Patriot Capital Finding, Inc. Q4 2008 Earnings Call Transcript

Patriot Capital Finding, Inc. (PCAP)

Q4 2008 Earnings Call Transcript

March 16, 2009 8:30 am ET

Executives

Rich Buckanavage – President & CEO

Bill Alvarez – EVP, CFO & Secretary

Tim Hassler – Chief Investment Officer

Analysts

John Hecht – JMP Securities

Greg Mason – Stifel Nicolaus

Derek Bobby [ph]

David Chiaverini – BMO Capital Markets

Vernon Plack – BB&T Capital Markets

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Patriot Capital Funding Q4 conference call. During the presentation, all participants would be in a listen-only mode. Afterwards, we will conduct a question and answer session. (Operator instructions) As a reminder, this conference is being recorded Monday, March 16, 2009.

It is now my pleasure to introduce Rich Buckanavage, President and Chief Executive Officer with Patriot Capital Funding. Please go ahead, sir.

Rich Buckanavage

Good morning and welcome everyone. This is the conference call to discuss the results for Patriot Capital Funding for the quarter-ended December 31, 2008. I am joined this morning by Tim Hassler, Chief Investment Officer, and Bill Alvarez, our Chief Financial Officer.

Before we begin the call, Bill, will you please provide our Safe Harbor disclosure statement?

Bill Alvarez

Today's conference call is being recorded and webcast live through our website at patcapfunding.com. An archive of today's webcast will also be available on our website as will an audio replay of the conference call. Replay information is included in our press release today and is posted on our website. Please note that this call is the property of Patriot Capital Funding Inc. Any unauthorized rebroadcast of this call in any form is strictly prohibited.

I would like to call your attention to the customary Safe Harbor disclosure in our press release today regarding forward-looking information. Today's conference call includes forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that would cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements, unless required by law. To obtain copies of our latest SEC filings, please visit our website or call Investor Relations at 212-835-8500. Lastly, there will be a question-and-answer session following our presentation.

And with that, I'll turn it back over to Rich.

Rich Buckanavage

Thank you, Bill. The trends that we outlined for you during last quarter's earnings call continued to accelerate during the fourth quarter. The M&A market finally buckled under the weight of these market forces, widening spreads and in some cases, double or almost triple early 2008 levels, materially lower leverage and economic weakness, all contributed to an almost non-existent M&A pipeline.

The things of the day however have shifted from discussion of pipeline and new investment commitments to that of portfolio performance and liquidity. We will spend majority of this call today discussing credit trends in the portfolio as well as providing an update on our liquidity position.

But first, we did close one proprietary investment early in the fourth quarter that is worth discussing. In October, we acted as lead arranger and administrative agent on a $32.5 million financing for the acquisition of Copernicus Group by DFW Capital Partners. We committed $22.5 million to the financing, which was comprised of senior unsubordinated debt and an equity investment. We syndicated $10 million of the senior secured debt to another financial institution. Despite the headwinds in the marketplace, we have felt this investment was compelling. The spreads represented over a twofold increase from prior periods, opening leverage points worth 30% lower than from levels in 2007 and early 2008. And lastly, the company operates in the healthcare sector that we believe is less correlated to the health of the overall economy.

Also during the quarter, we exited two syndicated senior secured loan investments, both in the amount of $1.4 million or $2.8 million in the aggregate. With this investment activity during the quarter, our portfolio at December 31, 2008 totaled approximately $322 million at fair value, represented by 35 portfolio companies.

The portfolio continues to perform reasonably well during this difficult economic period. We continue to manage the portfolio aggressively, particularly our watch-list investments in order to generate the most favorable outcome for our shareholders. Almost 87% of the total portfolio is rated either 1 or 2, our two highest ratings categories. As is the case within any quarter, we had movements up and down within the asset-rating categories. This quarter, there were slightly more upgrades than downgrades, resulting in a modest improvement to the average portfolio risk rating, which stood at 1.97 at December 31.

