Triangle Capital Corporation (NYSE:TCAP)
Q4 2012 Earnings Call
March 7, 2013 9:00 AM ET
Sheri Colquitt – VP, IR
Garland Tucker – CEO, Chairman and President
Steven Lilly – CFO and Secretary
Brent Burgess – Chief Investment Officer
Mickey Schleien – Ladenburg
Kyle Joseph – Stephens
Robert Dodd – Raymond James
Greg Mason – KBW
Bryce Rowe – Robert W Baird
At this time, I would like to welcome everyone to Triangle Capital Corporation’s Conference Call for the quarter and year ended December 31, 2012. All participants are in a listen-only mode.
A question-and-answer session will follow the company’s formal remarks. (Operator Instructions) Today’s call is being recorded and a replay will be available approximately two hours after the conclusion of the call on the company’s website at www.tcap.com under the Investor Relations section.
The hosts for today’s call are Triangle Capital Corporation’s President and Chief Executive Officer, Garland Tucker; Chief Financial Officer, Steven Lilly; and Chief Investment Officer, Brent Burgess.
I will now turn the call over to Sheri Colquitt, Vice President of Investor Relations, for the necessary Safe Harbor disclosures.
Thank you, Latif, and good morning, everyone. Triangle Capital Corporation issued a press release yesterday afternoon with details of the company’s quarterly and full-year financial and operating results. A copy of the press release is available on our website.
Please note that this call contains forward-looking statements that provide other than historical information including statements regarding our goals, beliefs, strategies, future operating results and cash flows. Although we believe these statements are reasonable, actual results could differ materially from those projected in forward-looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks including those disclosed under the sections titled Risk Factors and Forward-Looking Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the Securities and Exchange Commission. TCAP undertakes no obligation to update or revise any forward-looking statements.
And at this time, I would like to turn the call over to Garland Tucker.
Thank you, Sheri. I’d like to welcome all of you to this morning’s call. As most of you probably know, 2012 was another very successful year for TCAP. And we’re pleased to have an opportunity to share our thoughts with you on today’s call. In terms of the format for today, I’ll start the call with some comments regarding Triangle, follow by few industry observations. I’ll then hand the call over to Steven to discuss our financial results, liquidity position and capital markets activities. And then Brent will provide an update on our investment portfolio in certain trends we are seeing in the investing market.
2012 was an incredibly active year for TCAP. During the year, we increased the value of our investment portfolio of approximately $200 million by adding 26 portfolio companies across 18 different industries. We increased our investment income by $27 million or 43%. We increased our net investment income by over $17 million or 42%. We maintained our leadership position in the industry in terms of our efficiency ratio. And we generated $6.7 million of net realized gains across our investment portfolio.
All of this activity provided us the opportunity to increase our quarterly dividend three times during 2012. And just last week, we announced another increase in our quarterly dividend of $0.54 per share. From a balance sheet perspective, during 2012, we raised accretive equity capital, and we became the first non-rated BDC to issue seven-year bonds.
And then, again, later in the year, we became the first non-rated BDC to issue 10-year bonds. In the middle of all this activity, we also successfully arranged and closed our $165 million senior credit facility. So, taken as a whole, both operationally and financially, 2012 was an active and successful year as we can recall. However, as important as all these accomplishments are, it is equally important to look forward into 2013 and begin to analyze what future opportunities and challenges might exist for TCAP and other BDCs.
So, when you think about Triangle and where we might go during 2013, there are few points that I hope you’ll keep in mind. First is investment focus. We have always focused on the lower middle market, and we plan to continue focusing on the lower middle market. By maintaining this focus, we’ve been able to achieve a very stable and high weighted average yield across our investment portfolio. Since our 2007 IPO, the weighted average debt yield on our investment portfolio has consistently ranged between 13.7% and 15.4%. Currently, it stands at 14.6%.
From a credit statistics standpoint, the average total leverage of our investments we added to our portfolio, again, since the 2007 IPO, has ranged from a low of 3 times to a high of 4.1 times. During 2012, it was 3.6 times.
From an average fixed-charge coverage ratio standpoint, the investments we have added to our portfolio on an annual basis have ranged from a low of 1.4 times to a high of 1.58 times. And during 2012, it was 1.52 times.
Second is maintaining equity upside across our investment portfolio. Since our IPO, our equity investment, as a percentage of our total investment portfolio on a cost basis, have ranged from a low of 7.6% to a high of 11.1%.
At December 31, 2012, we were 10.1%. This is important to track because analyzing our current equity positions on a cost basis is a meaningful predictor of what potential future equity gains may exist across the portfolio. Since 2007, TCAP has generated $13.4 million of net equity gains. That is equity gains after accounting for principal debt losses. As we analyze our current equity positions, we are optimistic that over the coming quarters and years, our investment portfolio will continue to produce similar types of positive returns.
Third is earning our dividend. We define earning our dividend as generating net investment income that, on a cumulative basis, is equal to or greater than the dividends we pay. On a per-share basis, our IPO – since our IPO, we have generated $9.99 of NII and we have paid out $9.53 of dividends. So, in other way, we have over-earned our dividend by approximately 5% since our IPO.
