Earnings Call Transcript - MFIC Q3 2020

Operator, Operator

Good afternoon and welcome to Apollo Investment Corporation's Earnings Conference Call for the period ended December 31, 2019. At this time, all participants have been placed in a listen-only mode. The call will open for 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.

Elizabeth Besen, Investor Relations Manager

Thank you, operator, and thank you for 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 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 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.

Howard Widra, CEO

Thank you, Elizabeth. I'll begin today's call with a review of the progress we've made over the past few years, followed by an overview of the results for the quarter. Following my remarks, Tanner will discuss our investment activity for the quarter and also provide an update on credit quality. Greg will then review our financial results in greater detail, and then we'll open up the call to questions. Over the last several years, we've made significant progress de-risking the portfolio and building a well-diversified portfolio of first lien floating rate corporate loans. Our progress is evident in the improvement of our credit metrics. For example, 82% of our corporate lending portfolio is first lien loans compared to 29% in June 2016. Over this period, our weighted average attachment has declined from 2.7 times to 0.9 times. Our portfolio is much more granular, as evidenced by the decline in our average borrower exposure in our corporate lending portfolio from 23.7 million in June 2016 to 16.4 million today. We have also significantly reduced our exposure to non-core and legacy assets which are higher on the risk spectrum and have more volatile returns. At the end of June 2016, non-core and legacy assets totaled $1.65 billion. At the end of December 2019, non-core legacy assets total $358 million—a 66% decline. Net proceeds from the sale of repayment and non-core legacy assets total approximately $600 million over this period. We continue to seek to monetize or restructure our remaining non-core assets with the ultimate goal of maximizing value for our shareholders. Additionally, over the last few years, we've been able to take advantage of two important regulatory releases: exemptive relief to co-invest and a reduction in our asset coverage requirements. The Apollo director origination platform originates a significant amount of senior floating rate loans, which are available to AINV given exemptive relief and are within our target spread range given our ability to use more leverage. Given our ability to co-invest with the broader Apollo platform, we have been able to participate in large commitments while maintaining relatively small hold sizes on AINV's balance sheet. In addition, AINV was fortunate to be in a unique position to already have all the origination necessary to implement a prudent lower-risk portfolio growth strategy when we adopted the reduced asset coverage requirement. Both of these regulatory releases have allowed us to build a diversified, granular portfolio of first lien floating rate loans. In this regard, since April 2018, when we began to invest in lower-risk assets following the passage of the Small Business Credit Availability Act, we have made approximately $2.4 billion of new corporate lending commitments. $1.9 billion of those commitments are currently outstanding, of which approximately $1.5 billion are funded—all of which are performing. Last week, we implemented a number of shareholder-friendly actions which demonstrate our commitment to creating value for our shareholders. In May 2018, we announced changes to our fee structure, including a new total return requirement for our incentive fee calculation. We also permanently lowered our management fee to 1.5% and further reduced it to 1% on assets in excess of one times debt to equity. Second, AINV has been actively repurchasing stock. We believe that stock buybacks are the most accretive use of shareholder capital when the stock is trading at a meaningful discount. Our board has authorized a $550 million plan with a total authorization of $250 million. To date, we have repurchased over $208 million of stock below NAV, which has accreted $0.68 to NAV per share. We believe the combination of AINV's fee structure changes and active stock repurchase program demonstrates our commitment to creating value for our shareholders. Moving to the December quarter, we continue to successfully implement our plan to prudently grow our portfolio. We had a strong origination quarter, growing our portfolio by approximately 6% by increasing our exposure to first lien floating rate corporate loans sourced by the Apollo direct origination platform. During the quarter, we also reduced our exposure to second lien loans and our non-core and legacy assets. Second lien sales and repayments totaled $62 million, while non-core and legacy asset repayments totaled $46 million. Given our strong net investment activity, our net leverage ratio increased to 1.43 times at the end of the quarter. As stated on our private conference calls, this leverage level is consistent with our expectation that we will operate between 1.4 and 1.6 times. In addition, this quarter was an important inflection point in the makeup of our non-core portfolio. The non-core portfolio decreased by approximately $67 million due to the combination of repayments and unrealized losses, reducing non-core assets to 12% of the portfolio. Furthermore, the risk attributable to our remaining non-core portfolio has decreased due to the successful restructuring of our investment in carbon-free chemicals during the period. The combination of this restructuring and the impact of reinvestment of the proceeds received from our non-core and legacy repayments has allowed us to have a smaller and better collateralized non-core portfolio while improving the overall earnings profile of Apollo Investment. Moving to our financial results, net investment income for the quarter was $0.54 per share, reflecting the net portfolio growth and the total return feature in our incentive fee structure, which resulted in a nominal incentive fee for the quarter. It is important to note that average leverage for the quarter was 1.27 times, and client at the larger portfolio will continue to drive earnings growth in the current quarter. Net asset value per share was 18.27 at the end of December, down 2.3% quarter over quarter. The $0.42 net reduction in NAV per share was due to a $0.54 net loss on the portfolio, partially offset by net investment income in excess of the distribution of $0.09, and a $0.02 accretive impact from share repurchases. Non-core and legacy assets accounted for $0.51 or 95% of the net loss; oil and gas accounted for $0.19 of loss, legacy assets for $0.18, renewable for $0.13, and shipping for $0.01. Turning to our distribution, the board has approved a $0.45 per share distribution to shareholders of record as of March 20, 2020. With that, I'll turn the call over to Tanner for investment activity for the quarter.

