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Good morning, and welcome to Apollo Investment Corporation's earnings conference call for the period ended December 31, 2017. [Operator Instructions]
I will now turn the call over to Elizabeth Besen, Investor Relations Manager for Apollo Investment Corporation. Please go ahead.
Thank you, operator, and thank you, everyone, for joining us today. Speaking on today's call are Jim Zelter, Chief Executive Officer; Howard Widra, President; Tanner Powell, Chief Investment Officer; and Greg Hunt, Chief Financial Officer. I'd like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Today's conference call and webcast may include forward-looking statements. Forward-looking statements involve risks and uncertainties including, but not limited to, statements as to our future results, our business prospects and the prospects of our portfolio companies. You should refer to our registration statement and shareholder reports for risks that apply to our business and that may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our SEC filings, please visit our website at www.apolloic.com. I'd also like to remind everyone that we've posted a supplemented 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.
Thank you, Elizabeth. Good morning, everyone, and thank you for joining us for our quarterly earnings conference call. I'll begin today's call by briefly discussing the environment and how we are approaching this market, followed by an overview of results as well as some additional business highlights. I will then turn the call over to Howard, who will discuss the progress we have made executing our strategy. Tanner will then cover our investment activity for the period and provide an update on credit quality. And finally, Greg will review our financial results in greater detail. We will then open the call to various questions. Beginning with the environment, the private debt market remains extremely competitive for lenders. We continue to see issuer-friendly conditions and a loosening of terms and general structures. The combination of our strong origination platform, broad product suite and sponsor relationships allow us to see a wide array of opportunities. We believe that given our size, relative to our funnel of investment opportunities, we are able to find attractive opportunities in today's very competitive market. That said, we expect to only put capital to work if it makes sense for our shareholders in the long term. We remain focused on credit selection while patiently deploying capital. Next, moving on to an overview of results. During the quarter, we invested $198 million, of which nearly half were investments made pursuant, our coinvestment order. Repayment activity was indeed strong, and net investment activity was a negative $6 million. Net leverage at the end of the quarter was 0.62x. Net investment income for the quarter was $0.16 per share. During the quarter, 3 separate events occurred, which advanced our long-term strategic positioning, our long-term earnings power and our book value stability but had a combined $0.09 loss per share. As a result, net asset value declined $0.12 to $6.60, a 1.8% decline. Excluding these 3 items, NAV per share declined 0.5%.
First, as mentioned on last quarter's call, in mid-October, we redeemed our 2,042 baby bonds and recognized a $0.03 realized loss per share on the extinguishment of this debt. This redemption reduces our funding costs and has an approximate 1 year payback period. Second, given the reality in oil, there was a $0.06 loss per share on our oil hedge, partially offset by $0.03 of unrealized gain per share on our oil investment marks. As a reminder, our oil hedge is designed to protect us against a significant decline in the price of oil. The fair value of our hedges is based on quoted prices, whereas the fair value of our oil investment is based on underlying fundamentals. We believe that in the long term, our hedges protect us from downside of risks while allowing us to participate in the upside of our investments. Third, we recognized a $0.04 unrealized loss per share on our investment in Solarplicity group during the quarter. Subsequent to quarter end, we exited a majority of our investments to Solarplicity group, a noncore asset, slightly below the fair value as of the end of the calendar quarter. Despite the loss, we are pleased with the exit, which we believe greatly enhances the quality of our portfolio as it reduces our PIK income, concentration risks and exposure to conditional or long-term noncore assets. Lastly, during the quarter, we continue to repurchase stock and have continued to repurchase stock in the March quarter. Regarding the distribution, the board approved a $0.15 distribution to shareholders of record as of March 27, 2018. In summary, despite the decline in NAV, we are pleased with the overall activity in the quarter and believe that we have moved to the next stage of our repositioning and will continue to focus on executing on our strategy, which we believe will yield stable and predictable returns for our shareholders in the long term. With those comments, I will now turn the call over to Howard.
