Earnings Call Transcript - MFIC Q4 2022

Operator, Operator

Good morning, and welcome to the earnings conference call for the period ended March 31, 2022, for Apollo Investment Corporation. I will now turn the call over to Ms. 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 Howard Widra, Chief Executive Officer; Tanner Powell, President and Chief Investment Officer; and Greg Hunt, Chief Financial Officer. I'd like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Today's conference call and webcast may include forward-looking statements. You should refer to our most recent filings with the SEC for risks that apply to our business and that may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our SEC filings, please visit our website at www.apolloic.com. I'd also like to remind everyone that we've posted a 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 our Chief Executive Officer, Howard Widra.

Howard Widra, CEO

Good morning, everyone, and thank you for joining us today. I'll begin today's call with an overview of results for the quarter followed by an update on our noncore assets, which we are pleased to say have been reduced to a nominal amount. Following my remarks, Tanner will discuss the market environment, review our investment activity, provide an update on Merx and discuss the portfolio's credit quality. Lastly, Greg will review our financial results in detail. We'll then open up the call to questions. Beginning with our results. Net investment income for the quarter was $0.42, which reflects a slight increase in interest income and strong fee and prepayment income. We recorded a net gain on our corporate lending portfolio, which continues to perform well. Overall, we had a net loss in our portfolio, primarily driven by a net loss on Merx due to exposure in Russia, which Tanner will discuss later during the call and on our remaining shipping investment, which was adjusted based on the expected net proceeds from a pending sale. Given the total return feature in our incentive fee structure and the net loss in our portfolio, incentive fees significantly declined quarter-over-quarter. We ended the period with net asset value per share of $15.79. Shifting to an update of our portfolio. We continue to successfully execute our strategy of investing in senior secured first lien middle market loans and also continue to make substantial progress reducing noncore assets with the receipt of significant cash proceeds from the repayment of noncore assets. During fiscal 2022, proceeds from the sale of noncore assets totaled $47 million, including $32 million in the March quarter. At the end of March, noncore assets totaled $135 million at fair value and represented about 5% of the portfolio. Post quarter end, we have received approximately $6 million of additional proceeds from noncore assets, and we have good visibility into additional repayments in the coming quarters as we are in exclusive negotiations on two of our assets, which will reduce our noncore exposure to approximately 3% of the portfolio. I will now provide some color on these sales. Beginning with our shipping investments during the March quarter, the Dynamic Product Tankers closed on the sale of four vessels in its suite, generating approximately $28 million of cash in the quarter. You will see a $3.1 million position in Dynamic at the end of March on our scheduled investment related to net working capital adjustments. Since the end of the quarter, we have received a $1.4 million payment from Dynamic and expect to receive the remaining balance by the end of June, at which time we will have fully exited that investment. We're in the process of selling the vessels of MC and our other shipping investment. The fair value of our investment in MC was $34.3 million at the end of March, reflecting the anticipated exit values from two proposed transactions, which will be supported by a small amount of seller financing. We have signed a PSA on two vessels, which we expect to close by the end of June, and we anticipate closing on the sale of the remaining vessels in the MC fleet in the September quarter. Moving