Tanner Powell, President and CIO

Thank you, Howard. The environment for middle-market lenders remains highly competitive given the significant amount of capital 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 funding were $491 million and $399 million, respectively. New debt commitments were all first lien floating rate loans. These new commitments were across 28 companies for an average commitment size of $17.6 million. The weighted average spreads over LIBOR for these new commitments were 612 basis points, within our target range of 500 to 700 basis points for incremental assets. The weighted average net leverage for new commitments was 5.3 times, which is within our range of 4 to 5.5 times. Lastly, 85% of these new commitments were made pursuant to our co-investment order. Sales totaled $15 million while repayments totaled $212 million, resulting in total exits of $227 million and net funded investment activity of $172 million, excluding marks and revolver activity. During the quarter, we reduced our exposure to second lien loans and non-core and legacy assets. Second lien sales and repayments totaled $62 million, including PSI, interim. Non-core legacy asset repayments totaled $46 million, including $34 million from asset repackaging, a legacy asset; $5 million from Glacier, one of our oil and gas investments; and $6 million from two of our renewable assets. In addition, net funding and revolvers were $1 million. We also received a net repayment of $2 million from Merck. Net funding totaled $171 million, including Merck's 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 December, investments on non-accrual status represented 0.7% of the portfolio fair value, down from 1% last quarter and 2% at cost, also down from 2.1% last quarter. Moving on to our credit metrics, the weighted average asset spread on the corporate lending portfolio decreased 16 basis points to 651, down from 667 last quarter, when compared to 612 basis points 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 of our investments decreased from 5.5 times to 5.27 times and compared to 5.3 times for new commitments. The weighted average attachment point of the portfolio declined from 1.3 times to 0.9 times. The average interest coverage improved and remained at 2.5 times. As we said in the past, we view this trade-off of the yield for credit quality as a positive at this point in the credit cycle. With that, I will now turn the call over to Greg, who will discuss the financial performance for the quarter.