Thanks, Jim. As Jim stated, we are pleased with our progress executing on our portfolio repositioning strategy. And we believe from a quantitative perspective, we are now more than halfway through our repositioning plan. More importantly, from a qualitative perspective, we have exited or sold the vast majority of noncore positions we were looking to exit or we have hedged our exposure to those assets. We continue to deploy capital in our core strategies, which include middle market corporate loans as sponsored by companies sourced by Apollo's direct origination platform as well as opportunity in life sciences lending, asset-based lending and lender finance. In addition, we continue to take advantage of our ability to coinvest with other funds and entities managed by Apollo. At the end of December, core assets, excluding Merx, were approximately $1.3 billion, with a weighted average yield of 10.5%. Since commencing our repositioning strategy in July 2016, we have funded approximately $1.08 billion into our core strategies, excluding Merx, all floating rate with an average deal size of $16 million. The current weighted average yield of these core assets is 10.4%. All of these assets are accruing and none are on the watch lists. Coinvestment opportunities represent $511 million or nearly half of this amount. To give you a sense of the benefits we are seeing from scale and our ability to coinvest, to date, AINV has represented approximately 29% of total capital committed by Apollo and its affiliates to coinvestment transactions. As mentioned, we have made great progress in reducing our exposure to noncore and legacy assets. Pro forma for the exit of Solarplicity, noncore assets are approximately $416 million or 19% of the portfolio, down by $493 million from when we commenced our repositioning strategy. Approximately 39% of the remaining noncore assets are in 2 oil names, which have improved in value significantly and have been hedged to reduce the volatility of their potential outcomes, and approximately 27% are in shipping assets. Further, we continue to make steady progress to improve the overall risk profile of our portfolio by increasing our exposure to first-lien and floating rate loans and decreasing our average borrower exposure.
At the end of December, first-lien debt had increased to 50% of the total portfolio. The floating rate portion of our corporate debt portfolio had increased to 92%, and our average borrower exposure decreased to $27.4 million, all at fair value. Pro forma for the exit of Solarplicity, our concentration risk will improve as our average borrower exposure will decline to approximately $26.1 million. With that, I'll now turn the call over to Tanner, who will discuss our investment activity.
Thanks, Howard. In this competitive environment, we are focused on opportunities that capitalize on Apollo's scale and areas of expertise that can also take advantage of our ability to coinvest with other funds and entities managed by Apollo. During the quarter, we deployed $198 million in 8 new portfolio companies and 12 existing companies. The weighted average yield of debt investments made was 9.9%. $94 million or approximately 48% of total deployment was in coinvestments across 8 companies. Of the $94 million, we deployed $77 million into corporate lending, $15 million into lender finance and the balance was in life sciences and asset base. Apart from coinvestment activity, we deployed capital into a few other proprietary transactions as well as a few syndicated transactions. Consistent with broader market trends, repayment activity was elevated. During the quarter, investments sold totaled $48 million and repayments totaled $157 million for total exits of $205 million. Net investment activity before repayments was $150 million, and net activity after repayments was negative $6 million for the quarter. The weighted average yield on debt sales was 10.2%, and the weighted average yield on debt repayments was 10.2%. Sales for the quarter included our investments in 2 IV-held CLOs. Repayments included the full repayment of our investments in Appriss, Poseidon Merger, SunEdison, Velocity and a partial repayment of Teladoc, among others. We also received a partial payment on our investment in Craft 2014, reducing our exposure to structured credit and noncore assets. Turning to aircraft leasing. As of the end of December 2017, AINV's investment in Merx was $407 million, representing 17.3% of AINV's total portfolio compared to $429 million or 18.2% at the end of September at fair value. During the period, we deployed approximately $5.8 million into Merx and were repaid $26 million, resulting in a net repayment of $20.2 million. Merx' underlying portfolio continues to perform well, and the team has been able to successfully monetize certain assets. Because of this strong performance, Merx paid a $4 million dividend to AINV during the quarter compared with $2.25 million last quarter. Regarding our energy portfolio, at the end of December, oil and gas represented 7.4% of the portfolio at fair value or $173 million across 3 companies. During the quarter, we funded $2.3 million into the Spotted Hawk. We continue to work closely with respective management teams, and we may deploy some additional capital into these names during the coming quarters to support accretive development projects. Recall in the September quarter, we hedged our oil exposure by entering into 2 costless collars on WTI. We entered into a third and fourth costless collar in the December quarter. These hedges are designed to protect against a significant decline in the price of oil. More specifically, AINV purchased put options with a strike price of $45 per barrel and sold call options with prices ranging from $54.30 to $62.75 per barrel. The options were structured so that the premium paid for the put options offset the premium received by selling call options producing a costless collar. If oil prices decline, the gain on our hedge should partially mitigate losses on our underlying investment. If oil prices rise, the loss on our hedge should offset at least partially -- should be offset at least partially by an increase in the net asset value of our underlying investment. Given the increase in oil, we recognized the loss of $12.7 million or $0.06 a share on these contracts during the quarter and an unrealized gain of $6.8 million or $0.03 per share on our oil and gas investment marks. The value of the oil hedge is a function of current option prices while the value of underlying companies is a function of long-term oil curves and other items. As a result, the oil hedge only partially offsets expected losses and gains in the portfolio. Despite this short-term mark mismatch, we believe that the hedge in place is designed to protect us against significant drops in the price of oil while allowing us to participate in a long-term price [indiscernible]. Now let me spend a few minutes discussing credit quality in the overall portfolio. During the quarter, our second-lien debt investment in Elements Behavioral Health was placed on nonaccrual status due to poor performance and near-term liquidity shortfall. No other investments were placed on or removed from nonaccrual status. At the end of December, investments on nonaccrual status represented 1.5% of the portfolio at fair value and 2.4% at costs. The risk profile of our portfolio is measured by the weighted average leverage and interest coverage of tower portfolio companies was relatively unchanged compared to the prior quarter. The current weighted average net leverage of our investments remained at 5.5x. The current weighted interest coverage remained at 2.7x. With that, I will now turn the call over to Greg, who will discuss financial performance for the quarter.