Fourth is maintaining a conservative balance sheet. Our capital structure contains a little more than $400 million of equity, $225 million of committed fixed rate SBA debentures, and $150 million of long-term fixed rate bonds. We also have a $165 million senior credit facility which is currently undrawn.
One factor that differentiates TCAP from many other BDCs, we intentionally minimize bank debt as a percent of our total capital structure because we believe in matching the long-term assets in which we invest with equity and long-term fixed rate debt.
We believe this funding approach is significantly more conservative for shareholders. It provides a natural hedge in the event the U.S. economy and there’s a period of inflation. And over the long term, we believe it helps produce better operating and financial results.
Fifth is accretive growth. Since our IPO, we have raised additional accretive equity capital seven times. And in six of those occasions, we increased our dividend per share within one quarter of the equity follow-on offering.
Our ability to match one additional equity capital with credible opportunities in our investment pipeline has been a major strength for us and has contributed to our ability to provide investors with a predictable dividend income stream.
And six, and finally, we remain committed to being an industry leader in terms of operating efficiency which enables us, as an internally managed BDC to pass along a greater percentage of our incremental earnings to our shareholders. This is a little understood but very important point. Our efficiency ratio for 2012 was 18% which represented almost a full percentage point of improvement from our 2011 ratio of 18.9% and well below the industry average of approximately 32%.
If you analyze our results since our 2007 IPO, our investment income, as our top-line revenue, has grown at an annual rate of 49%, and our net investment income has grown at an annual rate of 55%, while at the same time, our G&A expenses have grown at an annual rate of only 32%. It is this operating efficiency that has meaningfully accrued to the benefit of our shareholders as our dividends have grown over this period at an annual rate of 53%. As we move into 2013 and beyond, we are committed to continuing to deliver superior operating efficiencies.
At this time last year, as we held our fourth quarter 2011 earnings call, I stated that our challenge and opportunity during 2012 was to continue to find solid investment opportunities we believe would provide an attractive risk-adjusted return to our shareholders. Well, I believe the same challenge and opportunity exists for 2013 and that the market is still quite attractive for lower middle market investing on terms and conditions that are very much in line with long-term historical averages. We are at what we consider to be an exceptionally average time in the credit cycle, where assets appear to be priced competitively but fairly from a risk-adjusted-return basis.
As we move into 2013, we believe investors would be wise to align themselves with those specific BDCs and have demonstrated consistent investment results, coupled with an ability to protect investor capital, an ability to earn their dividend, an ability to raise new capital accretively, an ability to deliver operational efficiencies, and an ability to operate on a conservative manner while focusing on the long term. Indeed, utilizing these benchmarks should position BDC investors for many more quarters of attractive returns.
With that, I’ll now turn the call over to Steven.
Thanks, Garland. As most of you know, we issued our earnings release and filed our 10-K yesterday afternoon after the market closed. Our focus in this portion of the call, first, our results for the fourth quarter of 2012 followed by our results for the full year, and then I’ll provide some discussion regarding liquidity and capital resources.
During the fourth quarter of 2012, we generated total investment income of approximately $25 million, representing a 36.4% increase over the $18.3 million of total investment income we generated during the fourth quarter of 2011.
The increase in investment income was primarily attributable to a year-over-year increase in the size of our investment portfolio. Of the $25 million in total investment income, approximately $500,000, or said another way, approximately $0.02 per share was related to a non-recurring portfolio company dividend.
Our total expenses during the fourth quarter were $9.4 million, consisting of interest expense and other financing fees and general and administrative expenses, compared to $6.3 million during the fourth quarter of 2011. For the three months ended December 31, 2012, interest expense and other financing fees totaled approximately $4.9 million as compared to $3.1 million for the fourth quarter of 2011. The increase of $1.8 million in interest expense and other financing fees was primarily due to our 7% senior notes issued in March of 2012 and our 6 3/8% senior notes issued in October of 2012.
G&A expenses for the fourth quarter of 2012 totaled $4.5 million as compared to $3.2 million for the fourth quarter of 2011. The $1.3 million increase was primarily due to increased salary and compensation expenses.
Net investment income for the fourth of 2012 was $15.5 million or $0.57 per share as compared to $12 million or $0.53 per share during the fourth quarter of 2011. On a recurring basis, our net investment income during the fourth quarter was $0.55 per share, that is, net of the $0.02 per share of non-recurring dividend income from a portfolio company that I just mentioned, as compared to $0.55 per share of recurring NII during the third quarter of 2012, which, as you will recall from our third quarter earnings call, our third quarter NII was also net of $0.03 per share of non-recurring dividend income from two portfolio companies during that quarter.
Our net increase and net assets resulting from operations during the fourth quarter of 2012 totaled $15.6 million as compared to $12.4 million during the fourth quarter of 2011. On a first-year basis, our net increase and net assets resulting from operations during the fourth quarter of 2012 was $0.57 as compared to $0.55 during the fourth quarter of 2011.
Our net asset value on a per-share basis at December 31 was $15.30 as compared to $14.68 at December 31, 2011 and $15.33 at September 30, 2012. The $0.03 per share declined in our net asset value from September 30, 2012 to December 31, 2012 was primarily attributed to a $0.09 per share decline related to taxes relating to a deemed distribution in the amount of $0.26 per share. And as most of you, a BDC has the opportunity to pay a deemed distribution when it generates net long-term capital gains which, as Garland mentioned earlier in the call, Triangle fortunately has been successful in doing since its IPO.