Greg Hunt, CFO

Thank you, Tanner. Beginning with the income statement, total investment income was $68.5 million for the December quarter, an increase of $1.8 million or 2.6% from the prior quarter. The decrease was attributed to lower recurring interest income and fee income, partially offset by higher prepayment and dividend income. Despite positive net investment activity, recurring interest income declined due to the decline in LIBOR and lower spread on new investments compared to investments sold or repaid and the cadence of activity during the quarter. Fee income was $1.2 million, down from $2.2 million last quarter. Prepayment income was $2.8 million, up from $2.1 million last quarter, and dividend income was $3.2 million, up slightly from $2.8 million last quarter. Expenses for the quarter were $32.3 million, down $2.3 million or 6.7% quarter over quarter, primarily due to a significant lower incentive fee and lower interest expense. Recall, the incentive fee was revised to include a total return requirement with a rolling 12-quarter look back beginning from April 1, 2018, and was put into effect on January 1, 2019. Interest expense declined slightly due to a decline in the weighted average funding costs, given the redemption of the baby bonds in the prior quarter and the increased utilization of the credit facility, which benefited from the decline in LIBOR, partially offset by higher average debt balance given the portfolio's growth. The quarterly weighted average interest cost declined 39 basis points from 4.59% to 4.2%. The average quarterly debt outstanding balance increased by approximately $90 million from $1.5 billion to $1.58 billion. Net investment income was $0.54 per share for the quarter compared to $0.53 per share for the September quarter. Net leverage at the end of December was 1.43 times compared to 1.24 times at the end of September. Average leverage during the quarter was 1.27 times, up from an average of 1.13 times during the September quarter. The net loss in the portfolio for the quarter totaled $35.9 million or $0.54 per share. Approximately $34 million or 59% of the net loss was attributable to our non-core and legacy assets, including our investments in carbon-free, Glacier, solar publicity, and Spotted Hawk. Net asset value per share was $18.27 at the end of December compared to $18.69 at the end of September. Turning towards the portfolio's composition, our total assets had a fair value of $3 billion at the end of December and consisted of 151 companies across 27 industries. We ended the quarter with core assets representing 88% of the portfolio, up from 85% at the end of September and compared to 80% a year ago. Non-core assets decreased to 12% of the portfolio, down from 15% at the end of September and 20% a year ago. First lien assets increased to 82% of the corporate lending portfolio, up from 77% last quarter and up from 62% a year ago. The weighted average attachment point improved to 0.9 times, down from 1.3 times last quarter. Investments made pursuant to our co-investment order increased to 76% of the corporate lending portfolio at the end of the quarter, up from 74% last quarter, and 59% a year ago. The average corporate lending portfolio yield for the quarter was 9%, down 40 basis points quarter over quarter. That decline was due to the combination of a decrease in LIBOR and a reduction in the weighted average spread at the portfolio, which decreased 16 basis points from 667 to 651, primarily due to our increased exposure to first lien and reduced exposure to second lien investments. On the liability side of our balance sheet, we had $1.79 billion of debt outstanding at the end of the quarter. We continue to evaluate alternative sources of capital with a particular emphasis on diversifying our funding sources. As you may have seen last week, Fitch downgraded our agency's credit rating from triple B minus to BB plus stable. While we're disappointed by this action, we believe that we have built a high-quality senior loan portfolio that can offset our increased use of leverage. Middle market CLOs with loans of identical credit quality often are rated higher. We believe the improved risk profile of our portfolio will result in earnings stability, which is in the best interest of our stakeholders. Lastly, regarding stock buybacks, during the quarter, we repurchased 502,000 shares at an average price of $15.65 for a total cost of $7.8 million. Given the recent rally in the stock, no shares have been purchased since early November. This concludes our prepared remarks, and operator, please open the call to questions.

Operator, Operator

We'll take our first question from Kenneth Lee with RBC Capital Markets.

Kenneth Lee, Analyst

Hi, thanks for taking my question. Just one on the asset sales; it looks as if you got some sales within the legacy and non-core side of the portfolio, wondering what your expectations are right now for any further sales within that portfolio in the near term?

Tanner Powell, President and CIO

So, it’s sales and repayments, right? There was one meaningful sale of around $30 million, and the remainder was repayments on some of the existing assets. And so we expect to continue to have sort of repayments because we're focused on liquidity on all these and getting a return of capital. So, obviously, wholesale excess of any of those assets is sort of binary, but if you look at Glacier, for example, we received $5 million during the quarter, and in each of the last three, four, five quarters—we have received capital, and we will receive capital this quarter as well. So we would expect to have two sources of liquidity in that portfolio, which are one, continuing to receive capital to pay down the exposure, and then to continue to work towards significant restructuring which can happen effectively.