Thank you, Tanner. Our revenue for the quarter was $64.8 million, down slightly quarter-over-quarter due to a slightly lower recurring interest income, lower prepayment income and lower fee income, partially offset by higher dividend income. Recurring interest income declined primarily due to a lower average portfolio and placing our investment in Elements on nonaccrual. Dividend income increased quarter-over-quarter, primarily due to a higher dividend level from Merx. We received a $4 million dividend from Merx compared to $2.25 million last quarter. Prepayment income was $2.8 million in the quarter compared to $4 million last quarter. Fee income was $1.5 million in the quarter compared to $2.6 million last quarter. Expenses for the December quarter totaled $30.9 million compared to $32.3 million in the September quarter. Expenses were down slightly quarter-over-quarter, primarily due to lower interest expense. The incentive fee rate for the quarter was 15%, and incentive fees also included a small reversal of previously accrued incentive fee related to PIK income from our Elements securities. Net investment income was $34 million or $0.16 per share for the quarter. This compares to $34.2 million or $0.16 per share for the September quarter. For the quarter, the net loss on the portfolio totaled $22.3 million compared to a net loss of $2.4 million for the September quarter. The oil and gas options contracts from our hedging strategy are measured at fair value. We recognized a $12.7 million or $0.06 per share loss on the contracts during the quarter. As mentioned, subsequent to quarter end, a significant portion of our first-lien debt investment in Solarplicity Group was repaid at a price slightly below the fair value as of December 31, 2017. The repayment reduced our exposure to Solarplicity Group by approximately $106.4 million. Based upon the fair value mark as of December 31 and including estimated escrow amounts, the retained portion of our investment in Solarplicity Group is approximately $16.4 million. In addition, we still hold our investment in Solarplicity UK Holdings, which had a fair value at the end of the quarter of approximately $7.9 million. In mid-October, we redeemed $150 million of our 6 5/8% unsecured notes due in 2042. We recognized a realized loss during the quarter of approximately $5.8 million or $0.03 a share on the extinguishment of those notes due to the acceleration of the associated unamortized debt issuance costs. It is our current intention to redeem our 2043 notes when they become callable in July of this year. In total, our quarterly operating results increased net assets by $5.8 million or $0.03 per share compared to an increase of $31.8 million or $0.14 per share during the September quarter. Net asset value per share declined $0.12 or 1.8% to $6.60 per share at the end of the quarter. Turning to the portfolio composition. At the end of December, our portfolio had a fair value of $2.4 billion and consisted of 86 companies across 24 industries. First-lien debt represented 50% of our portfolio; second-lien debt represented 32%; unsecured debt, 5%; structured products, 4%; and preferred and common equity interest of 10%. The weighted average yield on our portfolio at cost increased to 10.5%, up 20 bps during the quarter. On the liability side of the balance sheet, we had $875 million of debt outstanding at the end of the quarter. Our net leverage, which includes the impacts of cash and unsettled transactions, was 0.622x at the end of the quarter compared to 0.59x at the end of the September quarter. Regarding stock buybacks during the period, we purchased approximately 778,000 shares at an average price of $5.97, inclusive of commissions, for a total cost of $4.6 million. We also continued to repurchase shares subsequent to quarter end under our $10 million 10b5-1 plan, which we fully utilized post quarter end. Since the inception of the program and through yesterday, we have repurchased 20.2 million shares or 8.5% of the initial shares outstanding for a total cost of $119 million, leaving approximately $31 million available for future repurchases under our current board's authorization. This concludes the prepared remarks. And operator, please open the call on to questions.
[Operator Instructions] And your first question comes from Jonathan Bock of Wells Fargo Securities.
Fin O'Shea in for Jonathan this morning. Just to start with a couple of portfolio companies. On the energy side, maybe Tanner, can you explain the delta between -- or just kind of walk us through the components of that, the delta between the portfolio company performance and the oil price derivatives, understanding that hedging is an imperfect science.
