MidCap Financial Investment Corp Q2 FY2020 Earnings Call

Good afternoon and welcome to Apollo Investment Corporation's Earnings Conference Call for the periods ended September 30, 2019. At this time, all participants have been placed in a listen-only mode. The call will open for a question-and-answer session following the speakers' prepared remarks. I will now turn the call over to Elizabeth Besen, Investor Relations Manager for Apollo Investment Corporation.

Thank you, operator, and thank you to everyone for joining us today. Speaking on today's call are Howard Widra, Chief Executive Officer; Tanner Powell, President and Chief Investment Officer; and Gregory 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 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 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 Howard Widra.

Thanks, Elizabeth. I'll begin today's call by providing a brief overview of our investment activity and financial results for the quarter. Following my remarks, Tanner will discuss the market environment, our investment activity for the quarter, and we'll also provide an update on credit quality. Greg will then review our financial results in greater detail. We'll then open the call up for questions. During the quarter, we continued to successfully implement our plan to prudently grow our portfolio given the reduction in our asset coverage requirement. We had a strong origination quarter and grew our portfolio by 7% by increasing our exposure to first lien floating rate corporate loans sourced by the Apollo Direct Origination platform. Given our strong net investment activity, our net leverage ratio increased to 1.24x at the end of the quarter. Our corporate lending portfolio increased to 72% of the total portfolio, up from 68% last quarter. First lien assets increased to 77% of the corporate lending portfolio, up from 71% last quarter. The weighted average attachment point improved to 1.3x, down from 1.7x last quarter. Investments made pursuant to our co-investment order increased to 74% of the corporate lending portfolio at the end of September, up from 67% last quarter. Our current pipeline is healthy, and we're confident with the pace of our new business volume. Consistent with our plan, we also successfully reduced our exposure to shifting assets and aircraft leasing. During the quarter, we sold two ships in our MSEA investment at a price above the internal allocated value, reducing our shipping exposure to 5% of the portfolio, down from 5.8% last quarter. In addition, Merx sold several aircraft during the quarter, which allowed Merx to repay capital to AINV, which reduced our investment to 12.9% of the portfolio, down from 14.5% last quarter. Moving to our financial results. Net investment income for the quarter was $0.53 per share, reflecting the strong net portfolio growth as well as the impact from the total return feature in our incentive fee structure, which resulted in a partial incentive fee for the quarter. Net asset value per share was $18.69 at the end of September, down 1.6% quarter-over-quarter. The $0.31 net reduction in NAV per share was due in part to a $0.22 decline in the value of our oil and gas investments due to the decline in the price of oil, which negatively impacted the valuation of our investments, as well as a $0.06 loss due to the extinguishment of our 2043 baby bonds. The net loss was partially offset by net investment income in excess of the distribution and the accretive impact from stock buybacks. I'd like to also provide a brief update on Merx. As previously discussed, our strategy includes reducing our balance sheet exposure to aircraft leasing while growing Merx's earnings from servicing income. Merx continues to source transactions for other Apollo funds, which generate servicing fee income from Merx. During the quarter, Apollo Global had an initial close for a fund focused on aircraft leasing. As previously disclosed, Merx will be the exclusive servicer for aircraft purchased by this fund. AINV will also receive a fee offset against fees due to its adviser associated with capital deployed by this new fund. Moving on, the equity market did present us with what we believe was an attractive opportunity to repurchase our stock. We consider stock buybacks below NAV to be a component of our plan to deliver value to our shareholders. Since the end of the quarter, we have continued to repurchase stock. The Company currently has approximately $41.9 million available for stock repurchase under the current authorization. We intend to continue to repurchase our stock should it continue to trade at a meaningful discount to NAV. Turning to our distribution, the Board has approved a $0.45 per share distribution to shareholders of record as of December 20, 2019. We know that many of you are focused on the impact of lower interest rates on our ability to cover our distribution. We expect that our earnings power will continue to grow in excess of the impact of declining interest rates as we continue to grow our portfolio. Incremental assets are now benefiting from the lower 1% management fee given that our debt-to-equity ratio was above 1x, and we also remain focused on reducing non-core assets, which are generally non-yielding or lower yielding. With that, I'll turn the call over to Tanner to discuss the market environment and our investment activity for the quarter.