Kenneth Lee, Analyst

Okay, very helpful. And just one follow-up if I may. In terms of the portfolio positioning, you talked about the first lien as a percentage of the portfolio increasing this quarter. And that just being consistent with the overall macro outlook—is this trend expected to continue over the next few quarters in terms of the positioning? Just want to get your thoughts on that? Thanks.

Tanner Powell, President and CIO

Yes, I mean, that's where we're focused. I mean, at our current leverage level and the makeup of our portfolio, we believe we have good earnings power consistent with where we've guided, and one of the key legs of the stool, if you will, of that is predictable credit quality. The way we deliver that is by staying high up in the capital structure.

Operator, Operator

Our next question is from Rick Shane with JP Morgan.

Rick Shane, Analyst

Hey, guys, thanks for taking my questions. So, when we look at the non-accruals, there's been sort of a steady write down in fair value there over the last three quarters. Their continued deterioration, are you just taking a more conservative approach? What do you see as we look at those four investments?

Greg Hunt, CFO

Well, it's almost all Spotted Hawk. And it's almost all driven by commodity prices, so not a fundamental company change other than the fact—the cost of the commodity. It's not exclusively that performance.

Rick Shane, Analyst

Great, thanks, Greg. The other issue, I think there're two divergent trends here. One is that the operating EPS, the NII at this point is steadily covering the dividends—you guys have done a good job moving in the right direction there and taking advantage of the higher leverage—at the same time, NAV continues to decline. How do you reconcile those two trends, and how do you ultimately reverse the NAV issue?

Tanner Powell, President and CIO

So, on the one side, obviously, we're focused on having the capital that we have available to be at work and generating revenue to be sufficient to cover dividends. So, as you noted, we're sort of there with a portfolio, then we have this non-core portfolio which has a lot of assets like Spotted Hawk or portions not earning or the renewable which are an equity that are not generating a cash return. So on average, that portfolio is producing somewhere in the 6% or 7%, 5.6%. So depending on the dividends that are paid off the shifts in a given quarter and so our focus is sort of twofold: maximizing the return on those assets in order to ensure that NAV doesn't decline all that much, but at the same time, focus on getting that capital back because it can be reinvested, which would sort of double the return. Put another way, if you look at, as I mentioned in my comments, we received $600 million over the last 2.5 years on a $1 billion portfolio. So there's been like $100 million of write-down roughly while we've received $600 million of proceeds. If you took that same percentage on the portfolio, I'm not at all predicting that you know that the hope and expectations recovered all, but if we got 85% of our cash back tomorrow, you would have another reduction in NAV of $40 to $50 million, and you'd have a significant increase in earnings. And so, you know, obviously, as that non-core portfolio goes down, you know, that the level of possible write-offs goes down. And so we're focused on that. But we feel like at the point where we're covering our dividend, it's now mostly economic upside to the shareholder. Even if net—meaning we'll be able to pay the dividend dollar at a share consistently and cover even beyond, even if we continue to realize more volatility today, the commodity prices in these assets.

Rick Shane, Analyst

Got it. Okay, last question. Look, you guys are approaching your leverage targets, and that in a continued strong market will prove to be a good deployment of capital. The flip side is if we were to see dislocation like we saw back in 2012, where there's some pressure in terms of NAV, and that causes the leverage ratio to go off, and you guys are unable to lean into a more opportunistic market, how do you feel about that trade-off given where you are right now in terms of leverage?

Greg Hunt, CFO

We feel like first and foremost, in order to change the narrative for our business, we wanted to have a stable predictable earnings stream, which we feel like we have in these assets. They're quality assets, set up from a portfolio structures perspective to perform well for the cycle. If the market changes and there's more opportunities to deploy capital, we feel like the combination of normal course repayments and our ability to effectively cherry-pick those opportunities, which benefit from being on the Apollo platform, will be good. We believe our ability to just have some capital be generating as well as to sell some assets to remain liquid on our balance sheet, and we'll have the ability to, on the margins, take advantage of that opportunity. But of course, not as much as if we were at 5 to 1, but enough that we will be able to benefit from it.

Operator, Operator

Our next question is from Casey Alexander with Compass Point.