For the full year ended December 31, 2012, total investment income, excuse me, was $90.4 million, representing a 42.6% increase from $63 million of total investment income for the year ended December 31, 2011. The increase again was primarily attributable to a year-over-year increase in our investment portfolio. Our operating expenses during 2012 totaled $32.7 million consisting of interest expense and other financing fees and general and administrative expenses, compared to $22.9 million during 2011.
For the year ended December 31, 2012, interest expense and other financing fees totaled approximately $16.4 million as compared to $10.9 million for 2011. The increase of $5.5 million in the interest expense and other financing fees was primarily attributable to our 7% senior notes issued in March and 6 3/8% senior notes issued in October of 2012, partially offset by lower weighted average interest rates on our SBA debentures.
G&A expenses for the year ended December 31, 2012 totaled $16.3 million, as compared to $12.0 million for the year ended December 31, 2011. The $4.3 million increase was primarily due to increased salary and incentive compensation cost and increased non-cash compensation expenses, driven in part by both an increase in the number of employees and by an increase in the per-share price of our stock.
Net investment income for the year ended December 31, 2012 was $57.7 million, as compared to $40.5 million during 2011. NII per share during 2012 was $2.16, as compared to our NII per share during 2011 of $2.07.
Our net increase and net assets resulting from operations during 2012 totaled $60.1 million, as compared to $56.8 million in the net increase resulting from operations in 2011. The net increase and net assets resulting from operations was primarily due to the $17.2 million increase in net investment income during the year, offset by $13.5 million decrease in net gains in our investment portfolio, as we had net gains in our portfolio during 2012 of $3.8 million, as compared to net gains in our portfolio during 2011 of approximately $17.3 million. So, on a per-share basis, our net increase and net assets resulting from operations during 2012 was $2.25 compared to $2.90 during 2011.
At year-end, our total investment portfolio had a fair market value of approximately $707 million, representing a 39.4% increase over the fair market value at December 31, 2011, or approximately $507 million. As mentioned earlier, our net asset value on a per share basis at 12/31 was $15.30 as compared to $14.68 at 12/31/2011, representing an increase of $0.62 per share during the year.
From a liquidity and capital resources perspective, on our third quarter call, I mentioned that we were in a “incredibly fortunate” position from a liquidity standpoint. Thankfully, that continues to be the case as we are still very well capitalized as we move into 2013.
With a little more than $72 million of cash on hand, full availability of our $165 million senior credit facility and approximately $11 million in available SBA debentures, our total liquidity at year-end approximates almost $0.25 billion.
Subsequent to year-end, on March 1 of this year, we voluntarily elected to prepay $20.5 million in SBA debentures which bore an interest rate of 6.44%. And as we have received in the past and hope to receive in the future from the SBA, we hope to receive approval to issue again $20.5 million in new debentures to replace the debentures that we prepaid.
So, as of 12/31/2012, our total weighted average cost of debt was 5.1%, which given the long-term fixed rate nature of our balance sheet, we believe is a very, very attractive cost of debt capital.
For those of you unfamiliar with the SBA program, SBA guaranteed debentures are 10-year fixed rate non-callable but pre-payable debentures. As a result, SBA debentures are our most attractive source of long-term capital. The SBA has been an outstanding partner since our inception, but while we recognize that the SBA debentures are debt securities. From a balance sheet perspective, the attractive terms coupled with the fact that they are excluded from our asset coverage calculation for different purposes allows our debentures to function essentially as an additional form of equity capital for us.
Said another way, SBA debentures provide us with an additional ballast of low-interest-rate capital that we can utilize to originate portfolio company investments that, in turn, increase the dividend yield we can provide on a sustainable basis to our shareholders. And to be clear, in this example, the SBA is directly helping provide much needed capital to lower middle market companies that can help create jobs in their respective communities across our country. We continue to be optimistic that the current push on the legislature to expand the SBA program will eventually be successful, resulting in the potential for up to $125 million in additional SBA funding for us.
Finally, from a capital market standpoint, Garland mentioned earlier that in September we closed on our $165 million senior credit facility and in October we completed a bond offering in the amount of $80.5 million. What is notably absent from our recent capital markets activities is a follow-on equity offering. And just to set expectations, as I mentioned earlier, as we exist today, we have almost $0.25 billion of liquidity available to us.
As a result, we believe the best strategy for Triangle is to continue to operate in the section of the market that we believe we know best and for us to look for the most attractive investment opportunities that we can find on a pace that is appropriate for our investment team. Given that our run rate NII is $2.20 per share and that our run rate dividend is $2.16 per share. We are in, what I would say is, in enviable position and that we can be very deliberate in what we do from an investment standpoint on a go-forward basis without being pressured in any way.
And with that, I’d like to turn the call over to Brent for some comments on our investment portfolio and also for some general comments regarding our views for 2013.
Thanks, Steven. Let me start by saying that we didn’t have any year-end holidays at Triangle because we were busy closing all of our first quarter 2013 transactions during the last week of 2012 or at least that’s how it felt. But all kidding aside, it’s truly was an incredibly busy fourth quarter and in many respects it’s accurate to say that certain transactions that normally would’ve fallen into 2013 were completed before year-end due to anticipated changes in tax loss.