Yes. No, I'll do it. It's Howard. The hedge is valued obviously by a current market price that takes into account to a far greater degree than the underlying companies' short-term volatility. So the fluctuations are great. The underlying oil companies, although under -- performing much better because of a higher oil price, we don't change the methodology to sort of take into account that change in volatility. And so it just doesn't -- although its long-term value goes up presumably more than those hedges do, the mark doesn't change to the method as much because the methodology doesn't change. So put one other way, if oil prices stayed stable at these levels over the long period of time, the hedge would become -- would have a lesser loss because the volatility could be washed out, and the company would go up more.
Makes sense. And then just looking at some of the mid-cap names, we're worrying what kind of percent of the portfolio we can expect going down the line as you reach targets. What's sort of the allocation policy for the platform? I think mid-cap has priority on it steals, it looks like. Are there a lot of other funds on the platform competing for the life sciences, health care names?
Well, you have to remember when we talked about this before when we described their mandate is of mid-cap and what the mandate is of AINV. A variety of activities that mid-cap does on a day-to-day basis, when they underwrite a senior loan, the structure and yield of that does not merit economic consideration for the BDC because of the yield. The activities that do constitute the overlap, things like life sciences and a variety of other maybe some potential second liens, those do run into the ZIP code where the BDC does indeed care. And in those, the allocation system is a well-documented process where the vehicles that can purchase those assets, too, and as the team said in today's dialogue or in our presentation, you can see how much has actually been taken up by AINV as part of that. So again, the breadth of mid-cap does not overlap to a great degree. There's a portion of it which does. And those which do, there's a process that goes in, and we have a legal allocation process for those. But as Howard and I have expressed in the past, our long-term objectives are to have less concentrated risk within our portfolio. So to date, the appetite of AINV has been able to be handled by the size of the transactions, and we are very comfortable that's the appropriate mandate of AINV going forward.
And just one more question for you given Apollo's leadership on the regulatory items we're seeing go through in Washington. Can you give us a sense on how the BDCs and the BDC bill are being perceived these days? And any of your other views on pending legislation as it's introduced into the Senate?
I would say -- give a couple of comments and hand it off to Greg. I would say as an industry and as a company, we're fairly aligned with what our objectives are in terms of getting legislative changes that would affect the leverage test and the shelf filing ability. We are very well coordinated as an industry and well coordinated as a lobby, a lot of times spent by myself and Greg and Joe at Apollo and many of our peers. Listen, a lot going on in D.C. right now. I think we're making great positive effort and a good momentum. But that being the case, there's a lot of intricacies, what's going on with getting legislation passed in this environment. But I know Greg was there last week, and maybe he can give some granular updates that may make some sense.
Yes. I think it's important to note that for the first time, as we've been working on improving on where BDC sits in the -- on spectrum of financing vehicles, that when we have very slimmed down bill, simple bill that is supported by both the House and the Senate, you have a House bill, H.R.4267, which was introduced by Congressman Stivers and Congressman -- Congresswoman Moore, which is very well supported in the House. Also in the Senate, you have Senator Heller and Senator Manchin, both -- bipartisan support of a bill, Senate Bill 2324. So for the first time, we have 2 bills in both Houses that are supporting where we're going. And I think also, last week, we were down on -- several BDCs were down in conjunction with the SBIA in looking at supporting the bill. And I think with the tax legislation, hopefully, that will be positive moving forward. So there's a lot of momentum. But as Jim said, getting things done in Washington isn't very easy.
Your next question is from Terry Ma with Barclays.
Do you guys have a sense of how the tax legislation will impact the cash flow profile of your portfolio companies given the lower tax rate and then also the lower interest deductibility?
Yes, I'll take it. And I don't think we have any -- to be quite honest, I don't think we have any more unique insights than that -- than the analysis that has been circulated in the market. Clearly, our focus on increasing number of first-lien companies, kind of floating rate with lower leverage, the math would suggest that they should be less affected. And clearly, there's also a benefit from the acceleration of capital expenditure -- expensing. So our insights would not be unique. I think one of the things that we look at in our companies, frankly, is not only in as much as what is the effect of the specific companies, but being cognizant of industries with competitive dynamics with unlevered players. Because obviously, unlevered players are in a better place, and so I think it goes to a full spectrum. But our analysis is not dissimilar than that which had been kind of published more broadly by the market and the industry and analysts like yourself.
Okay. Well, have you seen any or expect to see any changes in demand for debt going forward or longer term?