Casey Alexander, Analyst

Good afternoon. A couple of questions. One, in relation to the debt side—the liability side of the balance sheet, you're upwards of 75%, 80% covered by the facility. What vehicles do you think you have available to you, especially in light of the Fitch downgrade, to diversify the liability side of the balance sheet?

Greg Hunt, CFO

Casey, we still have investment-grade grading from Kroll. We feel very comfortable that we can either access the debt market or the convert market at rates that are acceptable to us as we look at where our portfolio growth is going to come from.

Casey Alexander, Analyst

Okay, thank you. If I calculate adjusted NII for the quarter, I come up with $0.43 a share. Looking at where LIBOR is going forward, even with the expansion as a balance sheet, it seems to me that you really need everything to go right to cover the dividend and comfortably cover the dividend. Frankly, not very many first-lien senior secured loan funds have a dividend now that is in excess of 10%. Wouldn't it offer investors a better total return if you were to adjust the dividend to a level where you were beating the dividend consistently and building NAV over time? Wouldn't that frankly make more sense?

Greg Hunt, CFO

I think no. Your adjusted number is probably a little bit low. I think it's a little bit low, but call it in the $0.43 to $0.45 range. Our average leverage for the quarter was lower than where we're at right now, so that drives another $0.03 or so to our NII. As our portfolio grows, like our recognition of fees, also it will tend to expand. I wouldn't say we're just creaking over it. Our view is that the expectation of the shareholders is for us to deliver the return that we promised over the past 2.5 years and we feel like we can do that. We also feel like, though, fully employed at this level right now, LIBOR has almost hit the worst possible point for us because if it goes down much more, our floors kick in; if it goes up, we make more money. So despite LIBOR being at that level, we've gotten to a point where we can cover the dividend. When you say everything has to go right, if we keep our leverage levels there, we will cover it. Sending the question how do we grow NAV in some other ways, and there are some other ways with some capital gains with tag along equity investments. We're dealing with the value we’re driving it max even with some of those things. I don’t think that we think it would be necessary to change the dividend. We think of all the times since I started being associated with AINV, when the dividend was cut to this level, this is the point where we've been most secure in covering it.

Casey Alexander, Analyst

Okay, thank you for taking my questions. I appreciate it.

Operator, Operator

Our next question is from Chris York with JMP Securities.

Chris York, Analyst

Good afternoon guys, and thanks for taking my questions. So Howard, maybe even Greg, I know your portfolio companies are now hedging commodity risk, but what effect has the decline in spot year-to-date for crude had on your portfolio? Maybe even specifically Spotted Hawk today? And then secondly, if oil stays at this spot rate, are any of your portfolio companies in a precarious spot to cover that service or require an equity injection?

Greg Hunt, CFO

The spot price doesn't drive the valuation. The longer-term curve drives the valuation. So the movement in the prices doesn't directly correlate to the valuation as of the snapshot of that day. That said, the long-term projections of prices today are different—not lower in all respects, but lower in most respects than it was a month ago. And so the valuation of the two oil deals that are currently on the book would be down some. In the short term, given that they’ve been generating cash and paying down debt—at least in the case of inflation, Spotted Hawk has been stable from a cash flow perspective, and they have some hedges in place. We don't expect there to be meaningful cash needs. Obviously, it could affect their ability to pay down debt, but in the short term, we don't see it causing issues. There’s no question though, if oil sat at $50—now before it sat at $40 for an extended period of time—that would create some issues, but not where it is today in the medium term. Is that a strong answer?

Chris York, Analyst

Yes. I looked at the forward curve, and yes, it's moved down a little bit too with the spot here. And so I'm just trying to think of if...

Greg Hunt, CFO

I don't want to reveal the exact number. We have a figure based on last week, specifically from last Friday when we were asked the same question. The key point is that Brent is relevant for one company, while WTI is applicable to another. These curves look different. The prices on the curve are actually higher in 2023 and 2024, which affects some of our expected outputs and our valuation. This means that the quarterly valuations of these companies based on those long-term curves can be somewhat frustrating, as they do not necessarily reflect what the value will ultimately be when we reach that time. However, if oil is priced at $60, it benefits companies whose prices are at $50. Consequently, you tend to see the market trend in that direction. Given the significant fluctuations in oil prices over the past month, we would expect more movement this quarter if there are no changes. Similarly, if prices rise, the increase isn't drastic; a decrease wouldn't be as severe either. A drop from $60 to $56, an 18% decline, does not suggest a significant loss in value.