to our oil and gas investments. We have some positive developments to announce. First, we signed a letter of intent to sell our investment in Spotted Hawk, and we expect the purchase agreement to be finalized in the next couple of weeks. We expect significant proceeds in the next few months, which we estimate will generate debt proceeds at or above our $30.1 million mark at the end of March. The demand for this asset is high, and there are multiple interested parties. Glacier, another oil and gas position is also benefiting from the increase in the price of oil. At the end of March, the fair value of the investment in Glacier was $62 million. The company continues to perform well as we received a $3.5 million paydown during the quarter and also wrote up the investment by $3.6 million. Post quarter end, Glacier paid us an additional $4.5 million on its outstanding obligations, which represented approximately 73% of the fair value position at the end of March. Pro forma for post quarter end activity, including pending sales, noncore assets totaled approximately $63 million, representing approximately 3% of the total portfolio at fair value. We are focused on monetizing the remaining noncore assets and are cautiously optimistic that there may be some upside in some of the remaining noncore positions. Our $42 million investment in Carbonfree Chemicals makes up the vast majority of the remaining noncore assets. As a reminder, our investment in Carbonfree consists of an investment in the company's proprietary carbon capture technologies and the company's chemical plant. Carbonfree is benefiting from strong interest in carbon capture, utilization and storage as part of broader ESG trends. Going forward, we do not intend to break out noncore assets as a separate category in our supplemental reporting. Of course, we will continue to disclose the detail of each investment on our scheduled investments, and we'll provide updates each quarter. We also continue to reduce our exposure to junior capital positions and received $7 million of second lien corporate loan paydowns during the quarter. Shifting gears a bit, let me take a minute to remind everyone about the construction of our corporate lending portfolio given the current operating environment, which is characterized by elevated inflation, higher interest rates, higher energy prices and other geopolitical factors. Similar to our positioning heading into the pandemic, we have built what we believe to be a well-diversified corporate lending portfolio of true first lien floating rate loans invested in less cyclical industries. Our corporate revenue portfolio is 94% first lien with a weighted average attachment point of 0.2x, a key metric, which demonstrates that we are truly invested at the most senior level of the capital structure. Additionally, 87% of the corporate lending portfolio is sponsor backed, which means these companies have financial and operational support from the financial sponsors who own them. We feel very good about the ability of our corporate lending portfolio to withstand potential economic headwinds. In terms of new opportunities, we believe AINV's ability to invest in loans originated by MidCap Financial is one of our most significant competitive advantages. In addition to cash flow loans to middle-market sponsor-backed companies, MidCap's product offering includes life sciences lending, asset-based lending, lender finance and franchise finance, products which are typically less competitive and have a lower correlation with the broader credit markets. At the end of March, these specialty products totaled approximately $340 million, representing about 16% of AINV's corporate lending portfolio at fair value. Turning to our distribution for the quarter. The Board has declared a base distribution of $0.31 per share and a supplemental distribution of $0.05 per share for a total distribution of $0.36 per share, consistent with net investment income for the March quarter, adjusted for a normal level of incentive fees. Both distributions are payable on July 7, 2022, to shareholders of record as of June 16, 2022.