The net result for us is that in terms of investing activity, we’ll be accurate to say that we probably completed some of our routine one and a half and two quarters worth of work during the fourth quarter. And just to provide a bit more color on what I mean when I make that statement, consider that we closed four investments totaling approximately $67 million during the last two weeks of December. And if you look back over the last eight quarters, our average quarterly investment rate has been, you guessed it, $67 million.
So, still very true that we don’t have a specific goal for a minimum or a maximum amount of investments we look to make each quarter or in any given year. It is also very true that the fourth quarter was an exceptionally busy quarter for us. And when transactions fall into our parameters and we see things that we like from a credit and an opportunity standpoint, our team aggressively seeks to win those transactions.
This perhaps is one of the greatest benefits of not being burdened with the pressure of making additional investments every quarter in order to meet a minimum dividend obligation or some other specific quarterly goal. When Garland even spoke earlier in the call about many of our key strategic viewpoints, the result is that our strategic focus provides our investment team with much more latitude to take our time and look for specific investment opportunities as opposed to being forced to focus on quantity.
We’ve said many times on these calls that we look for quality over quantity in terms of our investments. And that statement continues to be as relevant today as ever.
So, in terms of recapping 2012, we made 26 new investments during the year. We made eight debt investments in existing portfolio companies, totaling $7.8 million. And we made five equity investments in existing portfolio companies totaling $0.6 million.
All of this activity yields total gross investments during the year of approximately $349 million. On a net basis, including the effects of principal and PIK repayments, totaling $157 million during the year, our net deployments totaled approximately $192 million.
During 2012, we sold equity investments resulting in net realized gains of approximately $6.2 million. On a cumulative basis, since IPO, our net realized gains have been $13.4 million. Needless to say, we are pleased with that number.
As some of you recall, during the third quarter, we had two investments on PIK non-accrual. That is, we were receiving cash interests on the investments but we voluntarily made the decision not to recognize PIK interest component of the interest rate because of the weakened operational position of those portfolio companies.
During the fourth quarter, we moved one of those, thankfully, the smaller one, to full-non-accrual status. The specific company is called Venture Technology Groups and the investment is a $5.5 million sub-debt investment. For those of you following us, I don’t think this move is much of a surprise because we’ve been talking about it for some time now. And for the last two quarters, the investment has been valued at 61% and then 49% of cost.
The other investment, which was on PIK non-accrual during the third quarter compositions, remains on PIK non-accrual. However, things are continuing to improve there, and we are hopeful that it might move back on to full accrual in the next one to two quarters. So, our non-accruals at year-end were 2.1% of the portfolio on a cost basis and 0.3% on a fair-value basis.
From an overall portfolio standpoint during the fourth quarter, we experienced unrealized gains of approximately $9.2 million, net unrealized losses of approximately $9.2 million, and an unrealized depreciation reclassification adjustment of $900,000 relating to the sale of one portfolio company equity investment. So, exclusive of the reclass adjustment, the portfolio was basically flat on a quarter-to-quarter basis.
As we have said many times before, we don’t discuss the specifics of our investment pipeline, but I will try to give you a bit of color in terms of our perception around how 2013 could look in terms of overall activity.
First, from a broader public markets perspective, we believe 2013 will be a very active year for M&A, as many public companies have meaningfully reduced their operating expenses over the last several years, yet they are still struggling to achieve top-line revenue growth. Couple that with strong balance sheets and active debt markets, and you have the ingredients for a lot of M&A activity.
Second, from a private market perspective, there are a few data points we believe are intriguing. The first data point we find interesting is the impact that private equity investors had on middle market over the last several years.
Industry estimates indicate that there are approximately 6,500 private equity owned companies in the middle and the lower middle market. And that 3,000 of these or almost half were purchased by their current owners between 2005 and 2007. This “inventory backlog” is not only significant in terms of its share number, it’s also older in terms of investment vantage than most private equity firms ideally like to have.
Said another way, the average portfolio company whole period for most private equity firms is now more than five years, which according to several M&A advisors we’ve spoken with recently is the first time that has occurred, so that these private equity owned companies continue to regain their operational footings and share the negative effects of the Great Recession. And as their private equity owners begin to think of appraising their next fund, we believe many private equity firms will look to sell these companies over the coming quarters.
Another statistic we believe is meaningful is that 2012 was the first year or more than 50% of the total M&A transaction volume in the middle market involve private equity funds as both the seller and the buyer. We believe this data point is meaningful because it indicates that private equity buyers are more active than ever in the middle market. It also suggests that private equity buyers are becoming more effective in competing against strategic buyers. If this trend continues, it suggests there will be more opportunities for Triangle to participate in middle market M&A transactions.
So, to wrap up my comments, I’ll make two quick points. First, the 2012 was an extremely busy year for investment team with great results. We generated net portfolio of growth, realized substantial net gains on investment exits during the year and maintained a very low non-accrual rate.
And second, as we look ahead into 2013, we see very solid fundamentals in our target market, though we certainly recognize that we don’t dictate the pace of M&A activity. We simply seek to be part of the best transactions that occur in it.