Chris York, Analyst

That's helpful. Just trying to understand the pain points there at a price level for potentially Spotted Hawk. Maybe you talked about the short term. So if it was at $55, $50 for the next 12, 18 months, what pain points that would cause? I'll just move on. Secondly, Casey asked this a little bit. It was on your capital structure. Obviously, 80% of your debt capital is tied to your bank revolving credit facility. And then you mentioned the downgrade below IG. You do have Kroll investment, Greg, but how should investors think about the sustainability of just that one stream? And then the potential diversity, you talked about on balance sheet securitization, which would be a good form of debt capital. But what do you think is the sustainable cost of your debt capital at full leverage?

Greg Hunt, CFO

Well, I think as we said, we're at 4.2. That may, if we did a bond offering or reverse that would go up slightly given the size of an offering that we might do, but I don't think it'll be meaningful. Maybe you're closer to 4.4, 4.5. It's still a very favorable cost of capital in the marketplace.

Chris York, Analyst

Got it. And then I would have to review the covenants. But is there any pricing adjustments in your bank credit facility on the downgrade there?

Greg Hunt, CFO

No, because it’s really for our sub-debt, just the rating that we are on.

Chris York, Analyst

Then Howard, last one here. You talked a little bit in your prepared remarks about exemptive relief benefiting AINV. That's absolutely true. The reason why I bring it up is that Apollo does have involvement with the coalition for business development. So prompt me just to revisit your potential update on the likelihood for exemptive relief for BDCs in the application of AFFP this year.

Greg Hunt, CFO

That approach has actually been withdrawn at this time. We are now focusing more on a legislative approach and collaborating on the fund-to-fund application related to the fund-to-fund rules under review by the SEC. We see this as a more effective strategy. It's encouraging that the SEC is now very familiar with this topic. The withdrawal of our application was mainly due to the direction the SEC is taking with the fund-to-fund rules.

Chris York, Analyst

Greg, does the withdrawal of that application change your potential identification of a probability of the removal of AFFP this year to be?

Greg Hunt, CFO

No, I don't. If we're able to get in the fund-to-fund rules it actually has a better chance of getting done than it did as a standalone exemption that we were asking for.

Operator, Operator

Your next question is from Kyle Joseph with Jefferies.

Kyle Joseph, Analyst

Hey, good afternoon guys. Most of my questions have been asked and answered. Just a few modeling ones. In terms of dividend income, were there any one-timers in the quarter and what's a good run rate to look for going forward?

Greg Hunt, CFO

Now I think you're fine at $2.8 million to $3 million—it's really coming out of our shipping investment.

Kyle Joseph, Analyst

Got it, that helps. Then it looks like peak income increased in the quarter. What specifically drove that?

Greg Hunt, CFO

What drove it was Bumblebee, which had their restructuring approved this weekend. We restructured our position and have been paid down partially subsequent to the quarter-end.

Kyle Joseph, Analyst

I was going to say, just stepping back, broadly appreciate Tanner's color on the portfolio metrics but just simplify it in terms of gross revenue and EBITDA; can you tell us where we are versus 3 months ago and versus even a year ago?

Tanner Powell, President and CIO

Yes, sure. It’s very much been a continuation of the trends that we've seen, wherein growth on an organic basis is still positive from a revenue standpoint, but EBITDA or earnings growth is underperforming the magnitude of revenue growth as our companies are grappling with a number of cost pressures. Depending on the industry, obviously, things are more pronounced. But freight costs have gone up, wages in certain places, notwithstanding the most recent downdraft in commodity prices, commodity price pressures. So you've seen that in a—that frankly has been something we've seen for the last couple of quarters and continued through Q4.

Kyle Joseph, Analyst

Got it. That’s it for me. Thanks very much for answering my question.