Tanner Powell, President and Chief Investment Officer

Thanks, Howard. Beginning with the market environment, in the first quarter of 2022, risk premiums increased across asset classes as concerns about the impact of inflation on global growth and geopolitical unrest in Russia and Ukraine drove investors to the sidelines. In the U.S. leveraged loan and high-yield markets, volatility and weakness in secondary prices resulted in significantly reduced new issuance levels compared to the record-setting pace in 2021. This type of broader market environment benefits providers of private credit who offer borrowers fully underwritten solutions at agreed-upon pricing and terms with certainty of execution irrespective of broader market conditions. From a portfolio allocation perspective, we believe that in the current rising rate and inflationary environment, strategies focused on diversified floating rate portfolios, particularly those with first lien can offer highly attractive risk-adjusted returns. Moving to investment activity. MidCap Financial was very active during the March quarter with $4.4 billion of new originations. AINV's level of investment activity was driven by our focus on operating within our target leverage range. For AINV, new corporate lending commitments for the quarter totaled $116 million across 16 companies for an average new commitment of $7.2 million. 94% of the new commitments were leveraged lending with the balance in lender finance and life sciences. All new commitments were first lien floating rate loans with a weighted average spread of 612 basis points and a weighted average net leverage of 4.7x. Gross funding for the quarter totaled $115 million, excluding Merx and revolvers. Sales and repayments totaled $141 million, excluding Merx and revolvers. Net revolver repayments were $28 million. In aggregate, net repayments for the quarter totaled $54 million. Moving to Merx, our aircraft leasing portfolio company, AINV's investment in Merx had a fair value of $299 million, representing 12% of the total portfolio at the end of March. It is our intention to reduce our investment in Merx through selling aircraft and deemphasizing its servicing business. During the quarter, we recorded a net unrealized loss of $19.7 million on our investment in Merx, primarily related to our Russian exposure. At the time of Russia's invasion of Ukraine and the imposition of sanctions, the Merx owned portfolio included four aircraft on lease to two Russian airlines. Three of the aircraft are in Russia and one was outside of Russia for maintenance at the time of the invasion. The three aircraft that remain in Russia have been reregistered there. The aircraft that was outside of Russia remains registered in Ireland and has been repossessed by Merx and moved to a storage facility in the EU. In response to the various sanctions imposed by the United States and the European Union, Merx terminated the leases on all of these aircraft. The Merx team has been actively engaged in discussions with the lessees regarding the grounding and redelivery of these aircraft. No aircraft in the owned fleet are in Ukraine or on lease to Ukrainian airlines. The three aircraft in Russia generated monthly rent of approximately $516,000 combined. As a reminder, Merx's owned fleet is financed through several independent limited recourse financings. All four of the aircraft that had been leased to Russian airlines were held in an aircraft securitization known as MAPS 2019. The three aircraft remaining in Russia represent approximately 11% of total adjusted base value in the collateral pool of MAPS 2019. As is standard practice and required under the terms of the leases, the lessees have an obligation to ensure the aircraft. Merx further maintains a contingent insurance policy on the aircraft. We are vigorously pursuing all claims available to us under these insurance policies. Management, based on consultation with legal counsel, believes we have valid insurance claims for the total loss value of the aircraft. We are claiming under both the lessee policies and under both the lessees' policies, which are placed in the Russian market and prior to sanctions have been reinsured with reputable insurers in the London and international markets and our own contingent policy, which is placed by Aon with reputable insurers in the London and international markets. Our valuation reflects various uncertainties, including the probability of recovery under our claims, among other factors, which resulted in a meaningful decline in the value of these aircraft during the quarter. Turning to the overall AINV portfolio. Our investment portfolio had a fair value of $2.52 billion at the end of March across 139 companies in 26 different industries. Corporate lending represented 83% of the portfolio, Merx represented 12% and the noncore and legacy assets represented 5%. As Howard mentioned, pro forma for post quarter monetizations, including pending asset sales, noncore assets represented 3% of the portfolio at fair value. First lien assets represented 94% of the corporate lending portfolio. At the end of March, the weighted average spread on our corporate lending portfolio was 611 basis points. We continue to monitor the impact of inflation on our portfolio companies. We believe our portfolio is generally weighted towards industries that are less impacted by inflation and supply chain issues. It's worth noting that none of our corporate lending portfolio companies are domiciled in Russia or Ukraine. Moving to credit metrics. At the end of March, the weighted average net leverage of the corporate lending portfolio was 5.29x, the weighted average attachment point was 0.2x and the weighted average interest coverage ratio was 2.9x. Investments made to our co-investment order represent 85% of the corporate lending portfolio at the end of the quarter. No investments were placed on nonaccrual status during the quarter. At the end of March, investments on nonaccrual totaled $15 million or 0.6% of the total portfolio at fair value, essentially unchanged quarter-over-quarter.

