Good afternoon, and welcome to the Apollo Investment Corporation 's earnings conference call for the period ended September 30th, 2020. At this time, all participants have been placed in a listen-only mode. The call will be open for question- and- answer session following the speaker's prepared reMerx. If you would like to ask a question at that time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. 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, 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're 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 that today's conference call and webcast may include forward-looking statements. Forward-looking statements about 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's doing well and you and your families are safe and healthy. I'll begin today's call with an overview of our portfolio and review of our financial results for the September quarter. Following my reMerx, Tanner will review our investment activity for the quarter, and we'll 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.
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 two quarters, our corporate lending portfolio has recovered approximately $22 million or $0.34 per share of unrealized losses. We believe that 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 86% first lien, 100% floating rate, and 86% sponsor backed. No investments were placed on non-accrual status during the quarter. We continue to work closely with our sponsor clients and portfolio companies, and we have generally been pleased with how sponsors and borrowers have been managing through this current environment. Conversations with sponsors and management teams continue to be cooperative and constructive. We are generally seeing strong equity support by sponsors.
Away from corporate lending, results for the quarter were negatively impacted by our investment in Merx and from non-core and legacy investments, which Tanner will discuss. During the September quarter, we made significant progress deleveraging to within our target range of 1.4x-1.6 x. The fund's net leverage ratio declined to 1.56 x at the end of September, compared to 1.66 x at the end of June and 1.71 x at the end of March. New investments as marketing activity resumes, while we also continue to manage our existing portfolio. Moving to our financial results, net investment income for the quarter was $0.43 per share, reflecting a smaller portfolio given net sales and repayment, a lower portfolio yield, partially offset by an increase in prepayment income compared to the prior quarter.
In addition, given the total return feature in our incentive fee structure, no incentive fees were accrued during the quarter. The portfolio had a net gain of $5.4 million, or $0.08 per share, driven by a net gain of $17.8 million or $0.27 per share on the corporate lending portfolio, partially offset by a net loss on Merx and on non-core and legacy assets. Slide 16 in our investor presentation shows the net loss for the quarter broken out by strategy. Net asset value per share at the end of September was $15.44, a $0.15 or 1% increase quarter-over-quarter. The $0.15 increase is attributable to the $0.08 net gain in the portfolio and $0.07 of retained earnings.
Turning to our distribution, as discussed last quarter, in addition to a quarterly base distribution, the company's Boards expect to declare a supplemental distribution in an amount to be determined each quarter. Accordingly, the Board has declared a base distribution of $0.31 per share and a supplemental distribution of $0.05 per share, payable on January 7th, 2021 to shareholders of record as of December 21st, 2020. With that, I'll turn the call over to Tanner to discuss our investment activity portfolio.
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've 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 buyouts, sponsor-to-sponsor sales, and dividends. While credit documents and structures have tightened, borrowers are seeking private credit solutions that would broadly portfolio, which is primarily, firstly, we believe the credit quality of our corporate for some of our borrowers during the quarter. During the quarter, we saw a 40% drop in the number of amendments in our portfolio.
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Opportunistically deploy capital in the face of widespread uncertainty and market disruption. To be clear, Merx is focused on the existing portfolio and not seeking new investments. However, growth in the overall Apollo aviation platform will emerge to the benefit of Merx as the exclusive servicer for aircraft owned by other Apollo funds. Moving to overall credit quality, as Howard mentioned, no investments were placed on non-accrual status during the quarter. At the end of September, investments on non-accrual status represented $143 million or 4.9% of the portfolio at cost, and $30 million or 1.2% at fair value. With that, I'll turn the call over to Greg, who will discuss the financial performance for the quarter.
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, being 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, was 1.56 x at the end 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 sale and approximately $4.44 million or $0.07 a 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 of credit spreads relative to the first and second quarters of 2020.
In our 2020 September quarter, Merx core and legacy assets at an unrealized loss of $6.5 million or $0.10 a share, primarily due to our oil and gas investments given the continued weakness in the forward oil curve. NAV per share at the end of September was $15.44, a 1% increase quarter-over-quarter. Moving to liquidity. As the pandemic began, many of our portfolio companies drew on their revolvers during March quarter to shore up liquidity. Many of these drawdowns were repaid in the June quarter, and repayments continued in the September quarter. MidCap is the agent for nearly all of our revolvers and delayed drawdown. For context, revolver utilization peaked at approximately 70% in mid-April and has since declined to 33% today. At the end of September, we had $1.6 billion of debt outstanding, a decrease of $155 million quarter-over-quarter.