And now I’ll turn the call back to Garland for any concluding comments before we take questions.
Okay. Thank you, Brent. As tempting as it is for us to want to pause and look back at 2012 which was, in every way, a great year, the opportunity lasts in 2013 and beyond. Our balance sheet is strong. We’ve made – we have ample liquidity going forward. Our investment portfolio is healthy. Our relationships are solid, and our current earnings more than cover our current dividends. As an internally managed BDC, we have no incentives to grow assets simply for the sake of growth itself. We view the still vast opportunity in the lower middle market as a disciplined and steady endeavor. And we believe that, taking a conservative approach to the key aspects of our business, we’ll continue to serve our shareholders well.
So, with that, I’d like to turn it back over to the operator and open it up for questions.
Thank you, sir. (Operator Instructions) Our first question comes from Mickey Schleien of Ladenburg. Your line is open.
Mickey Schleien – Ladenburg
Good morning. I wanted to get a sense of whether there are any companies in your portfolio that you’re perhaps a little bit more nervous about given the potential impact of the defense cuts and healthcare cuts that we’re seeing at the federal budget.
Yes, Mickey, thanks for your question. We have three companies in the portfolio potentially affected by sequester. We have looked at each of those companies in an attempt to measure and judge the impact of the sequester. What we have found, Mickey, is that none of them actually expected their business will be impacted. What they are seeing, however, is that the uncertainty is causing a higher degree of lumpiness in their business, causing shrinkage of backlog, not because again the business is going away but because their customers are putting in smaller orders due to the uncertainty. So, it’s creating a lot of uncertainty in these three particular portfolio companies. They’re not seeing any material degradation in performance, certainly not yet at this point. And they’re not anticipating that but it’s really just the uncertainty is creating a greater degree of lumpiness.
Mickey Schleien – Ladenburg
Okay. Appreciate that. And just one other question. Steve, can you give me a sense of how many sponsors you’re working with and how your deal flow is breaking down between sponsored and non-sponsored deals?
Mickey, it’s still about that sort of 80%, 80%-plus rule of thumb that we’ve experienced in the last several years. 80% or so of deal flow is through financial sponsor, either large sponsor or small sponsor transactions, and then the other high teens to 20% is what we would call fundless sponsors or family offices or situations where Triangle serves as the institutional capital on a transaction. So, no overall change there.
Mickey Schleien – Ladenburg
Okay. Thanks. Thanks for your time this morning.
Thanks so much.
Thank you. Our next question comes from Kyle Joseph of Stephens. Your line is open.
Kyle Joseph – Stephens
Good morning, guys. Thanks for taking my questions.
Kyle, good morning.
Kyle Joseph – Stephens
Just looking through our model, it kind of looks like PIK as a percentage of total income has been trending down in 2012. Is that kind of a strategy you’ve undertaken or is that more of a market dynamic and where do you expect that to go from here?
Kyle, thanks. If PIK revenue or PIK income as a percentage of total revenue has – it has ticked down a little bit over where we were back, I would say, couple of years ago. I think for the last couple of quarters, it’s been fairly static around somewhere that 15%, 16% range. And then, of course, net PIK, that is, the remaining PIK income recognition net of the folks who prepay, choose to prepay their PIK interest during the year actually did decline a little bit for us year-over-year.
I think last year, our net PIK was about $6.4 million or so and this year was maybe $5.9 million. So, that’s really the true drag on cash, if you will, for us, which is, of course, a very small number from where we sit. And a lot of that has to do with loan repayments that we experienced during any particular quarter or particular fiscal year. So, there’s no real change in pricing for us. The lower middle market is great in the sense that you can typically achieve a little bit of additional thick interest on your transactions, which helps return. But it just really is affected more by investment mix over time.
Kyle Joseph – Stephens
Okay. Thanks. And that’s a good transition to my next question. I was going to ask about yield in the quarter. It looks, given your disclosure, it looks like deals were pretty stable. But could you give an update on the fourth quarter and also what you think, so far, in the first quarter? I guess the question’s for Brent.
Yes. Thanks, Kyle. Of the seven new transactions in Q4, the average coupon was 14.1%. So, that’s clearly a little bit down from what we’ve seen, again, related to Garland’s comments, well within historical averages. And so, we don’t see a lot of change to that going forward. I think, in the first quarter, because there’s not as much activity, we’re seeing a little bit more pressure on those yields. I think as activity picks up in the pipelines we build during the year, I think there’ll be probably more of a bounce back, back to kind of probably what we saw in the fourth quarter.
Kyle Joseph – Stephens
All right. And then, Steven, I know you’ve mentioned the coupon on the SBA that you financed in the first quarter. Can you give us an idea of what the new coupons are going to be on net debt, or where you’re seeing SBA debt pricing?
Yes. The last time we pooled, Kyle, last – I guess, last fall, we were 3.39%, 3.4%. On an all-in basis, I think that’s about 3% flat than the fees that get worked into it and make it about 3.4%. And so, if we were going to pull today, we think it’s be plus or minus that range. So, for modeling purposes, call it 3.5% and you’re probably safe.
Kyle Joseph – Stephens
Got you. Thank you. And just one last question. Do you guys have a kind of a target leverage or can you comment on that?
