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Q3 2009 Apollo Investment Corporation Earnings Conference Call - Final.

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OPERATOR: Good morning and welcome to Apollo Investment Corporation's third fiscal quarter 2009 earnings conference call. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Mr. James Zelter, Chief Executive Officer of Apollo Investment Corporation. Mr. Zelter, you may begin your conference.

JAMES ZELTER, CEO, APOLLO INVESTMENT CORPORATION: Thank you and good morning. I am joined today by Patrick Dalton, Apollo Investment Corporation's President and Chief operating Officer; and Mr. Richard Peteka, our Chief Financial Officer. Rich, before we begin, would you start off by disclosing some general conference call information and include the comments about forward-looking statements?

RICHARD PETEKA, CFO, APOLLO INVESTMENT CORPORATION: Sure. Thanks Jim. I would like to remind 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.

Audio replay information is available in our earnings press release. I would also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information.

Today's conference call and webcast may include forward-looking statements and projections and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these statements and projections. We do not undertake to update our forward-looking statements or projections unless required by law.

To obtain copies of our latest SEC filings, please visit our website at the www.apolloic.com or call us at 212-515-3450. At this time I would like to turn the call back to our Chief Executive Officer, Jim Zelter.

JAMES ZELTER: Thank you Rich. We believe we're now more than 18 months into this historic cycle in credit. Major technical and fundamental pressures have caused substantial damage to the financial sector and the economy as a whole.

Banks, commercial finance companies, hedge funds and many other credit (inaudible) are undergoing extraordinary change as marked to market accounting in this unprecedented, illiquid market continues to challenge the capital ratios of many regulated financial institutions including BDC's which specifically and primarily invest in credit with intentions for holding to maturity. The [technical] credit cycle has now evolved into a fundamental cycle of credit and many businesses face increasingly difficult challenges.

Apollo Investment Corporation will not be immune to these challenges. That said, we believe that we had have prudent with both our portfolio construction and our use of leverage.

Approximately three years ago, we made a strategic decision about portfolio construction and transitioning our overall portfolio into larger companies with highly experienced management teams that we believe would better position us for a down cycle. Furthermore, we also believe that many of these investors will offer us increased portfolio liquidity as needed.

In addition, our historical conservative use of leverage has remained a conscious and purposeful business strategy, specifically keeping our leverage approximately half of our allowable regulatory limit of one to one debt to equity on average. And while our portfolio underwriting and performance has been relatively strong since our IPO date, we expect to see some credit deterioration as we progress further into 2009.

During the quarter ended December 31, 2008 we continued our work and focus on our existing portfolio including taking the opportunity to selectively exit certain portfolio investments. Harvesting existing investments for liquidity is one important management tool available to us in managing through this cycle.

Other management tools at our disposal include new investment pacing and managing our dividend policy, among others. Given the dramatic and substantial challenges suffered by many companies during this down cycle, we won't hesitate to use all available management tools in this difficult environment to protect Apollo Investment Corporation and its shareholders.

Our overall strategy in this market will be a proven one and our objective remains to protect and preserve long-term shareholder value. As a reminder, BDC's are governed by certain regulatory limitations on debt to equity levels of one to one. This limitation is also commonly used by creditors of the BDC's including Apollo Investment Corporation.

Historically and by design, we have managed our leverage levels well below the limitation. However, during the recent volatility of asset values, we must now more than ever manage our balance sheet with additional conservativism in light of what we expect may be more volatility with a goal of maintaining compliance at all times.

Accordingly and like so many other companies navigating through this storm, we believe reducing our quarterly dividend is appropriate and prudent and therefore in the best interest of our shareholders. We believe a reduction of 50% will help strengthen our balance sheet as it more closely approximates our average expected cash flows and also increases retained earnings to build additional cushion in our asset coverage ratio.

There were many considerations in our decision including the lack of visibility and how much further (inaudible) marked to market accouting will impact portfolio valuations and how much the current economy will impact our portfolio company investments. Furthermore, as valuation pressures continue, we may seek additional -- harvest additional portfolio investments which would further reduce earnings.

Therefore we established a dividend rate of $0.26 per share for the March quarter considering both qualitative and quantitative factors. Before I turn the call over to Rich, let me say that we understand the importance of the quarterly dividend to our shareholders and have made this decision after considerable thought.

We ultimately concluded that retaining excess earnings and cash flow within Apollo Investment Corporation further fortified our balance sheet during this unfavorable credit cycle and therefore we believe in the best long-term interest of our shareholders. Of course we will also continue evaluating all of our options as we progress further through this cycle and make such adjustment to our strategy to the extent we believe such adjustments are appropriate and in the best interest of AIC and our shareholders.

With that, I will pass along to Rich Peteka, our CFO.

RICHARD PETEKA: Thank you Jim. Let me briefly go through some balance sheet highlights. We closed our quarter on December 31, 2008 with an investment portfolio of $2.4 billion(Sic-press release), down from $3.19 billion as of September 30. Our stockholders equity totaled $1.40 billion at December 31 with a net asset value per share of $9.87. This compares to stockholders equity of $1.95 billion at September 30 and a net asset value per share of $13.73.

The decrease in NAV was primarily driven by significant marked to market net unrealized depreciation from the general capital markets technical dislocation as well as fair value reductions on a certain number of our portfolio company investments who are facing challenges in this economy. Let me remind you that 100% of our investments are valued each quarter by independent third parties.

At December 31, 2008 Apollo Investment Corporation placed its investment in Latham International on nonaccrual status and effectively wrote off $1.2 million in interest for the three months ended December 31, 2008. There were no other nonaccrual -- no other loans on nonaccrual status at December 31 and no other interest passed through at that time.

Next I will discuss Apollo Investment Corporation's outstanding debt and leverage ratio. As a...

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