Certainly not to date. When -- oftentimes, in the context of an LBO, which -- and supporting sponsors, the use of debt is a function of levering equity returns, not just for the tax arm. And so there have been no kind of mitigation in demand to date. It certainly had perfected our models and how we model out cash flow and how the sponsor thinks about cash flow, but it has not resulted in a material change in demand for debt capital.
Yes. I would just add that in the analysis that we've done as a firm, typically, the leverage multiple where it really impacts the deductibility is higher than we would normally like to underwrite anyway. So if our cash endpoints are 4, 5, 5.5x, what we've -- in this current rate environment, when you get to being north of 7 or 8x, which some buyouts are because of the enterprise value being 12 to 15x, that's really where it's going to impact a small amount, but it doesn't really affect our ability to underwrite debt securities nor does it impact a broad array of sponsors' desire to use debt as part of the acquisition currency.
Okay, got it. And I think you mentioned in your prepared remarks that you're about 50% through your repositioning. But I imagine most of the low-hanging fruits are already picked. So maybe you can just talk through the next steps in the time line for completing repositioning?
Sure. I mean, one of the reasons I said it was qualitatively largely done is because I think, you're right, a bunch little of low-hanging fruit has got done and one very high-hanging fruit just got completed. And so what remains is some shipping assets, which are -- we don't expect to exit in the short term because of how they're producing cash and where we think their long-term value is versus today. And then the oil and gas names, which we will exit when the time is right. And in a market like this, it becomes more likely as oil prices move up. And after that, it's just sort of bits and pieces of things, which will come out over time, for sure, but are -- will just happen in a natural course of things. So we feel like in terms of sort of almost as a focus for us and for people looking to invest in the company, it's a lot clearer picture. So -- and it's a lot easier to understand because it's just these few investments. So we think it's largely done. And we think the impact it has to our long-term P&L, based on what those assets are worth and what they're returning currently, is relatively neutral for what -- depending -- regardless when we exit them.
Your next question comes from Rick Shane with JPMorgan.
Really 2 things. One is, I'd like to talk a little bit about what's going on with Elements. I think you had written it down modestly before, but the impairment you took this quarter in the historical context of this company is pretty severe and very rapid. Really curious to hear what's happening there and what you think the potential recovery value is. And then also, one of the things that everybody thematically is talking about is spread compression in the space. I am curious if you see any opportunity on the liability side given the brand to reduce your funding cost to potentially offset some of that spread compression.
Yes, sure. I'll do the Elements quickly by way of background. This is a substance abuse treatment, and this company is a provider of substance abuse and -- treatment and services operating across the U.S. The company has been plagued by a number of operational issues, long standing, including problems with census and various other problems related to billing. This is still an attractive space. And over the last year or so, the sponsors, including a new third party came in to contribute over $20 million to the company to give the fund losses and give the company time to try to rectify some of those operational issues. The problems proved to be more acute. And so more recently, the sponsors have chosen to stop funding those operating losses. And as a result, the prospects for the company were significantly less. The first lien is now evaluating options. And I think as it relates to your question about prospect, I think our mark reflects likelihood of a recovery for us. But really, as we kind of drill into it, it goes to the discontinuing of the equity support to pick the operational issues that's having catalyzed the current predicament. And then on...
Can I -- before we go to second element for my question, I want to just dive back into this a little bit. That's actually very intriguing. What you're describing is an operational and billing issue. If you'd said to me it was a reimbursement issue related to policy changes, that would have almost been -- made more sense. Presumably, that's something that's fixable if it's an operational issue.
Well, so -- yes. So to -- the company -- new capital is invested as Tanner said, pretty recently towards a strategy of sort of driving things better operationally. And in this case, operationally means census, right? And so you're right. It's not -- normally, you think of operationally. It's just get to -- to get to streamline it and get it running more efficiently. It wasn't that operational. It's operational from the revenue side. And so their ability to drive census, which, on the marginal census is really, really valuable because there's high fixed costs there. They believe strongly, which is why the market -- where it was. And they spoke with their capital, including third-party capital that they could drive census in a number of sort of new strategies, especially on fixing those facilities that were particularly well positioned, and they just were not able to. So in this case, operational is not something as easy to fix as just totally in their control, if you will.
And to again, remember the breadth of what we're doing, when you say census, you mean patient enrollment?
Yes, yes.
Okay, just want to be clear. I'd rather ask the dumb question.
No, no. That's a good question.
And then can you talk about funding an opportunity to offset some of the spread compression that we're seeing industry-wide?