Gregory Hunt, CFO

Thank you, Tanner, and good morning, everyone. Beginning with our AINV statement of operations. Total investment income was $54.7 million for the quarter, down slightly quarter-over-quarter. Results for the quarter reflect a slight increase in interest income and strong fee and prepayment income. The weighted average yield at cost of our corporate lending portfolio was 7.7% at the end of March, up from 7.6% at the end of December. The weighted average spread of our corporate lending portfolio was 611 basis points compared to 605 basis points at the end of December. Net expenses for the quarter totaled $27.9 million, down $4.6 million quarter-over-quarter, primarily driven by the decrease in incentive fees. As a reminder, AINV's incentive fee on income includes the total return hurdle with a rolling 12-quarter average, and given the net loss during the quarter, incentive fees during the quarter totaled approximately $1 million compared to $5.4 million last quarter. Net investment income for the March quarter was $0.42 per share, and net leverage was 1.51x. On Page 16 in the earnings supplement, we disclosed the net gain or loss by strategy over the past five quarters. During the March quarter, our corporate lending book had a net gain of $3.8 million, $0.06 per share, concentrated in a few positions. As Tanner mentioned, we recorded a $19.7 million unrealized loss on Merx or $0.31 per share related to our exposure to Russia. We recorded an additional $6.7 million or $0.11 per share on noncore legacy assets driven by losses from our remaining ship investments and reflecting realizable rates, as Howard had spoken about. NAV per share at the end of March was $15.79, reflecting a decrease quarter-over-quarter. The decrease is attributable to a $0.36 per share loss in the portfolio, offset by $0.06 of net income relative to the distribution. Moving to capital. Our liquidity position remains strong with undrawn revolver capacity well in excess of unfunded commitments to borrowers. Consistent with our historical cadence, we do expect to amend our revolving credit facility in the fall. Given the increased focus on the current interest rate environment, I'd like to provide some comments on the impact of higher reference rates on our portfolio. We are well positioned to benefit from rising interest rates. We expect increases in short-term rates as they exceed the floor on our investments that will have a positive impact on net income. The average floor on our investments is approximately 1%. Short-term interest rates have increased significantly, with LIBOR increasing from 21 basis points at the end of December to 96 basis points at the end of March. And as of yesterday, LIBOR was about 150 basis points. Based on quarter-end rates, we estimate a 100 basis point and a 200 basis point increase in reference rates would result in annual incremental earnings of approximately $0.07 and $0.19 per share. Regarding stock buybacks during the quarter and post-quarter end, AINV repurchased approximately $2.4 million of stock, which leaves us approximately $30 million available under our authorization for future stock repurchases. This concludes our remarks, and we'd like to open up the call to questions.

Operator, Operator

Our first question will come from Arren Cyganovich with Citi Global Markets.

Arren Cyganovich, Analyst

I was wondering if you could talk a little bit about the spread widening, if there's any kind of improvements in terms of documentation, just given the kind of volatility we're starting to see in the more liquid markets and if that's starting to move down into the less liquid private markets as well.

Howard Widra, CEO

Yes. The spread widening, I'd say, is, at least with regard to things being proposed right now. I wouldn't say the documentation is yet. And obviously, that's sort of like an imperfect thing to monitor because deal by deal. And as has been the case really for the last, I don't know, year or two, there have been some groups that have driven a lot of sort of the degradation of the documents and they are still active. So the market has not moved yet, I'd say, on terms, but I would expect it to. We've actually spent a lot of time discussing in the past couple of weeks about where we want to lend and how we want to make choices in a market that's going to look different six weeks from now. It just takes a little while to work its way through. So I'd say, yes, on the pricing and no on the terms yet.

Arren Cyganovich, Analyst

And then you're still running kind of at around 1.5x net leverage. It's still not super high relative to your limit, but it is higher than I'd say most BDCs have been operating new lending portfolios. Is there an intention to bring that down? Or do you continue to expect to run around the 1.5?

Howard Widra, CEO

We've mentioned our range being 1.4 to 1.6, but we're likely leaning towards the lower end of that spectrum. We don't anticipate reaching 1.6. This relates to the underlying risk of our portfolio; our focus remains on maintaining an attachment point of 0.2. Many loans categorized as first lien loans have higher leverage in front of them from banks. For example, if we're at 1.5x leverage and are genuinely senior at 1.25 leverage, with something in front of us, they present similar risk perspectives. We believe our risk level is comparable to what others are encountering. However, we do exclude second liens and focus on true first liens, as well as some asset platforms that show very low loss potential. Overall, we feel our risk level aligns with that of the market. We acknowledge the concern regarding our leverage being high, and our intention is to reduce it as suitable opportunities arise.

Arren Cyganovich, Analyst

That makes sense and you should benefit from the rising rates as well. This should provide you with some opportunities in the future. My last question is about the Russian aircraft. Is that affecting the insurance payment on it? Do you expect that process to be lengthy, or is it something you might anticipate to be resolved within the next couple of quarters?

