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Apollo Investment Corporation (NASDAQ:AINV)
Q4 2018 Earnings Conference Call
May 18, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Apollo Investment Corporation's earnings conference call for the period ended March 31st, 2018. At this time, all participants have been placed in a lesson only mode. The call will be open for a question and answer session following the speakers' prepared remarks. If you would like to ask a question at that time, simply press *1 on your telephone keypad. If you would like to withdraw your question, press the # key. I will now turn the call over to Elizabeth Besen, Investor Relations Manager for Apollo Investment Corporation.

Elizabeth Besen -- Investor Relations Manager

Thank you, operator, and thank you everyone for joining us today. Speaking on today's call are Jim Zelter, Howard Widra, Tanner Powell, and Greg Hunt. 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 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 [inaudible] disclosure in our press release regarding forward-looking information.

Today's conference call and webcast may include forward-looking statements. Forward-looking statements about risks and uncertainties including, but not limited to, statements that to our future results, our business prospects, and the prospect of our portfolio companies. You should refer to our registration statement and shareholder reports for risks that apply to our business and in the adversary effect any forward-looking statements that we make. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our FCC filing, please visit our website at www.apolloic.com. I'd also like to remind everyone that we've posted a supplemental financial information package on our website, which contains information about the portfolio as well as the company's financial performance.

At this time, I'd like to turn the call over to Jim Zelter.

Jim Zelter -- Co-President

Thank you, Elizabeth. As you've seen in today's press release, we have a variety of important announcements. To start, I am happy to announce that Howard Widra, who has served as president of AINV since June 2016, has been appointed Chief Executive Officer as I step down from this role. Howard's also joined the board of directors of the corporation. I will continue to serve as the director of the company and its co-president of Apollo Global Management and as such will continue to be involved with AINV in its strategic capacity.

In addition, Tanner Powell has been appointed president of the company, filling the vacancy created by Howard's appointment. Tanner will also continue to serve as Chief Investment Officer for the company's investment advisor. These appointments reflect Howard and Tanner's ongoing contributions to the successful execution of the company's portfolio repositioning plan over the past two years and their work at Apollo over many, many years. I look forward to continuing to work closely with Howard and Tanner as they continue to execute the company's strategic initiatives. Congratulations to both of you. With that, I will turn the call over to Howard to discuss our other announcements.

Howard Widra -- Chief Executive Officer

Thanks, Jim. I will begin today's call by discussing the changes to our fee structure, followed by an overview of our go-forward strategy in light of our board's recent approval to reduce our asset coverage requirement. Following my remarks, Tanner will discuss the market environment, our continued progress repositioning the portfolio, and our fourth quarter investment activity. We will then review our financial results for the period. We'll then open the call to questions.

Beginning with the fee structure, we're pleased to announce several changes to our fee structure, which we believe greatly enhances the alignment of interests between our manager and our shareholders. First, the base management fee has been permanently reduced and we have adopted a tier fee structure whereby management fees decrease as assets grow. The base management fee has been reduced from an annual rate of 2% of the company's gross assets to 1.5% of gross assets up to a one-time debt to equity ratio. And reduced to 1% of gross assets in excess of one-time debt to equity. For purposes of calculating the base management fee, the definition of gross assets excludes cash and cash equivalents.

Second, the calculation of the incentive fee on income has been revised to include a total return requirement with a rolling 12-quarter look back beginning from April 1st, 2018. The incentive fee rate and hurdle remain 20% and 70% respectively and there is no change to the catch-up provision. The incentive calculation with the total return requirement will be put into effect on January 1st, 2019. For the period between April 1st, 2018 through December 31st, 2018, the incentive fee rate will be waived to a flat 15% subject to the 70% hurdle rate. I refer you to the AK that we filed this morning for the amended and restated investment advisory agreement for additional detail. We believe that this new fee structure demonstrates our commitment to creating value for shareholders.

Moving on, as you are aware, in late March the small business credit availability act was passed, which permits BDC's to operate with a reduced asset coverage requirement or said differently, an increase in leverage. In early April, AINV's board of directors improved our ability to operate with higher leverage, which will go into effect in April 2019. After much thoughtful and thorough analysis, we have developed a comprehensive plan, which we believe prudently implements the increase in leverage and which we believe will enhance returns for our shareholders.

