Apollo Investment (AINV)
Q2 2012 Earnings Call
November 04, 2011 11:00 am ET
Richard L. Peteka - Chief Financial Officer, Principal Accounting Officer and Treasurer
Patrick J. Dalton - President of Apollo Investment Corporation and Chief Operating Officer of Apollo Investment Corporation
Elizabeth Besen - Director of Investor Relations
James Charles Zelter - Chief Executive Officer, President and Director
Jasper Burch - Macquarie Research
Richard B. Shane - JP Morgan Chase & Co, Research Division
Greg Mason - Stifel, Nicolaus & Co., Inc., Research Division
Casey J. Alexander - Gilford Securities Inc., Research Division
John Stilmar - SunTrust Robinson Humphrey, Inc., Research Division
Previous Statements by AINV
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James Charles Zelter
Thank you, and good morning, everyone. I'm joined today by Patrick Dalton, Apollo Investment Corporation's President and Chief Operating Officer; Richard Peteka, our Chief Financial Officer; and Elizabeth Besen, our new Investor Relations Manager.
Elizabeth, before we begin, would you start off by disclosing some general conference call information and include the comments about forward-looking statements?
Thanks, Jim. 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 and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these statements and projections. We do not undertake to update our forward-looking statements or projections unless required by law.
To obtain copies of our latest SEC filings, please visit our website at www.apolloic.com or call us at (212) 515-3450.
At this time, I'd like to turn the call back to our Chief Executive Officer, Jim Zelter.
James Charles Zelter
Thank you, Elizabeth. As you've seen, yesterday evening, we issued our second quarter earnings press release and filed our quarterly form 10-Q with the Securities and Exchange Commission. I will begin my remarks with a brief review of the market environment during the quarter. I'll then provide some portfolio highlights for the quarter and discuss our capital position. Next, Rich will discuss our quarterly results, followed by Patrick who will discuss changes to our portfolio during the quarter in greater detail. We will then open the call to questions.
During the quarter that ended September 30, 2011, we believe investors became increasingly risk-averse given the escalating sovereign debt crisis in Europe and the persistent worries about the U.S. economy. S&P's downgrade of the U.S. also weighed on the capital markets. For the period, major U.S. equity indexes fell between 12% and 14%, volatility rose sharply as the VIX more than doubled. With increased risk-aversion, debt spreads widened particularly for high yield.
Given this uncertainty and volatility, investors appear to become increasingly defensive and sought less risky assets, as was evidenced by rising gold prices and falling treasury yields. In addition, there was a notable behaviorable change by some banks as they've began to derisk in advance of the implementation of Basel III and Dodd-Frank, putting additional pressure on certain asset classes.
As a reminder, our portfolio of investments consists in part of larger companies, some of which are high yield. As a result, we believe our portfolio is relatively more exposed to market volatility than the other BDCs that invest primarily in the mezzanine market or in smaller companies.
With an uncertain backdrop and increased risk aversion during the quarter, high-yield bond issuance fell sharply to $23 billion, a decline of 71% from the prior quarter. This was the lowest quarterly issuance level since the quarter ending March 31, 2009, and the quarter also saw continued weak demand with outflows from high-yield funds $443 million during the period.
The BofA Merrill Lynch CCC index rose 472 basis points from June 30 to September 30, highlighting the bearish tone in the market, and the unlevered price return for the index was negative 15.8% for the quarter. Accordingly, these technical macroeconomic factors contributed significantly to a 17% decrease in the NAV per share of Apollo Investment Corporation for the quarter.
As we stand here today, we believe that the vast majority of this decline is recoverable over time. Since the end of the quarter, the credit market has shown signs of improvement. From the end of September and through yesterday, the yield of the CCC index has declined 177 basis points and has an unlevered price return of 7.8%. In addition, high-yield fund flows have turned positive with October posting inflows of almost $6.7 billion.
Given the significant market volatility, we believe that the recent rebound in the credit markets has had a positive impact to our NAV. We also remain cautiously optimistic that our overall portfolio will continue to perform well in the near term.
Given the decline in our NAV, I'd like to talk -- take a minute to talk about what causes changes to NAV. First, it is important to distinguish NAV changes that result from market volatility and interest rate changes versus NAV changes caused by expected or actual credit impairment. As a reminder, a component of our core strategy is to invest in larger companies. While this allows us to maintain a liquid portfolio, it can also result in higher relative value in our portfolio.