Thank you, Howard. Overall, middle-market loan volumes during the quarter declined as lenders have become more selective and are pushing back on aggressive deals and terms. Middle-market loan yields remained flat as the decline in LIBOR was offset by higher spreads, original issue discount (OID), and fees. The environment for middle-market lenders remains highly competitive, given the significant amount of capital that has been raised for U.S. middle-market lending. As Howard mentioned, during the quarter, our investment activity focused on first lien floating rate corporate loans sourced by the Apollo Direct Origination platform. New investment commitments and fundings were $377 million and $358 million, respectively. All new commitments were first lien floating rate loans. These commitments were across 22 companies for an average commitment size of $17.1 million. The weighted average spread over LIBOR of these new commitments was 604 basis points, within our target range of 500 to 700 basis points for incremental assets. The weighted average net leverage for new commitments was 5.4x, within our target range of 4 to 5.5x. Lastly, 94% of these new commitments were made pursuant to our co-investment order. Sales totaled $20 million, and repayments totaled $136 million for total exits of $156 million, resulting in net funded investment activity of $201 million, excluding Merx and revolver activity. We sold two ships in our MSEA investment during the quarter at a price above the internal allocated value, generating $12.5 million of net proceeds to AINV and reducing our shipping exposure to 5% of the total portfolio, down from 5.8% last quarter. In addition, net funding for revolvers totaled $24 million. We also received a net repayment of $17.9 million from Merx from the sale of several aircraft in its portfolio. Net fundings totaled $207 million, including Merx and revolver activity. Now let me spend a few minutes discussing overall credit quality. No investments were placed on or removed from non-accrual status. At the end of September, investments on non-accrual status represented 1% of the portfolio at fair value, down from 1.7% last quarter and 2.1% at cost, down from 2.5% last quarter. The decline was primarily due to the write-downs on both Spotted Hawk and KLO Holdings. The decline in Spotted Hawk was primarily due to the decline in the price of oil. Regarding KLO, our investment was placed on non-accrual status last quarter due to the underperformance from lower customer demand, consolidation challenges, and higher costs. The Company's liquidity position has continued to weaken. The Company expects to complete a comprehensive restructuring in the coming months. Moving on to our credit metrics. The weighted average asset spread on the corporate lending portfolio decreased 19 basis points to 667, down from 686 last quarter and compared to 604 for new commitments. The lower average spread is due to the decrease in second lien exposure and the increase in first lien exposure. The weighted average net leverage for investments increased from 5.43x to 5.5x, and compared to 5.4x for new commitments. The weighted average attachment point of the portfolio declined from 1.7x to 1.3x. The average interest coverage improved slightly, increasing from 2.4x to 2.5x. We view this trade-off of yield for credit quality as a positive at this point in the credit cycle. With that, I will turn the call over to Greg, who will discuss the financial performance for the quarter.

Thank you, Tanner. Beginning with the income statement. Total investment income was $70.3 million for the September quarter, up from $66.5 million for the June quarter, an increase of $3.8 million or 5.7%. The increase was attributable to higher interest income, dividend income, and fee income partially offset by lower prepayment income. When excluding prepayment income in the $3.3 million catch-up interest we received last quarter from our investment in Sprint, interest rose 7.1%, in line with the growth in the portfolio. Prepayment income was $2.1 million as compared to $2.9 million last quarter. Fee income was $2.2 million as compared to $900,000 last quarter. Dividend income increased quarter-over-quarter as we received dividends from both Merx and MSEA. Expenses for the quarter were $34.6 million, up from $32 million in the prior quarter due to higher interest expense and management fees given the growth in the portfolio. As a reminder, the management fee was reduced from 1.5% to 1% for assets in excess of 1x debt-to-equity. For the September quarter, a 1% management fee was applied to approximately $180 million worth of gross assets. In addition, $1.9 million of incentive fees were accrued during the quarter, impacted by the total return provision in our fee structure. Net investment income was $0.53 per share for the quarter compared to $0.50 per share for the June quarter. Net leverage at the end of September was 1.24x compared to 1.03x at the end of June. During the September quarter, we funded $105 million into NFA Group and then subsequently, in October, sold down approximately $65 million of our position to achieve our desired whole size. Adjusting for the impact of NFA, net leverage would have been approximately 1.19x. Average leverage during the quarter was 1.13x, up from 0.93x during the June quarter. The net loss on the portfolio for the quarter was $24.3 million or $0.36 per share. The net loss was primarily attributable to our investments in Spotted Hawk, one of our oil and gas investments, and KLO, which was placed on non-accrual status in the quarter. As Howard mentioned, in mid-August, we redeemed $150 million of our 6.87% unsecured notes due in 2043. As a result, we recognized a realized loss of approximately $4.4 million or $0.06 per share on the extinguishment of the notes during the quarter. Net asset value per share was $18.69 at the end of September compared to $19 at the end of June. The $0.31 decrease, as previously mentioned by Howard, was primarily in our non-core oil investments, KLO, and a loss from the extinguishment of our debt. The average corporate lending portfolio yield for the quarter was 9.4%, down 50 basis points quarter-over-quarter. This decline was due to a combination of a decrease in LIBOR and a reduction in the weighted average spread of the portfolio, which decreased 19 basis points from 686 to 667 basis points primarily due to asset deployment into first liens and a reduction in our exposure to second liens. On the liability side of our balance sheet, we have $1.58 billion worth of debt outstanding at the end of the quarter. As we mentioned last quarter and given the current rate environment, we continue to evaluate alternative sources of capital with a particular emphasis on diversifying our funding sources. Our weighted average interest rate on our average debt for the quarter was 4.6%, down from 5.2% last quarter. If you exclude the 2043 notes, which were repaid during the quarter, the weighted average annualized interest costs would have been approximately 4.5% for the quarter. Lastly, regarding stock buybacks, during the quarter, we repurchased 880,000 shares at an average price of $16.15 for a cost of $14.2 million. And since quarter-end and through yesterday, we have repurchased an additional 502,000 shares at an average price of $15.65 per share for a total cost of $7.8 million. This concludes our prepared remarks. Operator, please open the call to questions.