Many of our competitors have sensibly talked about the possibility of increasing leverage in order to access a broader range of assets and they will examine that possibility as time progresses and origination allows. We are fortunate to be in the unique position to already have all the origination necessary to implement a prudent and lower risk portfolio growth strategy with the increased leverage and to have insight regarding how those assets perform over a cycle. That is why we have taken such a clear position on our path forward upon passage of the act. We believe the incremental leverage will allow us to de-risk AINV's portfolio by using the incremental investment capacity to invest in lower-risk assets which should improve our ability to generate stable earnings and mass.

As mentioned, we believe the ability to increase our leverage provides the unique opportunity for AINV given the robust volume of senior first lien floating rate assets already originated by the Apollo platform. We believe that our ability to access mid-cap extensive origination capabilities as a senior lender gives us an advantage over many other BDC's. We expect the majority of incremental assets will be first lien floating rate loans with leverage between four times to five times EBITDA and would spread to 500 to 700 basis points over live work.

Let me take a moment here to remind everyone about MidCap, a middle market focused specially financed firm, which I co-founded, that currently has 8 billion of funds employed and 16.3 billion of commitments under management. MidCap has an outstanding track record of investing in senior corporate loans. AINV and MidCap can co-invest on a negotiated basis pursuant to our co-investment order. Today, MidCap originates a significant amount of senior floating rate loans within AINV's new target yield that will now be available to AINV. For example, in 2017, approximately 3.7 billion of new loans originated by MidCap were either committed to by third parties at close or were syndicated to third parties post-close. These assets will now be appropriate for AINV.

Moreover, the combination of MidCap plus AINV with its increased leverage capacity will enhance Apollo's overall ability to win deals based on size. With our new target portfolio asset mix, we expect to operate with a leverage ratio of between 1.25 and 1.4 times, well below the adjusted regulatory limit. We expect that it could take between 18 and 24 months from now to operate within this revised target leverage range. Regarding our funding plans, we have had preliminary discussions with the lead banks in our credit facility to renegotiate the leverage covenant and we believe that we will be able to come to a favorable amendment to that agreement for all parties. Our incremental leverage will most likely come from secured bilateral credit facilities, like the facilities used by MidCap on identical assets. We have already received term sheets from a couple of large banks with pricing inside our current cost of funding, which we believe will reduce our overall borrowing cost.

This reduced cost of funding, combined with the lower management fee on the incremental assets, means that newly originated assets will create meaningful accretion to our [inaudible]. We believe that with this go forward investment strategy; we will be able to deliver higher and more consistent returns for our shareholders. Turning to our distribution, the board approved a $0.15 distribution to shareholders of recorder as of June 21st, 2018. With that, I'll turn the call over to Tanner to discuss our investment activity.

Tanner Powell -- Chief Investment Officer

Thanks, Howard. Beginning with the environment, middle market rending remains very competitive. Middle market loan is showing to a slow during the quarter while private credit fundraising remains robust. Wide demand imbalance has continued to pressure the structures and spreads. We believe the combination of our strong origination platform brought product sweep and deep sponsor relationships allows us to see a wide array of opportunities. We believe that given our size relative to our prominent investment opportunities, we can find attractive opportunities in today's competitive market.

That said, we expect to only put capitals in work if it makes sense for our shareholder in the long term. We remain focused on credit selection while patiently deploying capital. We continue to be pleased with our progress executing on our portfolio repositioning strategy and in the competitive environment we are focused on opportunities that capitalize on Apollo's scale and areas of expertise and can also take advantage of our ability to co-invest with other funds and entities managed by Apollo.

During the quarter, we deployed 243 million in eight new portfolio companies and nine existing companies. The weighted average yield of debt investment made was 9.7%. 114 million or approximately 47% of total deployment was in co-investment of which 72 million was in an after date transaction for Genesis Healthcare, the largest skilled nursing facility operator in the U.S. This investment is a great example of the benefits we are deriving from our ability to co-invest. The benefits of scale as AINV and MidCap combined underwrote the entire $555 million facility. It was mentioned in AINV's current exposure to Genesis is less than 50 million and given the company's revolver availability we expect our exposure to remain near this level. Other notable co-investment transactions during the quarter included Crown Automotive, Partner Therapeutics, and V-Power among others.