Tanner Powell, President and Chief Investment Officer

Yes. I'm able to take that one, Arren. The answer is yes. It will be disputed, not surprisingly, from the other side and the insurance companies. And ultimately, it is a problem that is not unique to us. I guess, unfortunately, more broadly. And thus, you have, as a result, quite a bit of focus on it and quite a bit of institutional heft kind of on our side, so to speak. As you would expect, broadly speaking, for lessors that are in a similar position to be treated relatively similarly. So a couple of quarters at least, certainly, and it will have a lot to do with how it progresses from here. But as I will call attention to in our prepared remarks and also call attention to other public lessors in their statements, we think 100% that our claims have merit and intend to pursue them vigorously.

Operator, Operator

Our next question will come from Kyle Joseph with Jefferies.

Kyle Joseph, Analyst

I'll start on Merx, Tanner. Obviously, some would consider onetime negative impacts in the quarter. Can you give us a sense for how the business is performing outside of that? Obviously, we know the domestic airline industry is crushing it. But on a global basis, give us some more color given Merx's global exposure.

Tanner Powell, President and Chief Investment Officer

Yes. Thanks for the question, Kyle. And I think your dichotomy actually is a good one, as the issues in Merx and the write-down that we saw were really just related to what our assessment of the Russia situation and the insurance claims, as we mentioned. And more broadly, we have seen a market that continues to heal itself. You obviously continue to be very volatile in terms of fuel prices and inflationary impacts. But we have seen a progressive healing within the broader air traffic market, which has benefited not surprisingly, aircraft values and underlying airlines as things have come back online, and that was reflected in the stability outside of the Russia situation within the Merx portfolio.

Kyle Joseph, Analyst

Got it. And then obviously, your nonaccruals were stable. How is the corporate lending portfolio doing in terms of revenue and EBITDA, either growth or margins? And then can you give us any sense for how your thoughts on the shift in rates is impacting credit in the middle market?

Tanner Powell, President and Chief Investment Officer

Yes, we track this closely. I want to reiterate a point I make every quarter. We try to separate the portfolio to get a clearer picture of organic growth, but it's challenging since our capital is appealing to sponsors aiming to consolidate industries. Despite this, our analysis shows mid-single-digit revenue growth. Overall, we've been in an inflationary environment even before the Ukraine invasion, which has impacted oil and food prices. We observed slower EBITDA growth, and it's important to note our results don't reflect the latest spike in commodity prices. Generally speaking, this supports our strategy, which Howard outlined, of creating companies with a significant loan-to-value ratio. Higher interest rates will inevitably lead to increased costs, and inflation affects companies' earnings differently. However, considering our portfolio and the way we've positioned these companies, we believe we have strong mitigation against these impacts, ultimately benefiting our credit quality and the loans and securities in which we invest.

Kyle Joseph, Analyst

Got it. And then one last one for me. Just where we are in your fiscal first quarter, can you give us a sense for investment activity, not asking for guidance, but maybe just comparing it to the quarter end March 31 for reference?

Tanner Powell, President and Chief Investment Officer

Yes, it remains strong. There are a few factors contributing to this. Overall, we are observing a decline in mergers and acquisitions. As mentioned in our prepared remarks, private solutions present an opportunity for us to excel. Additionally, as we've reiterated, our Business Development Company and AINV benefit from being a $2.5 billion fund with an origination sales force sourcing for around $25 billion of capital. Consequently, even in markets where mergers and acquisitions face challenges, our relatively small position in the overall business allows us to adjust our originations without significant impact during periods of decline in M&A activity. Howard Widra: To quantify this, in the first quarter, MidCap achieved $4.4 billion in originations; in April, it reached $2.2 billion. While we don’t expect these numbers to be as strong moving forward, as Tanner mentioned, activity levels are still fairly similar. The mix may shift slightly, potentially favoring more asset-based lending as market conditions change, but overall, the momentum remains robust. Not all of this is reflected in AINV, particularly given our 1.5x leverage, which influences our selection of opportunities.

Operator, Operator

Our next question will come from Kenneth Lee with RBC Capital Markets.