Well, here again, we’re so fortunate that we have the SBA relationship. And the additional, as I mentioned in the prepared comments, is we will call it the balance of capital that that provides us. So, in terms of – just on a stated leverage basis, we would be very comfortable continuing to run as we are and utilizing, as I mentioned, to get-and-prepare comments portion of our bank facility. Obviously, that we have $250 million of total liquidity, obviously I don’t think it would be responsible of us to – even though we could, to utilize the full $165 million of the bank facility. So, you always want to keep a little bit of sand in your pocket, if you will.
But I think from a modeling standpoint, if you were to take a sort of easy look at it, just assume we invest $100 million over the course of this year and assume the net spread is 10%, including the cost of the credit facility and using some cash on hand, I guess. And that would generate, I think, over our share count, a run rate of additional NII of somewhere around $0.36 per share. If you just cut that in half, it’s a high-level assumption, that would be $0.18 per share this year depending on when the investments come into the portfolio. And with the base of $2.20 on a run rate NII per share, for modeling purposes, if you’re in that, that would be $2.38. But just hear back a bit to be a little conservative and you’re in that $2.30 to $2.35 range and I think that’s a pretty comfortable number that provides a pretty nice dividend lift over the course of the year and then earnings lift as well.
Kyle Joseph – Stephens
Okay. Thanks so much for answering my questions and congrats on a great quarter and actually year, too.
Yes. Thanks so much.
Thank you. Our next question comes from Robert Dodd of Raymond James. Your line is open.
Robert Dodd – Raymond James
Hi, guys. Yes, congratulations on another really good quarter and a consistent trend there. Couple of questions, if I can. First one on the rate of repayment you’re seeing in the portfolio. The last couple of quarters, obviously your portfolio has grown a lot and that’s what I’m – is this going to be normal course or is this kind of the activities that you talked about in terms of fee service maybe starting the churn at the portfolio, obviously, you may retain some of those relationships if it’s portfolio company, yours is getting sold or refinanced. But can you give us a little bit of color on what – if there’s any indicators about where you think repayments could go over the next couple of years. I mean, stay at this kind of level, ramp up or head down to where they were a couple of years ago which was $50 million. Obviously, your portfolio is a lot bigger today?
Yes. Good question. If you have any insights, let me know. It’s impossible to predict as we’ve always said. And generally speaking, the more active we are going to be on the origination front, the more activity we will be seeing in terms of portfolio churn and exits. I would say, in general, that the level of repayments was lower in the last – in, say, 2010 and 2011 than I anticipated. And that is because private equity hold periods have gone up over historical averages. And I think we caught up on a lot of that in 2012. With the credit markets being more accommodating and other factors, I think that drove exit activity. And just as our origination activity was somewhat accelerated into Q4 because of the tax law changes, similarly, our repayment activity was accelerated.
So, the way I think about it, Robert, is that, in general, somewhere between three and four years is going to be a typical hold period for our portfolio. So, whether us deploying roughly $340 million in 2012, most of that money is going to come back to us in 2015, 2016. And I can probably predict that more accurately than I can predict what will happen in 2013.
Robert Dodd – Raymond James
Okay. Appreciate that. And, Steve, could you give us any color on – I mean, you mentioned the dividend fee – or the dividend income which I assume is dividend pickup or something like that. And any color you can give us on kind of the other fee components. I mean, obviously, you tend to amortize points you get up front but some of those you take as up-front fees and, obviously, you had a very high deployment quarter. So, was there any – other than the $0.5 million which you’ve already flagged, were there any other kind of fee income in that quarter that would be above sustainable level? I’ll put it that way.
Yes. Thanks, Robert. It varies every quarter. There are kind of, I guess, three types of fees that exist for really, I guess, any BDC. The first would be a – when you receive an up-front fee in a transaction that you amortize that over the life of the transaction at least, I think most of the sort of more conservatively tilted BDCs tend to do it that way. So, that’s the first piece and that just kind of occurs every quarter.
The second piece is fees that you would generate when you have transactions at prepay or repay and prepaid and penalty fees and those types of things. So, in a period of higher prepayments, you might generate incrementally a little more of that type of activity, and we think of those as non-recurring fees that tends to happen every quarter because you have some percentage, as Brent alluded to, of the portfolio that does kind of churn every quarter.
And then, you have, surely, the – out of left field or right field, dividends or sources of income from portfolio of companies that are truly one-time in nature that you just can’t predict and would be loathe to predicate your business plan on them. And those are the fees that we call out every quarter to the market to be sure that you guys, as you’re writing your models, don’t get too excited over last quarter $0.58 of NII, which included $0.03 of a non-recurring dividend. And this quarter, $0.57 of NII that included $0.02 of a dividend. So, we think about it as those first two buckets tend to happen every quarter. One, just by the contractual nature of it and the other just by the portfolio journey. Does that make sense?
Robert Dodd – Raymond James
Yes. Yes. I appreciate that. And last question if I can. Just on exchange technologies which is about one I’ve been keeping an eye on because it looks like it’s been maybe struggling for a little while. It got down again in the fourth quarter. It’s more obviously pretty much only a port – individual investments as for – relative to the total at this point, and it’s only an 8% payer. So, it’s not going to boost the numbers. But any color on the update there? I mean, the fair value got cut in half again versus the third quarter, and it’s now about 25% of cost. That’s usually, in our view at least, an indicator of the performance probably of the company. Have you got any color there?