Our first question is from the line of Rick Shane from JPMorgan.

Look, I think you touched upon this during your prepared remarks, but I would love to explore this a little bit more. When we look at the four non-accruals from last quarter, in general, we saw further deterioration in the fair value marks. I'm curious if that is a function of what we're seeing in the market.

I think, Rick, we lost you.

Operator, can you hear us?

Indeed, we can. Rick, I believe you may have actually put your line on mute? Are you still there? I believe Rick Shane is having some problems with his phone. We'll move to the next question. Our next question is the line of Fin O'Shea from Wells Fargo Securities. Fin?

I have a quick question first, and it's fantastic to hear the positive news from Merx Aviation. Can you provide some context regarding the extent of the fee rebates or servicing fees received? Also, if I missed it, will this appear in the reimbursements line or in a different section?

Yes. Regarding Merx, our agreements with the aviation fund manager stipulate that when capital is deployed, we will earn a servicing fee at the Merx level. This will affect Merx's cost structure, income, and ultimately its valuation. Additionally, the manager will rebate 20% of any management and incentive fees back to the fund. The incentive fees will be paid at the fund's term end, which is expected to be 6 to 7 years, while the management fee will be current. As soon as the equity is deployed, we will start to earn that. You will see this reflected in the income statement from the fee rebates, and we will also emphasize the impact of Merx.

Got it. I have a follow-up on the MidCap side. It sounds like you're expanding there. There was a purchase of P&Cs franchise financing. You guys talked about growing that platform's verticals more. Can you talk about the impact on Apollo? Should we expect to see a wider funnel? Or will you focus the BDC still on the core cash flow, life science strategies, for example?

Yes. I think that as a strategic approach across Apollo, whether it's MidCap or Apollo, we are aiming to broaden our origination reach, particularly in areas where we can maintain some proprietary access. Franchise finance has historically been a segment of commercial lending that is economically resilient and has a long history of stable performance. Therefore, this business aligns well with our objectives at Apollo and MidCap. If these franchise acquisitions generate assets that are beneficial for AINV, we would expect AINV to engage in them. To clarify what "work" means, it refers to being the low loss given default and meeting our yield target. If the franchise deals meet these criteria, we would anticipate participating in them. Many loans within that platform are smaller, but there are also equity-backed groups owning 40 to 60 franchises that resemble cash flow loans. We now possess the expertise and relationships with franchisors to execute these effectively.

And our next question is the line of Kyle Joseph from Jefferies. Kyle?

Congratulations on a good quarter. My first question is for Tanner. You mentioned your non-accruals and noted some incremental energy weakness in the quarter. However, could you provide an overview of the broader portfolio performance excluding those industries and troubled credits?