Kenneth Lee, Analyst

It sounds like you're making great progress on the noncore asset dispositions, and by now, Carbonfree is the remainder there. Just wondering if you could give us what's your best sense on a potential timeframe for disposition there? Is that dependent on any kind of milestones or other factors?

Howard Widra, CEO

Tanner, do you want me to do it?

Tanner Powell, President and Chief Investment Officer

I'm happy to answer that. Thanks for the question, Ken. As we've mentioned before, this is a company and technology that we're very excited about, and it aligns well with the attractive trends around ESG. Their carbon capture technology is modular and has gained significant traction with companies so far, and we expect this focus to grow in the coming years. It is still in earlier stages, and in more volatile markets, there may be fewer opportunities for exit. On the positive side, the company has raised a convertible note, providing them with the capital needed to implement their business plan. However, I see this as a longer-term investment that is unlikely to lead to an exit within 2022. Importantly, the company will continue to execute its growth plan and demonstrate that it offers a very appealing solution for refineries and the wider industrial sector regarding its carbon capture technology.

Kenneth Lee, Analyst

Great. Very helpful there. And in terms of a follow-up and impact, looking at the impact of rising short-term rates on portfolio companies, will you be able to give a sense of how the portfolio could be impacted if rates were to sharply rise?

Tanner Powell, President and Chief Investment Officer

Yes, sure. And Ken, just to clarify, your question is that the underlying company level or at the AINV level?

Kenneth Lee, Analyst

The underlying portfolio company level.

Tanner Powell, President and Chief Investment Officer

Yes, of course. If we look at our interest coverage, it's important to emphasize that in our origination, we focus on stretch senior financing and, to a lesser extent, unitranche-type financing, which helps us maintain a lower levered profile. This is an advantage for our origination and portfolio construction. In the first quarter, when LIBOR was well below the floor, our coverage was at 2.9 times. This figure does not account for anything above 1, but it indicates a solid cushion as rates rise. The trajectory moving forward will depend on various factors, and we can calculate the implications if LIBOR ultimately outperforms its upward trend. Overall, we are in a strong position for coverage, which stems from our lower levered profile and our strategic emphasis on stretch senior solutions from our MidCap origination.

Operator, Operator

Our next question will come from Finian O'Shea with Wells Fargo Securities.

Unknown Analyst, Analyst

I have two questions for Tanner related to the loan book. It seems that Merx wrote down their assets on the Merx balance sheet by $47 million for the jets in Russia. Could you clarify whether that amount reflects the full value of those jets or if it is based on probability weighting? Additionally, on the AINV balance sheet, Merx is down about $20 million. Does this difference represent a probability-weighted assumption of what you expect to recover? Any insights you can provide on this would be appreciated.

Tanner Powell, President and Chief Investment Officer

Yes. Very, very good question. So when we look at the Russia situation, again, distress, we think that our claims are very strong and have merit and fully intend to pursue a full payout owing to the potential that it's either a negotiated solution and/or could be protected. We took a discount to the value, the insured value based on the methodology of probability weighting that you kind of alluded to in your question there. And if you think about it, the value was somewhere in the mid-40s, and we took a haircut to $20 million, $25 million kind of on a net discounted value as what we have in our valuation on those Russian planes in particular and assume that those proceeds take about two years to come in. And then as it relates to the other movements within Merx, there were some ins and outs, but outside of that Russia write-down of roughly $20 million, the Merx portfolio was roughly flat and in line, and that goes to that comment that I made to Kyle's question that we are seeing some stabilization outside of the Russia-specific situation.

Howard Widra, CEO

Let me just jump in. The difference between the balance sheets—between the Merx financial statements and the valuation is the Merx write-down of the assets was the full value under GAAP, which is the same thing you're seeing from all lessors because under GAAP, if you no longer have the asset, you can't have it on the balance sheet. On the same token by GAAP, you don't put the insurance claim on the balance sheet as an asset because it's still contingent. So the balance sheet shows the full reduction, but the valuation rules obviously require you to value what your asset is worth. And so Tanner just walked through why the valuation, but that's why there's a difference. And it's not that different than you see from some of the big lessors who have big exposure. They said two things: We've written down our exposure completely, and we expect to recover a lot, right? That's sort of what you've seen from the industry, and that's what this shows. We feel like our valuation methodology was relatively conservative versus the strength of our claims.