Yes. Very quickly, Robert. Steven. Then I’ll let Brent expand on this if you’d like to. But, yes, I mean, just to be specific, I think it’s held at 25% of calls now so to speak. So, I think your eyes are doing the right work there in terms of taking that up. At about a $6 million investment for us (inaudible) something like that. Were we to lose it, I think the impact in the portfolio would be eight-tenths of 1%. So, we take non-accruals from 2.1% to 2.9%.
So, well below historical averages for, I think, anybody in the industry including us. So, from that standpoint, we feel great that it’s – if we were to lose it, it’s just not a big deal, thankfully. From earnings to dividends standpoint, obviously, we took that into account as you would imagine in our modeling purpose – in our modeling here before increasing the dividend last week, as Garland mentioned. So, one way or the other, obviously, we hope for the best but sort of prepare for the worst. So, from that standpoint, thankfully, we’re able to sleep pretty well at night with it. But, Brent, would you add anything just operationally?
Yes. I mean, it was a very difficult one for us to value this quarter. There’s actually a tremendous amount of activity going on there to try to write a shift. And it’s just a little too early yet for us to make a call on how successful those efforts are going to be. So, just stay tuned. We hope that we’re being conservative in our valuation.
Robert Dodd – Raymond James
Okay. Appreciate that. Thanks a lot, guys.
Thank you. Our next question comes from Greg Mason of KBW. Your question, please.
Greg Mason – KBW
Okay. Thank you. Steven, you talked about your expectations that the SBA program will be expanded. Can you give us any commentary? I know you guys are tied in to the SBA and the Small Business Investor Alliance. Can you talk about what you’re hearing in terms of what’s going on in Capitol Hill, kind of timing for that, what’s standing in the way of that not happening sooner versus later?
Greg, thank you for your question and thank you for your comments. Within the question of saying that we’re acknowledging that we are – we’re trying to be active there and hopefully helpful where we can be so. I would say the single biggest thing in the way is that little item called the sequester that the government is trying to work through now. I think the – that’s really the bigger issue. It’s been referred back to committee as we understand since it didn’t get done in late December when it was – lots of folks were holding their breath hopefully. So, yes, it’s still one of those things.
One of the few things, I think, in Washington that both parties really do agree on. But it’s not large enough as a single piece of legislation to work through on its own accord so it has to be attached to some other bill. And the odds of that are just too difficult, I think, for anybody to predict with any degree of accuracy. So, I’ll try not to follow to that trap. But we are certainly hopeful that something will get done because, yes, it’s a money-making program for the government, for our country and really does help provide jobs in local communities across the country.
Greg Mason – KBW
Great. And then, I appreciate the comments about you talking about – you have significant amount of capital to invest, but I also got to think, investment bankers are calling you know that you’re trading at 2 times book value. In terms of potential equity capital raises, can you talk about your balance between the stock trading at 2 times book and could do an accretive equity raise versus the available capital you have for new investments? How are you guys balancing those two discussions?
Well, thank you very much for that question. Essentially and I actually just look at my phone and I had an e-mail from a banker while we were on this call asking about exactly that. So, yes, the people – yes, bankers are trying to pitch their way, or so to speak. Greg, as one of the reasons I made the comment in the prepared remarks about the SBA debenture program with low interest rate, a long-term money like that, 10-year money.
I’m not trying to say that, hey, look, that is equity, but that really is long-term ballast capital in our capital structure. And as long as Triangle or, frankly, any BDC can handle the interest expense which, of course, is very low interest rate, that’s permanent capital that we can use to increase our yield on a sustainable basis and I think the market is beginning to understand that that really is what that form of capital is.
And if you look at Triangle and, frankly, any other BDC and adjust for SBA debenture, the SBA debenture program that way, I think we’re trading at somewhere around plus or minus 1.2 times book or something like that. And again, I’m not trying to say that is equity, but it’s a fact that that capital exists for a very, very long time and especially when you can refinance those, when they hit year seven or eight, and then push maturities out for another 10 years, it’s just a very efficient form of capital.
So, I think our opportunity going forward, we’ve got great committed liquidity with the bank facilities. It’s a four-year deal. That’s longer than a lot of deals in the industry. We have two one-year extension options on the deal.
So, well, as you know, we have an aversion to piling the balance sheet up with a lot of short-term capital. To utilize some of that bank facility is certainly reasonable for us and any equity offering on a go-forward basis, I think, has to continue to be predicated on the investment pipeline and are the opportunities there to support it for us to believe that we could put their dollars to work in a very, very short period of time like, going back to Garland’s comments, we’ve been able to do, frankly, every time that we’ve raised equity before. So, it’s not just a valuation play. If we were externally managed, it might be because every time an external manager raises equity, he takes 4% of the dollar he raises and puts it in his own pocket. From our standpoint, it’s about increasing dividends per share on a steady-state basis. So, Garland, would you add anything to that?
Well, just to say I think it’s very much on the point of our attempt and I think our success at matching the needs of deployment pipeline to our ability to raise capital. And when we issue shares, we view that as an obligation to not only continue paying the dividend but continue to earn it. And there’s certainly – going back over a lot of years, there have been times when the markets have been willing to give companies more money than they would or should have. And we are determined not to fall into that trap.