Consistent with broader market trends, repayment activity with Elevated, during the quarter investment sold total 119 million in repayment; total 238 million for total exit the 357 million. Net investment activity before repayments was 124 million and net investment activity after payments was a negative 114 million for the quarter, excluding the impact of the sales Solarplicity net investment activity would've essentially been flat. The weighted average yield on debt sales was 7.6% and the weighted average yield on debt repayments was 10.8%. Sales and repayments included the pay down of two of our non-core assets, Solarplicity Group and Kraft 2014.

During the period we significantly reduced our exposure to non-core assets, which now represent 434 million or 19% of the portfolio down from 907 million from when we commenced our repositioning strategy in mid-2016. Approximately 39% of the remaining nine core assets are in two oil mains, which have significantly improved in value and has the hedge to reduce the volatility of their potential outcomes. Approximately 36% are in shipping investments, which is up last quarter as we deployed 42 million in dynamic Pride tankers during the period to redeem debt from an existing lender; a move that we believe greatly enhances our flexibility. The new room represents the senior part of the capital structure and therefore do not add to the risk position of the asset. Turning to aircraft, we've seen as of the end of March, AINV's investment in March was 402 million representing 17.9% of AINV's total portfolio. During the quarter, we deployed approximately 18.5 million in Merx and were paid 25 million resulting in a net repayment of 6.5 million. Merx's underlying portfolio continues to pull strong well and the genus enabled to successfully monetize select aircraft. Because of the trump performance, Merx paid a 2.5 million dividend to AINV during the quarter. In April, Merx announced the pricing of an aircraft securitization representative of [inaudible] at Servicer -- two securitization transactions. Merx priced 506.5 million of secured notes and used the proceeds to finance -- we financed 25 of its owned aircraft including 19 aircraft from the ABS portfolio. Investor demand for the notes was strong and the transaction was well oversubscribed.

The cross A notes were rated single-A, the cross B notes were rated triple B, and the class C notes were rated double B by both S&P and Kroll. The transaction quotes earlier this week. Over the past year or so, Merx has been investing in technical resources and developed into a full-service aircraft-reaching platform. As such, we expect Merx will continue to manage an increasing portion of its fleet, which should enhance its up rank performance. Regarding our energy portfolio, at the end of March, oil and gas represented 8.2% of our portfolio at fair value or 184.1 million across three companies. During the quarter, we funded 1.2 million in Spotted Hawk. We continue to work closely with the respective management teams and we may deploy some additional capital into these names during the coming quarter to support a creative development project. Given the increase in the price of oil during the period, we recognize an unrealized gain of 8.9 million or $0.04 a share on our oil and gas investments and also recognize the loss of 8.8 million or $0.04 per share on our oil hedge.

Now let me spend a few minutes discussing credit quality. During the quarter, our second lien debt investment in Sprint Industrial Holdings was placed in non-equivocal status. The company is experiencing earnings pressure but with a recent improvement in operating performance, we are hopeful that this term will also recover well above its current mark. Know then, that never replaced on or removed from non-accrual status. At the end of March, investments on non-accrual status represented 2.3% of the portfolio at fair value and 3.3% at cost. The risk profile of our portfolio is measured by the weighted average leverage and interest coverage for our portfolio companies was relatively unchanged compared to the prior quarter. The current weighted average net leverage of our investments remains 5.5 times. The current weighted average interest coverage decreased to 2.5 times. With that, I will now turn the call over to Greg who will discuss financial performance for the quarter.

Greg Hunt -- Chief Financial Officer

Thank you, Tanner. Revenue for the quarter was 61.5 million down 5% quarter over quarter due to lower recurring interest income and lowered dividend income. Interest income declined primarily due to a lower average portfolio and the placement of our investment in Sprint, our non-accrual. Dividend income decreased quarter over quarter primarily due to a lower dividend for Merx and lower dividends from structured credit investments as we have reduced our exposure to this asset class. Pre-payment income rose during the quarter consistent with the increase in repayment activity. Pre-payment income was $3.5 million in the quarter compared to $2.8 million in the December quarter. The income declined slightly to 1.3 million in the quarter compared to 1.5 million in the December quarter. Expenses for the December quarter for the March quarter totaled 29.5 million compared to 30.8 million in the December quarter. Expenses were down primarily due to lower management and incentive fees. The decline in management fees was due to the decrease in the portfolio -- cite the portfolio. The incentive fee for the quarter was 15%. And the incentive fees for the quarter also included 1.8 million reversal of previously accrued incentive fees ready to take income from our investments in Solarplicity and Sprint Industrial. That investment income was 31.9 million or $0.15 per share for the quarter. This compares to 34 million or $0.16 per share in the December quarter.