Yes, certainly. This aligns with what we've communicated in previous quarters, as well as what you might have read in major publications like the Wall Street Journal. We are experiencing a slowdown. While we are still achieving positive revenue growth, many of our borrowers are facing a more challenging margin environment due to factors like wage increases, rising freight costs, and pressures from certain commodities. As a result, for several consecutive quarters, we have seen earnings growth lag behind revenue growth. Although the numbers remain positive, the growth rate is slowing down. Similar to many of our peers, we are particularly sensitive to cyclical businesses given the current economic climate. This sensitivity is evident, especially as we start to observe some weaknesses in the manufacturing sector along with specific unusual situations.

Got it. That's helpful. And then, Greg, just talking about margins here, obviously, you had a nice debt paydown to reduce your cost of funds, and we're balancing that with a lower rate environment and ongoing movement higher up the capital spectrum. But as you think about your yields going forward with some offsets on the cost of funds side, where do you see that trending both in the near term and the longer term?

If you compare our spreads from this quarter to last quarter, we were at about 550 basis points last quarter and are now at 604. While we've seen a bit of flattening in new originations, we are still within our target range of 500 to 700 basis points, which is good. We plan to continue utilizing the credit facility along with managing rate reductions. When it comes to our LIBOR loans, most of the impact from the recent Fed rate drop has already been reflected this quarter, as evidenced by LIBOR trading at the end of June and July, which had already factored in those adjustments. Moving forward, I believe our earnings power will keep growing as we add more assets, and overall, we're positioned well at this moment.

I'll just comment quickly. There has been a modest widening in spread that is offsetting some of the pressure in LIBOR, as we mentioned in our prepared remarks. Keep in mind that many of the deals that we're doing, oftentimes, there's a long lead time between when we are indicating on those deals and when they actually get executed. So the effects of that change in market pricing sometimes operate with a lag as it often does in the middle market.

And our next question is from the line of Casey Alexander from Compass Point.

Yes. First of all, and maybe this is nothing. But the $111 million draw on the revolver. So it just sounds like a lot to have happened in one quarter. Was there anything idiosyncratic about that level of draws that went out to revolvers? And did any of those revolvers go to companies that are on non-accrual?

No, there is nothing related to non-accrual. That is typical for asset-based lending revolvers. Unlike cash flow revolvers that are under pressure due to liquidity challenges, the majority of this activity is mainly from asset-based lending draws, which are offset by asset-based lending paydowns. We report the net activity as well, which is around $50 million. We are trying to clarify this in our reporting, and if it’s not clear, we would appreciate your feedback on how to improve it.

Okay. Great. That is helpful. You talked about the $12.5 million proceeds from the sale of two ships as being above your internal allocated value. Is that internal allocated value different than what those ships were on the balance sheet for? Or are you calling that the same number?

It's the same value. We use that terminology because those two ships were part of a fleet of eight or nine. These two ships were sold, and the company's overall value is determined by the cumulative value of each ship. If we sold each ship at their allocated internal value or higher, we would exceed the total value of the company. However, we do not assign an exact number to each ship based on external valuations.

Yes, it does.

Our next question is from the line of Robert Dodd from Raymond James. Robert?

Just a clarification first. On the Merx, the management fee rebate, that will be a contra expense item rather than a top line item, right?

Yes, yes.

Got it. Could you provide some insight into the broader market regarding revenue and EBITDA growth? I noticed on page six of your presentation that the weighted average net leverage for the second lien has increased from 5.89x to 6.26x over the last few quarters. However, you haven't deployed any new second lien during this period, which suggests you may have exited some. Is this increase a result of those exits, or does it indicate there is a decline in EBITDA in the second lien book that is perhaps outpacing the overall EBITDA trends in your portfolio?

So definitely the former. However, it's not surprising that the best candidates for refinancing are those that have reduced their debt the most. You would expect this to happen, especially when it comes to adverse selection, where highly leveraged seconds might be emerging. We have not invested, I think, a few million into the second lien. Regarding debt performance compared to the first lien book, there is no significant difference in the operating conditions for either company. I will mention that our second lien deals typically lean towards larger companies. Other than that, there is nothing more to add about the relative performance of our first lien credits versus our second lien credits.

And then just to that point, if I can, one more on the bigger companies. I mean as a company gets larger, obviously, it probably gets more overseas customers, etc., versus domestic, and the domestic environment seems a bit better than the global environment right now. So you're seeing any delta between performance between those with exposure more focused domestically versus increasing international exposure?