Yes. I mean, I think, Rick, as we indicated, so if you get -- if you look at the 2042 notes that we took out on -- there was probably a 300 bp improvement there just looking -- using our credit facility. But I think if you then look at our 2043 around the same amount, if you use our credit facility, but I think the opportunity in the marketplace is to probably do some unsecured notes. And with that opportunity, you probably saved 200 bps instead of the 300 bps. But we think that's probably a better long-term strategy. And as you've noticed, historically, we've tried to use 40% secured and 60% unsecured. We'll be a little bit out of balance as we may redeem our 2043s. But other than that, it should help us reduce some of that spread compression going forward.
Your next question is from Ryan Lynch with KBW.
I just want to talk about kind of the portfolio growth outlook and opportunity set. So if I think about your 2 main businesses, you have the PE-sponsored back business, which has a very big opportunity set but has a lot of competition. Then we look at all the strategies within mid-cap, which seemed to be more niche-y businesses, maybe less competitive but maybe a smaller opportunity set for the deals that can actually flow into AINV. So when I think about the portfolio growth going forward, do you guys expect to that -- for that growth to be funded more by kind of the traditional PE-sponsored back investments or more growth coming from the mid-cap strategies?
So our -- the longer-term portfolio we've guided to, which we still think sort of fits about right is to say about 50% to maybe a slightly higher percent of the portfolio will be leveraged deals, if you will, either first lien or second lien. And another 20% to 25% will be the other mid-cap strategies, the remainder being Merx and some legacy stuff that we keep, that we're comfortable with. So that's our guidance for when it's long term. As a result, more of the growth comes from the mid-cap stuff right now because mid-cap stuff is only about, I think, [ 6% ] of the portfolio. So you would expect more of the short-term growth to get to that level playing field to come from the niche-y areas. But in terms of leveling out long term, we still sort of think that's a reasonable and achievable goal.
Okay, that's helpful. And then your guys share repurchase certainly accelerated in calendar first quarter of 2018 quarter-to-date. Should we expect it to continue at that pace throughout the remainder of the quarter? Or is that going to slow down?
We've been pretty consistent. We know our company. We know our portfolio. And when we think it's accretive and -- to our shareholders, we will. So as Tanner and Greg said, program's in place. It's accretive, and you should expect us to continue that.
Okay. And then Greg, I believe you mentioned dividend income increased significantly in the quarter due to the larger Merx dividend, of $4 million increase from, I think, $2.2 million or so. Should we expect kind of a $4 million run rate from Merx going forward and then dividend income to kind of remain in the level we saw in the calendar fourth quarter?
No, I would guide you more toward the maybe $2 million a quarter. It's really a function of the activity inside of Merx and the trading of the assets.
Okay. So this quarter was kind of a non -- a portion was kind of a nonrecurring dividend?
Yes, yes.
Okay. And then just one last one as far as modeling goes. Looking at portfolio growth in the near term, with the large exit of Solarplicity in first quarter, calendar first quarter, should we expect portfolio growth to be flat to negative in that quarter?
Obviously, that's a large position running off. So I think, yes. I mean, that's a reasonable expectation. We do have a good pipeline right now, and we're partially way through the quarter already. So we feel like it will be in sort of -- we'll ultimately end up in a band of where we've been over the past year in terms of -- by the end of the quarter. But obviously, it's a bit -- it's [indiscernible] to absorb, and there's still some other things in the portfolio that aren't getting paid off as well. So I wouldn't say it's just -- it won't be replaced at all. But obviously, it's a little bit of a hole to fill in. We're not filling it with $100 million positions anymore. So it takes a bunch of transactions.
Your next question is from Kyle Joseph with Jefferies.
Most of mine have been answered. I just wanted to touch on portfolio yield trends given the increases in short-term rates, the spread compression that Rick alluded to and combine that with the -- your ongoing strategy shift, not -- well, yes, I am actually trying to ask you to predict the future a little bit here. But if you could give your outlook for portfolio yields for the -- for sort of near term and intermediate term.
Well, if you give us a particular date anytime in future, I can tell you exactly what our yield will be. No, I mean, I think we have guided that we think long term, we are projecting -- or we are building our business based on having a 10% yield on new assets we originate. And then we've been asked the question, "Well, LIBOR is increasing. How does that factor in?" And we said, "That should be positive for us, but don't give us credit for it." Let that balance out what -- with the yield compression. And by the way, the yield compression is 2 issues. Yield compressing some, although frankly, I think in the market, terms are getting more aggressive than yield is compressing, but it's also us moving up with -- up the capital structure. So let's say those things roughly net out or closely than what you have remaining is -- where are we today. We're around -- at 10.5% with the refinance in Solarplicity, which was lower yielding. We're really sort of running in -- at 10.7% or something like that. So we have room in the portfolio to absorb more of that compression. So the way we think of it rather than saying -- we would think of it and say continue to model at 10%, and we think we have quite a bit of cushion there given the LIBOR increases and the fact that we're above that right now.