For the quarter, the net loss on the portfolio totaled 11.3 million or approximately $0.05 per share compared to a net loss of 28 million or $0.13 per share for the December quarter. Given the increase in the price of oil, there was a $0.04 per share positive impact on our oil investments during the quarter, which was offset by a $0.04 loss per share on our oil hedge. Away from oil and gas, there was a $0.05 loss per share on our investments during the quarter. The largest driver of this negative performance was from our remaining Solarplicity investment, which was restructured during the quarter. The restructuring has provided the company with the runway to execute on its new business plan. Consequently, net asset value per share declined $0.04 to $6.56 per share at the end of the quarter. A decline in that was attributable to the $0.05 loss per share on the portfolio partially offset by $0.01 share appreciation on to the stock repurchases.

Turning to the portfolio composition, at the end of the March, our portfolio has a fair value of 2.2 billion and consisted of 90 companies across 24 industries. First lien debt represented 50% of the portfolio, second liens represented 31%, unsecured debt represented 5%, structured products represented 3%, and preferred and common equity investments represented 11%. The weighted average yield on our portfolio at cost increased by 20 basis points to 10.7% primarily due to increases in Liebor, partially offset by the retainment of higher-yielding assets. During the quarter, one-month Liebor increased approximately 30 basis points and ended the quarter at 1.9%. Three-year Liebor increased approximately 60 basis points and ended the quarter at 2.3%. Since we have more floating rate assets than floating rate liabilities, an increase in Liebor generally is positive for us.

However, as Liebor increases, there's usually a lag effect before we see the full impact of the interest and we receive from our borrowers as borrowing rates generally reset either monthly or quarterly. Assuming no change in our balance sheet composition from the end of March, an additional 100 basis point increase in Liebor would translate into incremental annual net investment income of approximately $0.04 per share. On the liability side of our balance sheet, we had $790 million of debt outstanding at the end of the quarter. Net leverage, which includes the impact of canceled and unsettled transactions, stood at 0.57 times at the end of March compared to 0.62 times at the end of December.

On our last earnings call, we indicated that it was our intention to redeem our 2,043 baby bonds when they become callable in July. Due to change in allowable leverage and changes to our funding strategy, we no longer intend to call those notes in July. As Howard mentioned, we're in the process of renegotiating our revolving credit facility and exploring additional balling arrangements.

In April, S&P downgraded AINV in connection with our plans to operate with higher leverage. While we're disappointed in S&P's actions, which we believe is rooted in their view of the industry and not AINV specifically, we do not believe that their action is an impediment to our successful execution of our go forward strategy. We look forward to working with all the rating agencies in evaluating the impact of the new leverage rules.

Lastly, regarding our stock buyback. During the period, we purchased approximately two million shares and an average price of $5.73 for a total cost of $11 million during the quarter. Since the inception of the buyback program, we have repurchased approximately 20 million shares or 8.6% of our shares outstanding for a total cost of $120 million, leaving approximately 30 million available for future repurchases, in other words, turn authorization. This concludes our remarks and operator please open the call to questions.

Questions and Answers:

Operator

Thank you. At this time, the floor is now open for questions. As a reminder, if you wish you ask a question, simply press * and then the number 1 on your telephone keypad. If at any point your question has been answered and you wish you remove yourself from the queue, press the # key. Our first question comes from the line of Jonathan Bock of Wells Fargo Securities.