Operator, Operator

Your next question is from Ryan Lynch with KBW.

Ryan Lynch, Analyst

Thanks for taking my questions. First one—I wanted to talk about your leverage range. When you guys initially passed a 2 to 1 leverage, you guys had a leverage range of 1.25 to 1.4x. That target leverage range increased over time to the current 1.4 to 1.6x. I'm just wondering, it seems to me in an environment that we are today, which has a lot of competitiveness—obviously, we're over 10 years removed from the last credit cycle. I'm just wondering how you guys are getting comfortable increasing your target leverage range? It would seem to be that you would want to increase that range in environments where you're seeing robust activity, there's very good deal flow and very good risk rewards, which I don't think is how most market participants would characterize this market. So can you just talk about in this environment, how are you getting comfortable, and what is the thought process behind increasing this target leverage range?

Greg Hunt, CFO

Well, so the first thing I'd say is we are seeing very good deal flow. That's because of what we've sort of focused on for the last few years is that the amount of deal flow today AINV has to take off. So the overall origination of the platform is such a small part that even if deal flow across the platform is more constrained because of the market dynamics you talked about, there's a lot of deal flow available to sort of get the stuff that builds our portfolio the right way. We had said 1.25 to 1.4 over really the amount of time to get to about the end of this year. That's what we said about 18 months ago, which is what we've gotten to, and we continue to have these opportunities. What you're asking is similar to one of the previous questions: don't you want your dry powder for other things? The first answer is, we believe that it is corroborated by the significant amount of capital that we raised from institutional investors for the same assets across our platform versus a lot of our competitors that we have a very good engine producing proprietary assets. At AINV, the leverage that it employs is high versus historical levels for BDCs but low versus a lot of commercial finance or specific investors leverage these assets. And that's because when you build a portfolio, when you have a wide funnel and you build a portfolio that's granular and broad-based, the ranges of outcomes even in the stretch part of the cycles is narrowed quite a bit. So the overall answer is—we are being circumspect across our whole platform. Our origination takes into account the challenges of the markets, we reject a huge amount of deals. We like a few of our competitors—take, for example, because of the size of our platforms and the size of our origination teams. We still have the ability to differentiate ourselves because of our size and the debt size and the depth of our relationships have enough assets for AINV to grow. Just so Ryan, the last point I'll say is the leverage loan portfolio at mid-cap has not grown over the past year, even though there's been a lot of origination, and that's because it is a larger, more stable—it’s already had as much runoff as it generates new business. And it spreads those assets also a lot of balance sheets. So we view the market as you view the market, we just have a very big funnel of deals coming through.

Ryan Lynch, Analyst

Okay, that’s helpful color. Just one more for me, and I'm not sure if you mentioned this, but if you hold the portfolio realized and unrealized gains and losses neutral next quarter under that assumption, what percentage of your incentive would you guys expect to earn—half, zero, or what? I'm just trying to get a gauge of where that incentive is looking to shake out holding that portfolio depreciation or appreciation constant?

Howard Widra, CEO

If there were no losses next quarter, we would pay the full incentive fee.

Operator, Operator

Next question is from Robert Dodd with Raymond James.

Robert Dodd, Analyst

Hi, guys. Probably a couple for Greg. On the downgrade you've addressed it a couple of times. If I look at—obviously if you shift the mix from the facility to more notes or other things that, the blended costs would go up. But when I look at the 2025 notes out there trading, they look to me to be trading above par before the downgrade and still above par now. Do you think the Fitch downgrade is going to have any meaningful impact on your like-for-like borrowing costs, rather than, you know, you mentioned if I go up to four, four, if the mix of types of buying shifts, but do you think that downgrade is actually going to affect your like-for-like borrowing cost on the note side?

Greg Hunt, CFO

No, I don't think so. And, you know, I think I just quickly did the math; it actually only goes up to 4.3. If you do a $200 million offering, you'll be inside of the cost of funds on ours bonds that are outstanding.