As long as we’ve got a good use for the money and can deploy it, as we have in the past, and continue earning the dividend, then we’ll absolutely step up and issue shares. But we’re not going to just respond to a market or investment bankers who are saying that we should take advantage of this opportunity if it’s not matching or deployment needs. So, that’s – I think that’s the overriding objective for us is to continue doing that.
Greg Mason – KBW
Great. Appreciate the comments, guys.
Thanks, Greg. Appreciate the question.
Thank you. Our next question comes from Bryce Rowe of Robert W. Baird. Your line is open.
Bryce Rowe – Robert W Baird
Thank you. Had a couple of questions, one is convoluted than the other. So, I’ll leave with that and then follow with the other one. So, Robert Dodd mentioned XTG, I’m wondering if there are other companies on your so-called watch list or radar screen that you’re keeping a closer eye on from a credit perspective.
And then the second question is when we look at the fair value of debt investments over their cost, I noticed a wider negative gap compared to 2011 but then, on the flipside also, wider positive gap from looking at the fair value equity investments over their cost. So, is the wider gap on net investments imply incrementally weaker credit conditions that you guys have seen over the past year? I hope I asked that question correctly.
Yes. Bryce, I think I understand that questions. Thanks for them. The other two companies that are probably most concerning to us, again not hard to figure out looking at write-downs, already mentioned home positions and that is – remains on PIK non-accrual. Again, we’re seeing some positive things there. We’re somewhat hopeful. Again, it’s always difficult to tell when a company is underperforming, whether your efforts are going to be successful. But we’re certainly – there’s a lot of activity there in terms of driving some improvements and that it’s a business model that has – that is experiencing actually a lot of growth.
On Minco, it’s the other company, again, we’ve written it down further this most recent quarter. That is one of the companies that is subject to sequester and kind of my comments earlier in terms of lumpiness, again, not expecting a long-term effect but potentially some short-term effect. So, if you look at the two of those companies, if they – I think each of them is roughly 0.8% of our NII. And so...
Of the portfolio. If both of them went on non-accrual, it would increase our non-accruals by about 1.6%. So, fairly, on a percentage basis, it would be a big move but still, again, would not result into clearly concerning non-accrual rates.
Just in general as it relates to your second question, I’ll let Steven answer it more specifically. Just in general, I would say, and I think I said this on the last quarter’s call as well, that the problems that we’re seeing in the portfolio company are specific or in the portfolio are specific to this portfolio of companies. They are not generic market credit issues or anything like that. There is no receding tide that’s going to sweep out a whole bunch of companies that we see at this point. It really is specific management, industry, market dynamics that are particular to each of these companies.
Bryce, this is Steven. Maybe adding to what Brent said, because I do think that with 82 companies in the portfolio and in addition to the few non-accrual assets that total 2.1%, if you were to take the worst-case assumption and assume XTG and Minco both were to go on non-accrual, that takes us to 3.7% which still obviously very well below long term historical rates for the industry and even Triangle. But I think from the total portfolio standpoint in terms of – from a credit perspective, our strategy of having equity upside in 80% to 85% of our investments that – as Garland mentioned at some of his comments of – the thing – the decisions we’re making today are from a patterning standpoint very equal to what we’ve done historically. And the statistics and the portfolio today are very much what they were – or has been historically.
And so, I think when you consider that XTG and Minco together I think they would – on a cost basis, be about $11 million. So, assume both those went to zero; horrible assumption. We’ve got $13.4 million of existing gains on the balance sheet. So, we would still be net-net positive from a gains versus losses perspective. And we have, I think, on an – if you look at all of our equity positions today across the portfolio on an unrealized basis, they total $30 million. So, you’d have all of those on the good side, so to speak.
And just I guess from a relative analysis standpoint, in terms of, how do we feel about that $30 million. If you go back and look at the 100% of the equity investments that we have – that we’ve captured and sold out of those positions since IPO, think of their 19 or 20 cases, in every instance, Bryce, the highest point of value of those equity positions was at exit with the exception of two accounts. And I think those two accounts total the amount by which they were not at their highest point at exit was I think for both accounts, total was $70,000.
So, they were right there. So, not to say that we’re – don’t know yet where the $30 million of equity value today will end up. But if the current portfolio equals what it has in the past, then hopefully, that $30 million is a pretty strong number. And so, two, three, four years from now, hopefully, we’ll be in the same position where, on a net-net basis, equity gains will significantly more than offset any principal losses over time. It certainly feels that way from a high-level perspective today.
Bryce Rowe – Robert W Baird
That’s great. Thanks.
You’re welcome. Did you have a second question?
Bryce Rowe – Robert W Baird
No, you got them both. Thanks.
Okay. Great. Well, thanks so much. Operator, are there any other questions in the queue?
Okay. Well, thank you all for participating. And we’ll look forward to speaking with you in May to discuss the first quarter.
Thank you, sir. And thank you, ladies and gentlemen, for your participation. That does conclude Triangle Capital Corporation’s fourth quarter full-year 2012 conference call and webcast. You may disconnect your lines at this time. Have a great day.
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