Sven O'Shane -- Wells Fargo Securities -- Analyst

Good morning guys, Sven O'Shane [sic] for Jonathan Bock this morning. Thanks for taking our question and appreciate your leadership on the leverage issue with the breakpoint there and all the color you provided on that. Just for a little more on that matter, with the incremental the 1% breakpoint going after one-to-one, the thing we noticed today is that your leverage is net 55 debt to equity. So can you kind of walk us through the incremental assets from here to one-to-one; are they going to be similar to what we see today and then go lower risk? Or will it be full on lower spread assets?

Howard Widra -- Chief Executive Officer

The way we think about it, and obviously, it depends on thick of assets as they come through but the way we think about it is that we expect it to operate between 0.7, 0.75 prior to this leverage change -- assets that are consisting with what we see before. And we still expect that to be sort of the base of the business in terms of building where the other extreme is from and then layering on top that. The assets that fit in the range that we talked about just now, meaning first lien assets between L500, L700, so there's sort of two parts embedded in your question and so if you go from 0.7 to 1.4 I'll leverage that to about between 900 million and one billion of assets, which is why we said we thought it took 18 to 24 months based on sort of the flow that we see consistently over the last few years and continue to see to build that up. So we expect to get back to 0.7. In the normal course, without regard to that new origination, at any time -- and the reason why I said "any time" is; without Solarplicity paying off this tax quarter we would've been very close to that, right? We have big positions paying off and we're not putting on as many big positions. And so for example, if we were to exit Spotted Hawk our leverage would go down we'd view that as positive and it may take a little while to climb back to 0.7. But we expect to get there in the normal course. We will put on top of that in it somewhat -- anyone's guess is as good as ours -- but in somewhat linear fashion that additional 900 million to one billion book.

Sven O'Shane -- Wells Fargo Securities -- Analyst

Appreciate that color. And then on the 2043 notes you just commented on that you'll no longer call in July, is that just a pause with all things under consideration or do you now view that that structure makes sense on your balance sheet in light of the S&P in higher leverage?

Greg Hunt -- Chief Financial Officer

No, it's just a pause at this point as we kind of look at our capital structure with the resources of financing going forward.

Sven O'Shane -- Wells Fargo Securities -- Analyst

Okay, thank you. And then just one more sort of market question we're trying to understand here. CLO's, as you know, are experiencing cash pressure given the GAAP on the three month and one-month Liebor. On middle market direct lending assets, is the optionality to the issuer between three month and one month, is that typical in the structure?

Greg Hunt -- Chief Financial Officer

Yes, it is. Predominately, as those two industries work closer together there was a bias for three month -- we've seen a little bit gravitation to one month but generally speaking, they do have that flexibility.

Sven O'Shane -- Wells Fargo Securities -- Analyst

Okay, and of course you'd see less of an impact given much lower rates of leverage but it was something that we're trying to come to grips with as Liebor goes up and those benefits accrue you. And that's all for us this morning and thanks so much.

Operator

Our next question comes from the line of Kyle Joseph of Jefferies.

Kyle Joseph -- Jefferies -- Analyst

Morning, guys. Thanks for taking my questions. Congratulations, Howard and Tanner. I just wanted -- in terms of the core investments you guys are making, just wondering about EBITDA and revenue growth trends you're seeing there and any sort of changes since we last talked?

Howard Widra -- Chief Executive Officer

Kyle, I don't think that there's been a material change. You obviously have a dynamic and a credit book where some of your outperformers are the ones that are the highest propensity to get refinanced out. We see it as still a positive growth environment, but relatively muted as it relates -- and that goes to earning trends. In terms of specific leverage, our leverage was relatively flat owing to the fact that the deals we were doing were relatively higher leverage. And I also note -- I think is something that we and our peers see is there's a greater proportion of sponsored deals are executing on rollover strategies and a lot of times those acquisitions are leveraging as well. To answer your question more specifically, definitely positive but muted in terms of the magnitude of that underlying earnings growth.

Kyle Joseph -- Jefferies -- Analyst

Got it. Can you update us on your appetite for share repurchase and the changes in leverage you addressed earlier?

Howard Widra -- Chief Executive Officer

I think we have the same appetite -- we've done it consistently when we think it's the right value. The increase in leverage certainly doesn't change that because it creates more capital available on less equity so I think we have the same appetite when it's a good investment from a return perspective for the shareholders versus making additional loans; we'll continue to do it.

Kyle Joseph -- Jefferies -- Analyst

Thanks very much for answering my questions.