Your next question is from Doug Mewhirter with SunTrust.
I had a question about the hedging program. Could you remind me why you hedged to BDC level and not the entity level? I would think that it would -- might be a little bit -- maybe a little bit more efficient to dial in specific production numbers, if you went to the entity level. Is it a capital issue at the subsidiaries?
No, there is some hedging done at those levels, but we don't own all these companies, and so the decisions aren't always tied in, and they're made sometimes for different reasons, what they want to hedge. So it's sort of -- it is definitely -- what we have done is informed by what the companies have done.
Okay, that makes sense. And continuing the oil and gas theme. It looks like, in your opening remarks, you said you had to downstream a little bit of capital for maybe further exploration. And with oil prices being relatively elevated, I would imagine that the assets that these companies own are getting more valuable. So how do you balance or -- and have you -- do you anticipate any interesting offers? Or have you been receiving more offers for those assets? And how do you balance the desire to maybe capitalize on the higher oil prices operationally versus selling them at an attractive price? Or -- and I realize you don't always have full control over the entity.
Yes, sure. And there are a couple of things there, so let me try to hit each one of them. So yes, there was a small investment in the Spotted Hawk in a particular period. Spotted Hawk has a portion of its assets where it's operated and a portion where it's nonoperated where we're supporting the drilling programs of others and are percentage ownership of the particular wells that they are -- that those partners happen to be drilling. What's interesting is, you're exactly right, is the level of activity is expected to perk up. Interestingly, obviously, the underlying companies extensively should have increased cash flows from which -- that they can draw. So disbursements will be a function of kind of obviously cash balances within those companies and the activity levels of the companies themselves as well as in the case of Spotted Hawk, the activities of the partners. As it relates to exit, I think consistent with the themes of the repositioning, we are looking to reduce the noncore exposures over time, including oil and gas. One would expect, in this sort of environment, there to be more interest in assets. But we'd remind you that these are like -- and not only are they illiquid assets, but -- so too also the dynamic that you alluded to, which is relevant is there other partners in these. So we're encouraged by the increase in oil prices. And irrespective of oil prices, the things that these companies have done to enhance value and hopefully drive -- increase salability and long-term value. But the sales are a function of partners as well as the M&A environment as well.
Your next question comes from Robert Dodd with Raymond James.
Going back to the hedge question. When you are looking at an oil and gas investment either to originate proprietary or to purchase, are you aware of the -- I presume you're aware of whatever hedge positions they've taken within the borrower. How much impact does that play into whether you actually take part in the loan or originate loan?
Let me answer because I want to make sure you guys understand what we did. Obviously, it's a very critical aspect. And if a company that we invested in and loaned capital to was broadly hedged on a variety of production, we would probably not need to do so at the portfolio. What Howard and Tanner and the team did is when they set back, as we repositioned our portfolio over the last 1.5 years, they made a decision that the downside risk would have an impact on our portfolio over and above what the companies were doing themselves. And so we paid for some downside protection insurance. And because of the lagging nature of the hedge, which is a very active, speculative commodity market and the underlying valuation price which was longer term, we have a basis issue. The hedge went down and the value of our companies did not go up to the same degree in this calendar quarter. We believe, over time, they have greater value than the loss of our hedge. But certainly, this is something that was done at that point in time. I would not expect that long term, we have a broad hedging policy in place. Our goal would be to invest and lend money to companies that have a successful, sustainable production and therefore, have a pretty good hedging methodology in place, so that would not necessitate us to do it in the future. But it was onetime, very supportive of it. It's got a little bit of a calendar timing issue right now, but we're comfortable with the long-term investments we have.
Okay. I appreciate that. I just -- if I can, to get you to say that maybe in an even more pointed way. Obviously, the hedge on oil is essentially hedging for an industry issue more so than it is company-specific issues, those components. What can stop you -- hypothetically, you start lending to restaurants. For Chuck E. Cheese's, you can hedge cheese prices. For -- then you can create synthetic hedges on consumer brick-and-mortar retail sales to hedge retail. There's any number of industries you can hedge that if you did, in the manner you've done oil and gas here, to a degree, would change the kind of the character of the business in a way? Can you just be clear? That isn't the intention or is that something you would actually consider?
Okay. So I would say this, that is not our intention. That is not, NOT, our intention. We have been in business a long time. We've done a couple of currency hedges in rare circumstances. But we have a multicurrency revolver. I would not expect this to be a future activity that we engage in to any great degree. Onetime event, it made sense. Do not look at us to engage in active hedging at AINV of our underlying portfolio dynamics.