Operator, Operator

Our next question will come from Robert Dodd with Raymond James.

Robert Dodd, Analyst

Different angle on Merx. I think, Tanner, you said, with the intention to reduce the investment in Merx by selling down aircraft. Obviously, it has been selling some. I mean, is the plan essentially to reduce the ownership of aircraft effectively on the AINV balance sheet to zero, i.e., take the corporate lending book up to 95% plus of all the assets and reduce that? And obviously, Merx also do some servicing for some other things? Or is there some in between where you expect Merx to still be a— I wouldn't say material, but a decent chunk of the portfolio? What—can you give us any color on how big you expect to or how much you expect to shrink Merx's ownership of aircraft exposure on the BDC balance sheet, if that makes sense?

Howard Widra, CEO

Yes. I mean significantly, if not completely. It actually goes to what Tanner was saying before. The rest of Merx is actually sort of—had sort of, if you will, like recovered to the extent that they were lease problems from COVID, they've been replaced and released, and we were in a good spot at the same time that there was like a good market for planes and feel like there's a good market for assets. Obviously, the Russia created some noise, both with regard to just the fact that there's three planes there, but also now one of the assets is an insurance claim. But just putting that aside because it's not that large an amount. Our goal is to basically have the assets be very minimal or not a part of the portfolio long term.

Robert Dodd, Analyst

Got it. I appreciate it. The tough one. Any color you can give us on the timeframe for that? Obviously, the weighted average life left on a lease is four years, but often it's easier to sell an asset that's still under lease than one that's out. So any color you can give us on how fast that might occur? I mean bottom line, obviously, the noncore is now very small, Merx is shrinking as well. I mean what kind of timeframe could we expect here to be reporting, say, just the portfolio is just corporate lending?

Howard Widra, CEO

Well, certainly, in this calendar year, you should see a significant reduction. There's a question of whether all the assets are sold together or all the assets are sold in their component parts. There are different securitizations or different pools. If they're sold in their different pools, there are some tax considerations with regard to timing, depreciation versus gain on the planes. And so that could drive some timing issues. And so it's—if you got into the weeds, your eyes would cross. But the answer is that we would like at this time next year, we would expect to be out or to have a view like to have stuff under contract. I mean certainly, obviously, as you know, that's no guarantee, and we want to make sure, but we think our valuation is right and constructive. We think there's a market for these planes, and we're focused on it.

Operator, Operator

Our next question will come from Melissa Wedel with JPMorgan.

Melissa Wedel, Analyst

We're hoping to get a little bit of clarification on the elevated prepayment and fee income. Could you break back down for us on sort of a per share basis and what that contribution was this quarter?

Howard Widra, CEO

Yes. I think, Greg, you have it on per share. I'm going to pull up. I mean, it was about $4.9 million, right? Greg?

Gregory Hunt, CFO

Yes.

Howard Widra, CEO

Yes. So $4.9 million.

Gregory Hunt, CFO

That’s correct.

Howard Widra, CEO

It depends on the situation. We did not have an incentive fee this quarter, but that will likely carry over to future incentive fees. Our expectation is around $3.5 million per quarter for certain periods or the average quarter. The last two quarters have exceeded that amount, while the one before those was lower. I hope and believe that based on current activity, $3.5 million is a conservative estimate. The fees we generated came mostly from smaller and medium-sized transactions related to the normal turnover of assets, without any significant or unusually large contributions.

Melissa Wedel, Analyst

Okay. That's helpful. And then looking at some of the exits that you've talked about already at this quarter, is there anything we should be thinking about in terms of sort of above or below or just in line with the longer-term average of roughly $3.5 million, or would these exits put you sort of again north of that level, do you think?

Howard Widra, CEO

Yes, I would remain at the $3.5 million estimate, mainly because there are many transactions set to close towards the end of June that might carry over into July. Therefore, the final amount could fluctuate and may be either below or above that figure. It's uncertain at this moment. Tanner, do you have any other insights on this?