Operator

Our next question comes from the line of Rick Shane of J.P. Morgan.

Rick Shane -- J.P. Morgan -- Analyst

Hey, guys. Thanks for taking my questions this morning. Look, we're at an interesting inflection point. We're clearly late in the cycle, though the cycle can continue indefinitely in terms of good credit. We have seen empirically and anecdotally heightened competition. We see that in terms of spread, we see that in terms of covenant. Now there is potentially an increase in supply, capital coming in, its leverage limits are increased. I'm just curious both strategically and tactically how you think about this over the next 12 or 24 months? Presumably, credit's always been tight, so what are the next dials to turn?

Howard Widra -- Chief Executive Officer

Something we talk about consistently and the change of BDC leverage one, because of the lagging over time and two, because it's only part of the capital formation in this competitive environment and it has been building everywhere is figuring out how to differentiate without competing on credit or on pricing and it had sort of become increasingly clear that size is the thing that does that and so we have been very focused on having as much capital as possible available for the safest part of the capital structure in buyouts to be able to speak for as much as possible. And given MidCap's presence in that market and increasing capital available, we have been able to sort of create a product that's not unique but far more differentiated than the vast majority of the people we compete with. And we think that sort of trend will continue. That's the first thing. As it continues to get competitive, you want to make sure that you have enough of a differentiation where you're not chasing a market. You can offer something that allows you to get the best pick.

The other is, to be invested in origination and have as broad and as deep a set of origination team as possible. We have a lot of people in the sponsor space. And then outside of the sponsor space, we have probably as much origination resources across asset-based lending and lender finance and life sciences and aviation and opportunistic credit across all the Apollo -- even whole poly universe as anybody. And so, you certainly have to be more selective, you certainly have to be aware of that. You have to have some lines you have to draw but the best defense is to have something -- product that most people don't have.

Rick Shane -- J.P. Morgan -- Analyst

Got it. Okay, as we are in this rising rate environment this is a question we've asked a couple clients. I am curious if you are helping your borrowers help themselves by asking them to take swaps and hedge out some of the risks that they're taking on the floating rate liabilities that they're incurring. Is that part of the strategy for you guys?

Howard Widra -- Chief Executive Officer

Well, it was a convention in the sponsor market when Liebor was at five years and years ago to have people have that exposure. That convention has not returned and so it's a challenge because if it returns for one person in the market no one else does it then you're not gonna win your transactions. But it is an important thing to consider. So for example, the underwriting is underwritten with a Liebor cover and what they can cover -- not just sort of flat Liebor. The importance of them making sure that they have the passable available leader who hedged their cash flow to pay their interest is part of the underwriting and I think it's a great question I think you'll probably see in the market that's starting to return over the next 12 to 24 months as rates continue to creep up.

Rick Shane -- J.P. Morgan -- Analyst

Got it. And then, again, look, I do want to acknowledge you guys breaking ground in terms of approaching your management restructure as you increase leverage, I think that's an important signal for the market. So thank you, guys.

Operator

As a reminder, ladies and gentlemen, if you wish to ask a question, simply press * and then the number 1 on your telephone keypad.

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

Doug Mewhirter -- SunTrust -- Analyst

Hi, good morning. Two questions: first, on the higher leverage in your origination strategy. It sounds like, as the way you described it, that most of the incremental loans will be more directly originated mainly for the MidCap platform and it sounds like there's some sort of pent-up demand which explains why you're fairly confident you can sort of lever up in a relatively quick manner in the grand scheme of things. Would you consider, or the part of the strategy to the extent that maybe there would be some air pockets in the origination environment where you wouldn't be able to ramp up that you would add tradable credit to that pile. So first thing that you would buy off the trading desk that you thought were right or are you going to stick to directly originating for this higher leverage pocket?

Tanner Powell -- Chief Investment Officer

I think the plan is to lean into the direct origination platform that Howard's built at MidCap. I think what we said historically is that from time to time there are those names that maybe are in the nether region of traded versus originated that still may compose a portion of our book, but as it relates to our intention going forward. It should be disproportionately from the MidCap portfolio. And again, senior secured floating rate assets.