Yes, I don't think it necessarily breaks down first lien or second lien significantly. Given our focus on U.S. domestic businesses, we are fortunately less exposed to international markets. However, there are some unique cases within the portfolio, such as the impact of tariffs or the relatively challenging international economic conditions. Still, this is not expected to be widespread in our portfolio since we aim for 70% of our lending to be directed towards U.S. domestic businesses.

And our next question is from the line of Paul Johnson from KBW.

My question is about your current dividend, which I believe has a yield of approximately 9.6% based on your book value. From your presentation, your debt portfolio yield also appears to be about 9.6%. It seems you might be able to achieve a slightly higher yield, around 9.8% on your core portfolio. As you transition your assets into your ideal core portfolio, do you still see sufficient opportunities within your strategy and the specialty sectors to boost income and earnings in order to sustain the dividend, especially with the reintroduction of incentive fees?

I believe we have been consistent regarding our target leverage, which we estimate to be between 1.25 and 1.4, possibly up to 1.5. The earnings potential, particularly with our 1% management fee, compensates for the declining yield. It not only covers the decreasing yield but also addresses the lower LIBOR. To clarify, 18 months ago, we projected that at 1.25x leverage with the yields we anticipated, which were slightly higher LIBOR rates around 10%, we could generate earnings of $0.46 or $0.47. However, since LIBOR has fallen and yields have compressed at 1.25, we are not quite reaching those figures. That’s why I’m suggesting a range of 1.4 to 1.45, but we still have the flexibility in our strategy to manage this. There are a few factors that can affect our performance each quarter, such as our fee income, which has been relatively stable over the last three years but may vary from quarter to quarter. We feel confident that our fee income can adequately support the dividend. Overall, despite yield and spread compression, as Greg mentioned, seems to have stabilized and with lower LIBOR, our cost of debt is also decreasing. Therefore, we do not require significantly more leverage than we currently have to consistently meet our dividend obligations.

Okay. Got it. That's great color. I know there's been a couple of questions on leverage, portfolio companies, but one thing I wanted to ask about and spend time a little bit is the leverage on first lien new commitments. I believe that's increased a little bit over the past few quarters from 3.9x back in March to about 5.4x this quarter. Is that just a function of the market and investment funding, or is there anything more specific to your strategy?

No, I think it was actually a little bit of a mathematical anomaly. We were long a deal NFA, which we mentioned we sold down over the quarter, and it has 6.2x leverage at closing.

And it was $100 million. In our first liens for the quarter, the originations were $264 million, with $100 million being NFA, and we sold it down at 30%. This is significantly affecting that number.

We should have adjusted for it earlier when we launched, but we included it in the numbers. However, if we remove that noise, the figures would be very similar to last quarter's.

Okay. And for my last question, could you remind me about the oil and gas hedges you had in your portfolio a while back to protect against the downside of oil? Did those run off, or is that no longer part of your strategy? Are they still in the portfolio?

No, they have expired. The hedging is conducted at the Company level and has been quite successful over the past year as part of Glacier's strategy for generating cash. Now, all hedging is handled at the Company level.

And our next question is from the line of Rick Shane from JPMorgan.

Anyway, two questions. First, what I was really getting at was, okay, non-accruals showed a little bit of weakness in terms of valuation. Some of that's idiosyncratic. One signal of an inflection point, though, more generally would be divergence between your better investments and your weaker investments. Are you starting to see that at all within the portfolio?

The two significant write-downs and the non-accrual deals are unique cases. One is related to restructuring credit and the other to commodity prices, with no broader macro trends impacting them. We haven't observed any divergence in our portfolio. As Tanner mentioned, there might be slightly slower growth this quarter compared to others, but there are no significant trends worth noting. Even looking at the overall platform beyond the AINV portfolio, we haven't identified any clear leading indicators of a turning point. Retail has been slow for quite some time, unrelated to the economic sector, and while there are some noteworthy trends in certain sub-industries, our portfolio remains consistent. There will always be companies that perform better or worse than their investment case but there has been no change in that general distribution compared to historical performance.

Got it. Okay. Great. And then second question, and I like the way Paul framed the question related to dividend and ROE. When we've heard and spoken with some of your peers, they see higher end leverage more as a defensive opportunity during periods of market dislocation. Basically, historically, BDCs have been unable to deploy capital into attractive markets because they've traded below NAV, and they don't have a cushion. And in some ways, it sounds like you guys are headed to your NAV or your leverage targets basically in order to sustain ROE. I'm curious how high you would be willing to take leverage in a market dislocation in order to be able to take advantage of things? Or do you think that you're sort of using that dry powder now?