Tanner Powell, President and Chief Investment Officer

Yes. And I'd also clarify a lot of the guidance we gave in terms of sell-down has to do with the noncore. That $3.5 million is really more generated by our corporate portfolio, whether prepayment fee or acceleration of OID to the extent something comes out earlier. And so that number really has to do with normal churn in our corporate lending portfolio and would echo a comment that $3.5 million is a good number to stay with, understanding that it will ebb and flow and some quarters will be above that and some will be below.

Melissa Wedel, Analyst

Okay. Appreciate that. And then my last question is around some of the—it's really a capital allocation question. I noticed the decrease quarter-over-quarter in share repurchase activity. Taking into account your comments earlier on the call about going to take our leverage, potentially a little bit at the margin, maybe some better price opportunities on new investments in the market as far as liquidity and the impact of the market on opportunities, makes me wonder if your appetite for share repurchase is sort of an outsized way like we saw in maybe in the December quarter if that's reduced a bit.

Howard Widra, CEO

The share repurchase activity may have decreased slightly this past quarter, but it wasn't primarily due to a lack of intention. Instead, it had more to do with our window being closed for a longer period and our 10b5 plan executing automatic purchases at a lower level than when the window is open. We typically buy back shares at our discretion during the quarter, but that depends on when the window closes. We consider the balance between paying down debt, buying back stock, and pursuing the next loan, and we think purchasing stock is a good use of our capital because we believe in our net asset value. However, we want to ensure we don't deplete all our capital, so we strive to maintain a balance. Ultimately, while I'd like to buy back shares significantly, the current leverage and market opportunities don't support that approach.

Operator, Operator

Our next question will come from Ryan Lynch with KBW.

Ryan Lynch, Analyst

Kind of another follow-up question on Merx. Just want to clarify. So I think you said the fair value of the insurance contract is around in kind of the mid-$40 million, and you guys have your aircraft or the value of those aircraft marked at around $25 million today. Did I get those numbers correct?

Tanner Powell, President and Chief Investment Officer

Yes.

Howard Widra, CEO

Although the fair value is not the right number. The contractual claim, I mean, the fair value of the aircraft was $44 million, is that what we were saying previously, and now it's—now the claim is $25 million. The fair value of the claim is in—the nominal value of the claim is higher than the $44 million.

Ryan Lynch, Analyst

Yes. So that was my—okay, so that was kind of my point. So is—or my next question is the— I mean, I'm not as familiar with how these claims—these insurance claims work. Is this sort of an event where you guys would expect to get 0 or expect to get all of the amount? And so the current value that you guys haven't marked at is not correct, and it's going to be either a bifurcated situation or a zero or a pretty big gain in these depending on how that works. And obviously, you guys are just doing a probability of somewhere in the middle, but is that how we should think about the end result being either a big gain or a big loss ultimately?

Howard Widra, CEO

No, I don't think so. I mean, there are multiple insurance policies affecting global coverage. So there are multiple claims. And so that creates like a diversity of results, and then add to that the fact that the more likely result is some kind of settlement below the full face value. It's only because we want to get the money sooner. I mean, we think we have the right claim. But the big issue is really that if it was just us, we think the claim wouldn't be all that hard, but there’s—the insurance companies have so much exposure to the industry that they're going to take a more protracted approach. But it is not binary. It is not by any means binary. I mean, I think our view is sort of like we have a valid claim. We think there's a possibility of some of the insurance that we have having arguments against it that are cut into that, and then there's also sort of room to negotiate some to end the discussion.

Operator, Operator

We have no further questions in the queue at this time. So I would like to turn the call back over to our speakers for any additional or closing remarks.

Howard Widra, CEO

Thank you, operator. Thank you, everyone, for listening to today's call. On behalf of the team, we thank you for your time today. Please feel free to reach out to any of us if you have any other questions. Have a good weekend.

Operator, Operator

Thank you, ladies and gentlemen. This does conclude today's presentation. We appreciate your participation, and you may disconnect at any time.