Howard Widra -- Chief Executive Officer

Let me just make one point. The sponsor origination that we have and have built over the last two years is not just MidCap, it's Apollo sponsored origination. There's sponsor originators from both places, it's all coordinated through one team. And we have gone to market by offering what AINV could historically offer and what MidCap could historically offer, as well as other products to sponsors. And that has been what we felt like an addition to size has helped us get additional wallet share from sponsors. All that this does now is basically say, there's more of these loans that MidCap and its managed accounts and its third party to syndicated to, there's now a portion of that that AINV can take a piece of. But it's already been part of that flow and it's already sort of a coordinated institutionalized sponsor coverage effort as it just so happens at MidCap was the centerpiece of that. Could it have the most capital and the most unique product?

Doug Mewhirter -- SunTrust -- Analyst

Okay, that's very helpful. Shifting gears a bit for my second and final question. Your energy investments -- looks like with higher oil prices that is definitely a good thing for your energy investments. But now you're in sort of a gray area in terms of what management might want to do with the companies or what you might want management to do with the companies. And I was trying to get an idea where their heads are at in terms of "oil prices are up, so let's go buy some more properties and grow our way out of the problem" versus "take an attractive offer from a bigger oil and gas company and get it off our balance sheet." Sounds like you would want to reduce your non-core assets as long as you get good prices but I know that the managers of the companies would generally want to sort of grow themselves. Not quite sure where the balance is at this point in time.

Tanner Powell -- Chief Investment Officer

Yeah, sure, I've answered this way, and you mentioned it has and continues to be our intention to reduce our exposure to non-core assets including oil and gas and that is the strategic priority for us. That said, every situation is unique and we are not interested in moving those assets at fire sell prices. And as we alluded to in our prepared remarks, from time to time, have put in money to support development activities within those companies and we'll continue to do so. To your specific question, I would say yes, it's still our strategic priority to try to reduce. We are admittable in working closely with management teams to accomplish to put ourselves in the position to best execute and derive value from the situation, which includes from time to time, continued support of those assets.

Doug Mewhirter -- SunTrust -- Analyst

Okay, thanks.

Operator

Our next question comes from Robert Dodd of Raymond James.

Robert Dodd -- Raymond James -- Analyst

Hopefully, you can hear me, the line seems noisy right now. Just focusing on almost following up to Rick's question but less about the next 12 to 24 months and more about today. The new assets you're talking about, the potential new assets L plus 500 to 700. In today's market, that seems like to cover a wide landscape of a kind of assets. Can you give us a bit more color on the kind of things we're looking at? Is L plus 500 a non-cyclical healthcare ABL or something like that and 700's a stretch senior for a decent-sized company etcetera. That does touch a lot of landscape there.

Howard Widra -- Chief Executive Officer

Agreed, so let me try to sort of narrow it a little bit. Even prior to this change, we have been focused on to the extent that the size and yield need to do asset-based lending and life science is lending that yields what we have said is 10% which is really sort of like L750 with fees. And we expect to continue to do that and the only thing that would change there is the potential to have a little higher whole sizes because our overall book is bigger so we can be a little bit more concentrated there, or we can have bigger loans at the same concentration. With regard to sort of the leverage loans, what we're referencing is basically first lien, either senior or senior stretch loans between two sponsors, between L500 and L700. The L500 deal, I agree, looks way different than the L700 deal. The L700 deal is few and far between. So I would focus more on deals that are between four and five times leverage that are L550 to L600. I think that sort of narrows it more. And those are sponsor buyout deals or recaps for company that are moving sort of slightly above leverage from the bank market, traditional, non-bank sponsored finance loans that are first lien. Obviously, there are liens getting done in those markets that are L450. I feel pretty good in these markets but it all 450 that those wouldn't qualify. So why do those still get done at L450 and other ones at L550? Sometimes it's speed of execution, sometimes it's size, sometimes it's more stable cash flow, sometimes it's lower leverage, it's all of those things. And obviously, price follows credit. But you should think of it as pretty standard first lien sponsor lending and not other things that are sort of outside of that. Just to be clear, not to say that there can't be a loan that comes up every now and then that fits those other categories but the vast majority will be in that category.