At the end of September, we had $216 million of immediately available liquidity, up from $227 million at the end of June and $224 million at the end of March. Also, at the end of September, we had $287 million of additional capacity under our credit facility, up from $167 million at the end of June and $131 million at the end of March. Moving to unfunded commitments. On page 18 in our earnings supplement, we break out for you our outstanding commitments as of the end of September. During the quarter, we continued to experience considerable net revolver payments. Of the $282 million of unfunded revolver commitments outstandings at the end of September, $183 million are available to borrowers and $99 million are not available to borrowers. Availability is based on limitations and other covenants. Now turning to the portfolio composition.
Our investment portfolio had a fair value of $2.6 billion at the end of September across 147 companies in 29 industries. We ended the quarter with core assets representing 92% of the portfolio, up slightly from the end of June. Non-core assets decreased to 8%, down slightly. First lien assets represented 86% of the corporate lending portfolio. The weighted average attachment point remained 0.8 x. Investments made pursuant to our co-investment order were 78% of the corporate lending portfolio at the end of September. We continue to remain focused on preserving liquidity. As our leverage and liquidity continue to improve, we will continue to evaluate repurchasing our securities. Please open the call to questions.
At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Again, that is star, then the number one to ask a question. Your first question comes from the line of Kenneth Lee with RBC Capital Markets.
Hi. Thanks for taking my question. Just wondering whether you could just provide any further details behind the visibility into additional repayments for the December quarter and whether you see any additional gross paydowns beyond the ones that were mentioned in the release. Thanks.
Well, 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 the new year, we don't know. About another $100 million. That's gross paydowns. We do expect to do, as I mentioned, some new business. Our leverage, Greg said, 1.47 x today, and probably below 1.45x in the next week or so based on stuff that's paying off in the near term. Then probably starting to tread water around there on the lower side of our range.
Great. Very helpful. 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. Thanks.
Not in the near term. We have a very supportive bank group with over 24 banks, and we're constantly monitoring the market. So we will at some point, but not at this time.
Great. Appreciate the call.
From the line of Kyle Joseph with Jefferies. Mr. Joseph, go ahead with your question.
Oh, apologies. Thanks, guys, for having me on. Apologies, I was on mute. Anyway, I'll get right into the questions. Deployments have been light, not surprisingly, over the last few quarters as you guys have focused on de-levering. 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 in terms of terms, how it looks versus kind of pre-COVID deals?
Yeah, sure. Thanks, Kyle. Thanks for the question. I think you're spot on. That has certainly been the focus, getting back within our targeted leverage level. 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. Our participation in that origination does not dictate whether or not we're able to provide those solutions to clients. Even while we have not been able to make as many deployments or do as much deploying, deals are still getting done. As it relates to the nature of COVID-19, you've definitely seen 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. Not surprisingly, the M&A has increasingly gravitated or has gravitated to those that haven't. In terms of terms, I think as we've said in the prepared reMerx, we still see an increase relative to pre-COVID. That's owing to continued robust competition in the private capital markets, private debt markets has seen that spread compress. 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've seen COVID. Obviously that is a more generic term. Generally speaking, a little bit better documentation.
I would also note as it relates to documentation, certainly we've seen less stability, 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. That's how I'd capture it, a little better, definitely tightening relative and importantly, AINV having done some sufficient de-leveraging 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 quarter-on-quarter pressure. Obviously I would guess that's not rate driven. Is that more of a mix shift in terms of the assets that are being paid down?
Yeah. 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 are set prior to the [audio distortion] the system, right? The LIBOR kind of came down steeply earlier in the year, it takes time for some of those contracts to roll off. That was contributing to a lesser extent to what you saw in terms of yield movement.
Got it. Last question from me just from a modeling perspective, probably for Greg. Just based on the losses in the earlier part of the year, if we can assume that status quo, no more losses, no more gains from here, when would you expect the incentive fee to begin being paid out again? Just to check my math.
Yeah. I think based on your assumptions, it'd be December of 2021.
Okay. That's it for me. Thanks a lot for answering my questions.
Yeah. Thanks, Kyle.