I want to slightly adjust your perspective. The reason we are utilizing our leverage at this time is that we believe we offer the best senior debt origination platform in the country. With our exemptive order and the ability to leverage up, this opportunity is now available for BDC investors. We believe we have communicated this clearly over the last few quarters. Our assets are diverse and granular, and while some historical investments affect the metrics, we see value in offering access to a unique mix of finance company assets through our platform, rather than trying to time market disconnects. We are confident in our strategy. Regarding our leverage levels, historically, many would stop at 0.8x. I’m not sure if that translates to the current environment as 1.6x or 1.8x depending on the needed cushion, but we believe 1.6x is our target for full leverage. If reaching 1.6x with a quality portfolio leads to a market disconnect and liquidity issues, we are confident we can generate sufficient liquidity internally as the portfolio matures. Even in challenging markets, loans typically pay off, allowing us to create enough liquidity to seize such opportunities. Narratives may shift based on circumstances, but our key strength lies in having a significantly larger pipeline compared to the size of our vehicle.

Got it. Okay. And so you're feeling like the funnel is big enough. I mean the counterpoint to that, I think, would be, if we think back and I may get my timing wrong, but I want to say it was the fall of 2012, there was a market dislocation. You guys were relatively highly levered. There was relatively less liquidity available to you. Some of your peers had more liquidity, and there was a divergence in performance over the next 6 to 12 months.

There is no doubt that if the market disconnects and people start investing, particularly if they invest money, which I am not entirely convinced they will do in this cycle as much as they did previously in broadly syndicated loans that can quickly recover, that presents an investment opportunity similar to buying gold at the right time. Therefore, having capital available and timing it correctly is an opportunity that investors should take advantage of if they have funds readily available. However, we don't think we should position our business to wait for that moment because we believe we can achieve stable economic performance over the long term with a diverse portfolio. This approach holds more value in the long run, even if we miss that particular opportunity. The reason for the divergence in the past was not only because some made significant profits on those trades but also because those who were unable to take advantage of the situation suffered losses on their existing portfolios. We are focused on building a defensive portfolio, which is why we believe we won't be in that vulnerable position compared to most of our competitors. I have not always been clear about this. Our entire strategy relies on over 20 years of origination history from our MidCap team through various economic cycles. While it’s true that an economic cycle affects everyone, there are proven strategies that help, such as portfolio diversification, focusing on low loss given defaults, ensuring asset coverage even in cash flow loans, and engaging in products like asset-based loans that perform well in tougher economic conditions. All these factors, assuming everything else is equal, can provide an advantage. Therefore, we place significant importance on the average borrower exposure, which was $27 million two years ago and is now $16 million, despite our growth as a business.

And our last question is the line of Casey Alexander from Compass Point. Casey?

Yes. I'm sorry, I should have remembered to ask this before. But particularly in the upper middle market, there has been some discussion about some spillage, particularly on the leveraged loan market that would be rated single B and spill back into not a driving market opportunity but an incremental market opportunity over and above what you might have normally seen. Have you guys seen any of that? Or does your group and the MidCap team sort of originate in a unique funnel that wouldn't necessarily participate in that.

We have definitely noticed this trend. Every sponsored deal that isn't suitable for broader syndication is now looking more favorably at smaller or lower middle market deals, which mostly consist of single B credits. These deals are increasingly considering private execution as an alternative, and likely as the preferred option. Additionally, larger platforms, including Apollo, have the capacity to engage in these transactions. This explains why, despite the overall decrease in middle market volume in the third quarter, firms like Owl Rock, Ares, and ourselves have been able to originate above our targets, as this is indeed driving market activity.

Do you think that's sustainable for a while? Because I mean there have been times in the past where, like in the fourth quarter of 2016, where it was technical and some spilled out, then it corrected itself very quickly, but the ratio of downgrades to upgrades and U.S. leveraged loans is running 3:1 and much higher than where it was in the past. And so do you think that perhaps this is a sustainable phenomenon for some period of time?

Yes. I believe our overall thesis at Apollo is that this represents a fundamental shift that will be influenced by market challenges. Additionally, the flexibility and the amount of capital available in the private market will play a significant role, even in markets that are stable. Therefore, I think that's our expectation, which aligns with what our peers also anticipate.

There are no further questions, and I will now turn the call back over to management for closing remarks.

All right. Thank you. On behalf of the team, thanks for your time today and your continued support. Please feel free to reach out to any of us if you have questions. Have a good night.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.