe, in addition, we have some ability to outperform because we can generate liquidity off some of our planes that are either cargo planes or have some strategic value to somebody, to bring our bases down some as well over the next two quarters. And that's our goal, to even further make that picture, that gap, less impactful to our cash flows and give people a sense of a -- more range-bound on sort of where the value is or a cushion we have on the valuation.

We have no further questions at this time. I would like to turn it back over to management for closing remarks.

That's me. Thanks, everybody, for listening today. And on behalf of our team we thank you again for taking the time and supporting us through this challenging environment. Feel free to reach out to any of us with any questions, and we hope everybody has a nice day.

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