Okay, I appreciate that...
Or to take directional risk either way by our underlying investments being exposed to that type of volatility. That's the core of the whole repositioning. So this hedge is meant to sort of advance that cause by being less exposed to volatility of commodities of any kind. We happen to be in them, so we try to mitigate it.
Right, got it. But again, just one quick one on Elements. Obviously, in the rehab business, that's a national issue right now. It's had its problems. It does look your second lien obviously marked down substantially. What -- are you likely to go through a review process as to whether you want to take that over and kind of make a play on the U.S. need for rehab and fix the business yourself because you have some experience there? Or is this just going to be see what happens for the second lien and then be done with it?
I mean, when -- in any of these situations, obviously, we will evaluate what -- the best alternative for us is to maximize value. But I will say, one of the other tenants of repositioning was minimizing as much as possible, investing into situations which have already created some downside. And so that will inform how we will -- the likelihood of us doing that.
I remember that component of the strategy, yes.
Your next question is from Christopher Testa with National Securities.
Most have been asked and answered. Just curious on the structured credit book. Obviously, it's become pretty small but still a noncore asset. Should we expect the sales in that to be able to pick up steam given that this is probably one of the best times to be selling that asset class? Or are the remaining things within that portfolio a bit tougher to market and sell?
Yes. I mean, a few of them are not easy to sell, but you would still expect -- you should still expect them to come off the books relatively quickly because they're subject to refinance and the underlying holders are going to -- or equity holders or controlling parties will likely refinance. So you should expect those to continue to dissipate in the near term.
Okay, got it. And I appreciate all the color on the originations and the coinvestment portion of them specifically. Could you give us a sense of what the weighted average EBITDA the borrowers were for your originations this quarter? And the kind of how that compares to any quarters past and whether there's been a material change in that along with your change in strategy?
I would say the average EBITDA is a little bit lower because the EBITDA on the first-lien loans, we're doing it a little bit lower because that's where we think the right market opportunity is. So for -- so the average EBITDA for second-lien loans that we do is generally higher, bigger companies, so you want more sort of stability. And for the first-lien deals that we're doing with -- the ballpark is $25 million to $35 million EBITDA companies. And we do that because those deals have covenants and have better structure and we think have better risk-adjusted returns right now in the market. So it's hard to give you -- if I gave you a mean, it would be meaningless, right, because it's just -- there could be $100 million company and a $15 million company. But by and large, the sweet spot is $20 million to $40 million of EBITDA.
And I'll maybe -- another quick comment. Howard, spot on with respect to the first-lien investments. But so too if you look across our book of second lien, we've talked in the past about -- syndicated is still a part of our strategy. But over time, we hope for it to be less a part of our strategy. And clearly, those syndicated deals have -- can and at times have EBITDAs in excess of $100 million. And actually, if you look at our average EBITDA, $70 million, that reflects that -- the influence of those syndicated. So we would expect, over time, as we focus our origination efforts or our deployment efforts more specifically on our origination platform, that to come down and maybe a bit.
Got it. And last one for me. Just I know you guys mentioned obviously, the Solarplicity being exited is obviously a large investment and might expect some modest portfolio contraction. But after that, given that it seems that you've really recycled out of a lot of the kind of noncore assets, do you guys think that for fiscal '19 that your pipeline is adequate enough that we should start seeing some net portfolio growth for them?
Yes. I know it's -- already given an unequivocal answer, so let me equivocate for a second. Obviously, any short-term pipeline, we don't know where the -- but we believe that we have origination far in excess of the amount necessary to sort of keep the necessary growth of AINV. Just any objective measures, the amount of stuff we see, the amount of originators we have, those types of things. So we're very in our comfortable in our ability to get there.
Our final question is coming from Casey Alexander with Compass Point Research.
And this is just real quick. On Solarplicity, you mentioned in the footnote that the disposition of Solarplicity was slightly below the fourth quarter fair value mark. Can you give us some sense of that? I mean, are we talking $0.01 a share, $0.02 a share, $0.03 a share? I mean, I would think that's a number that you would know.
Yes. I mean, it's around $0.01 a share, but we also receive -- there's a portion of the proceeds that are kept at escrow. So if you receive 100% of the escrow, it valuates depending on the valuation. So we'll revalue the whole pool of assets at 3/31. But right now, it's about that set of shares.
So on behalf of all of us in Apollo, we want to take you for your time today and your continued support. Please reach out to Elizabeth or any of the team if you have any further questions. Have a great day.
Thank you. This does conclude today's conference call. You may now disconnect.