Robert Dodd, Analyst

Got it. And then one more if I can or just—I’m having some trouble reconciling some things on the picking come on the P&L or in the queue. In the notes, $2.6 million was recognized, but in the cash flow or elsewhere in the queue, there was almost $13 million capitalized. That's the biggest delta in that I've ever seen from you guys. Was that also related to Bumblebee, or could you give us any color on reconciling that? Because it’s a pretty big gap.

Greg Hunt, CFO

We think it was carbon-free; it was our restructuring the carbon-free position and to recapitalize the PIC that has not been capitalized prior.

Robert Dodd, Analyst

Okay, so that was the previous non-accrual that you non-accrual but you capitalize if you didn't run it for the P&L.

Greg Hunt, CFO

It ran through the P&L in prior quarters, and it was sitting as an interest receivable, and that was capitalized in the restructuring of the debt.

Operator, Operator

And your final question comes from the line of Fin O'Shea with Wells Fargo Securities.

Fin O'Shea, Analyst

Hi, thanks for taking my question. Just a follow up on Carbon Free. Can you give us, to the extent you're able, any context on the restructuring? Just seeing this was an affiliate investment, so to today sort of trip any performance measure? And then a second part to that, how has this de-risked beyond your position converting more so into equity? Or did at the company level, is there more reduced debt?

Howard Widra, CEO

I'm not, first of all, just let me clarify if you're saying it’s an affiliate position. I'm not sure what you mean? So there are two things that the restructuring did to make us more stable. What basically, the equity owner of the facility basically was running this project, both to produce profit as well as to build off an IP value of carbon-free technology. Our restructure, basically, changed our deal to sort of align us directly with that equity investor. So, we both had debt on our operating company, if you will, and we had ownership in the IP that is monetizable in other places we believe and has raised money at a good valuation. So what we have done in terms of the sort of stability, one, we diversified our collateral, if you will. So we basically the position now has both the previous collateral that it had before, which is this plant, and it also has this IP, which is separate and had separate value, that's one. And two, because of that, and because of allocating a portion of the value to that equity, the debt that the operating companies forced to carry is now much lower. So, the cash flow profile of that entity is easy for it to service its debt. It can still have some variability on its ability, but it now has less debt. So it has a much lower burden of debt. It also has no PIC. It wants to grow anymore. So it will have something like $33 million in debt that it can cover, which is far less it had to cover before. And then, we have a separate pool of value. We view it as meaningfully different from where it was before. Obviously, we wrote some down as well, so there's less debt, less debt to service, and more collateral.

Fin O'Shea, Analyst

Okay, appreciate that color. Just another follow-on mid-cap, there were a couple of questions. Can you talk about the mid-cap funnel and its allocation across the accounts? That's been growing since Apollo acquired, and since you're now co-investing, but seeing Apollo, the BDC generally onboarding 600 last couple of quarters, is this reflective of the overall funnel, or is there a tilt—was on one in the BDCs say in the US and then on the other hand, are you seeing SMEs with more allocation to the L450 stuff? Would that be directional tilt there or is it even-keeled on allocation?

Greg Hunt, CFO

Well, you know we have six or seven separate investors that look to invest in deals, and they each have different criteria some return based on leverage based some industry based. So, buy and large, what AINV is doing is the vast majority of the origination in our leveraged loan area. There is not as much being done in the L450 range mostly because that's not where the market is; people want effectively 4.5 to 5 times that as opposed to 3.5, 4 times debt for the lower cost. Just to give you some numbers, mid-cap did $13 billion of new commitments last year; about two-thirds of that was in leveraged lending, so we know the other third is in life sciences, ABL, and real estate. When those deals make sense, that is part of the origination for AINV, and it might make sense it basically means they’re big enough that AINV can get a size that it makes sense for them to do. The other two-thirds across our leveraged loan book that $6 billion is something like 80 or so loans. There are probably 20 of them that are below the yield profile that AINV may want to choose to do.

Operator, Operator

There are no further questions at this time. I'll turn the call back over to management for any closing remarks.

Howard Widra, CEO

Thanks. Thank you everybody for your time today and your continued support. Please feel free to reach out to any of us if you have any questions. Have a good night.

Operator, Operator

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