Your next question comes from the line of Matt Tjaden with Raymond James.
Hey, everyone. Afternoon, and thanks for taking my questions. Tanner, maybe first one for you. I know you said last quarter on the call that through July, cash flows and Merx were tracking at or above expected levels. Did that hold throughout the entirety of calendar third quarter? Any commentary you can give on what you're seeing thus far through November?
Yeah, sure. Happy to. That was what we were seeing through July. I would say that held true 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. In Asia, you've obviously seen a return or greater return or pickup in air travel. Also in the U.S., while air traffic still remains very challenged, obviously the capital markets and the government support have been very robust. 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 six to nine months. It is during this period, we're kind of real time on those coming back online. While we are encouraged by kind of relative to expectations of what we've seen to date, we remain cautious in as much as not all of those borrowers, not all of those lessees have been scheduled to come back online as of now.
40% drop in amendments during the [audio distortion] of those amendments compared to the prior quarter.
You were right to recognize, and I think it makes sense, is in the midst of the pandemic, in the worst of the downdraft, you saw a lot of borrowers reaching out proactively. As that activity has passed, 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 nine 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. The other half would be more kind of strategic and less substantive. In terms of your specific question, I would say those that were substantive, sort of very much dealt with underperformance or COVID effects.
In terms of volume, as we mentioned in our prepared reMerx, definitely less activity and importantly, where there were those more COVID affected AINV saw good sponsor support in those particular amendments.
That's it for me. Appreciate the time.
Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. That's star one. Your next question is from the line of [audio distortion]
Hi, good afternoon, everybody. Start this quarter, just sort of a two-part. First of all, question on the valuation going down 1.8%, you said that there was an offset from the collateral value versus the servicing contract. The first part is what was the magnitude of those swings? Were they larger? Were they both pretty modest given the net impact was pretty modest. Second part, to the extent the servicing business increased for your servicing business, what was sort of the level of collateral or assets that the business wanted to service to Apollo presumably generated, maybe in quantity of airplanes or capital invested, if you understand how we'd prefer to answer, if you can. That's the first question. Thanks.
Yeah, sure. Greg might have the specific number. I'll jump in first and answer that down five in terms of color question related to the servicing platform. We mentioned in our August call, we'd 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. Part of the write-up was related to some of that harvesting. Not as much a specific quantum that I can point to in terms of what drove that increase except to say, though we have successfully raised a dedicated fund, which 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.
I don't know, Greg, if you have the specific numbers, but relatively modest up and down.
I think the ballpark of the numbers were there's a total write-down of $5. I think the servicing platform was increased in value between the sort of the medium single digits. Between something like $5 and $10. That means the collateral part was down $10-$12. It's like that ballpark.
The servicing platform went up for a couple reasons. Both because there are more transactions on the platform and also because there were some explicit fees generated that are now receivables off disposition of some planes. That's even more direct value because there'll be cash coming in the door.
Right. Then the other directional thing that you can get is the net, the way we look at it, has been written down, and these are based on cash flow residuals and all of that, over 18%. Okay? That's kind of the magnitude that we have written down [Matter], assuming things as we talked about, a lot of these aircraft are tied to government-sponsored or major airlines around the world. Maybe some were being renegotiated and such. Assume now that you've been through most of that.
What kind of top-line impact overall for the business did Merx experience, and how far along do you think you are in that process?
Well, let me take a shot first. Yes, 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? If there's other challenges, that could change going forward. 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-$45 million range between debt payment and dividends coming out of Merx to AINV each quarter. Now it's $20 million of interest. It's less. The answer is that once those cash flows, if people perform under these leases, we will generate significantly more. Between that $45 and $20 per quarter, but significantly more than the $20.
The issue, in the short term, is that there's some catch-up to do in some of the securitization structures. The cash isn't necessarily produced that month, it's paid that quarter, it's paying down debt. 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 building our servicing platform. Does that make sense?
Yes. Very helpful.
That's sort of how we're looking at it. The key is keeping these lease We now know what to expect. It's not as good as it was before, 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. 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 basis down some as well over the next few 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 cushion we have in the valuation.
Great. Appreciate that, Howard.
We have no further questions over to management for closing reMerx.
Thanks everybody for listening today, and on behalf of our team, we thank you again for taking the time and support 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. Speakers, please hold the line.