Robert Dodd -- Raymond James -- Analyst

Got it, really helpful color. One of the other things you mentioned was the incremental buying to be secured by lateral and at rates lower than your current borrowing facilities. Can you give us any more color on that [inaudible] cost-effective revolver already, but the traditional BDC type revolvers have come down that much. So is this traditional revolver type structure or is it more of a securitization structure or warehouse or something like that?

Howard Widra -- Chief Executive Officer

No, I mean we're referencing not cheaper than our current revolver that didn't unsecure debt.

Robert Dodd -- Raymond James -- Analyst

Okay, got it. I understand now. Okay, I misheard that. Last question: one of the things, obviously, you can't go over one to one until April. On the BDC balance sheet, there are obviously ways around that; off-balance sheet, warehouse facilities, SLF type structure, the BDC and then buy in the assets. Should we expect, for lack of a better term, you did that creative to manage -- obviously, originations are happening at MidCap right now and they have been happening and you could potentially capture some of those and be ahead of the game, so to speak, when the one year anniversary of the board approval passes, or is it just gonna be kind of steady and not creative adjustments to have capture that?

Howard Widra -- Chief Executive Officer

I don't think we'll do anything creative to fix the short-term problem of having too much origination that has long-term implications. There's not a whole lot of reason for that. Obviously, if we're at 0.9 leverage in August that's a good problem if we lob all our loans and it's grinding her in reverse and we'll deal with that when that happens but we expect it to just sort of be -- everything we've tried to do over the past two years and continue to try to do is to be sort of simple and clear and we'll stay that way even at the expense of doing something sort of quick and creative.

Robert Dodd -- Raymond James -- Analyst

Thank you.

Operator

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

Sven O'Shane -- Wells Fargo Securities -- Analyst

Thank you for taking my questions. Sven was kind enough to ask questions because I lost my voice but I wanted to congratulate on the production but then ask a follow up if you can understand me. If not, I'll do it over email. The question is Howard, as you built out MidCap, I'd imagine you have a number of third-party funds that have been in the works -- SMA's, etcetera because MidCap is certainly a large originator. The question is: Give us a sense of the funds that the L550 loan will be shared with and whether the available capacity on the BDC balance sheet is a third or a half in comparison to those other third-party funds that MidCap is now managing.

Howard Widra -- Chief Executive Officer

Well, there's always changing, right? Because we're continuing to raise money and then also sort of the allocation policy in the extent of order taken to account some of the priority but I would say that it is for leverage lending -- itself, the BDC is probably about 15-20% of the culpable available for those loans.

Greg Hunt -- Chief Financial Officer

John, I would just add from our perspective, net flow as you can heel at the consistent being that the team has articulated this morning. That flow is there so it's just really a matter of turning on the larger faucet for the BDC to be able to buy those. We feel we have plenty of capacity to increase ours without having a diminished impact on the overall because we're going to still maintain an appropriate diversity. And as tanner mentioned in his notes and Howard's as well, even in these large syndications, we're gonna be consistent with our goal of 1% and 2% visions at most. The ability for on a several hundred million dollar underwriting for the BDC to take 30 to 40 million, that's totally appropriate and the 25 or 40, whatever the number may be, that number is clearly not going to drive the train but we're bringing that capital to the overall frontend which is the critical aspect.

Sven O'Shane -- Wells Fargo Securities -- Analyst

Got it. Congratulations and clearly understand we appreciate the creed of math above one to one. Thank you very much.

Operator

And that was our final question. I will now like to turn the floor back over to management for any closing remarks.

Jim Zelter -- Co-President

Okay, listen, thank you, operator. On behalf of the team, we thank you for your time today and your continued support. Please feel free to reach out to Greg, Elizabeth, and the entire team and we look forward to talking to you on various questions. Have a great day.

Operator

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect and have a wonderful day.

Duration: 46 minutes

Call participants:

Elizabeth Besen -- Investor Relations Manager

Jim Zelter -- Co-President

Howard Widra -- Chief Executive Officer

Tanner Powell -- Chief Investment Officer

Greg Hunt -- Chief Financial Officer

Sven O'Shane -- Wells Fargo Securities -- Analyst

Kyle Joseph -- Jefferies -- Analyst

Rick Shane -- J.P. Morgan -- Analyst

Robert Dodd -- Raymond James -- Analyst

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