Despite recording the highest levels of unrealized depreciation in our history against the portfolio this quarter, fair value still represents 88% of cost. Our non-accrual debt investments continued to be maintained at a manageable level, representing 2.8% of the total portfolio at fair value and 7.9% at costs. Rather than broad-based, our non-accrual debt investments are limited to all of the debt in two portfolio companies and a portion of the debt of a third company. In the end, the health of a portfolio can be gauged by its ability to produce a predictable cash flow capable of supporting the established dividend, and this portfolio did just that. We reported tax distributable income in the fourth quarter of $6.835 million, or $0.33 per share versus a fourth-quarter dividend of $0.25 per share.

It was our stated objective, during the last quarter’s earnings call to out-earn our dividend in order to reduce the amount of return of capital in our 2008 distributions. The $0.08 per share of excess distributable income allowed us to achieve this objective and reduce the total return of capital for 2008 to just $0.05. In fact, if not for the change in tax year, the portfolio would have yielded sufficient distributable income to support the dividend 100%.

Now, turning my attention to the right side of the balance sheet, at December 31, 2008, we had unrestricted cash of approximately $6.5 million and availability under our securitization revolving credit facility of approximately $17.5 million. Balance sheet leverage was approximately 0.9:1, based on outstandings of $162.6 million. Our regulatory asset coverage ratio, based on this level of outstandings was 211%. We are currently in full compliance with all of the terms and conditions of our credit facility and have access to approximately $180.1 million of our total $225 million commitment. The limitation on utilizing the full commitment is driven by the decline in book equity, which stood at approximately $180.1 million.

Subsequent to year end, we received several scheduled and unscheduled pay-downs, enabling us to build our cash balance to $14.4 million and reduce outstandings to $150.1 million. This lower level of outstandings further reduces our balance sheet leverage to 0.83:1. Finally tested quarterly, our regulatory asset coverage test, with the reduced level of outstandings, would be approximately 228%. Upon the closing of our line of credit extension, we would anticipate using a significant portion of our cash to further reduce our balance sheet leverage.

While our liquidity position has improved somewhat since year end, we are disappointed to report that we have not been able to complete the renewal of the liquidity facility associated with our securitization revolving line of credit. We had hoped to complete the process prior to filing our 10-K. However, we were not able to achieve that important objective. We have received a term sheet from our two lenders that outlines the terms and conditions, under which they might entertain extending the facility for one year. The term sheet is non-binding however, and still remains subject to the credit approval of each institution and satisfactory documentation. As such, there remains some uncertainty around their facility renewal. Unfortunately, due to this uncertainty, our independent registered public accounting firm is expected to include an explanatory paragraph that expresses doubt regarding our ability to continue as a going concern for our fiscal year ended December 31, 2008.

Lastly, the uncertainty surrounding the extension of the liquidity facility has caused our Board of Directors to defer its decision on declaring a first-quarter dividend. Further, the volatility of today's asset values has also caused the Board to rethink its dividend declaration procedure and is currently considering amending its existing procedure, such that dividends will be declared only after completion of the quarter and receipt of the financial results for such quarter to which such dividend relates.

I would like to now turn the call back over to Bill Alvarez, who will discuss our earnings release for the fourth quarter and full-year in more depth.

Bill Alvarez

Thank you. I will begin with a discussion of our December 31, 2008 balance sheet. We ended the year with total assets of $354.3 million. Total debt outstanding was $162.6 million and total stockholder’s equity was $180.1 million. Our debt to equity ratio was 0.9:1 and our coverage ratio was 211%. At year-end, our total investment portfolio at fair value totaled $322.4 million, down approximately 2.6% from $331.1 million at September 30 and down approximately 16% from $384.7 million at the end of 2007.

The primary reasons for the decrease in our portfolio during 2008 related to an increase in payoffs recorded in 2008 in the amount of $27.7 million, and an increase of $36.4 million in unrealized depreciation for the year. The weighted average yield on our interest bearing portfolio in 2008 was 12.1% as compared to 12.4% in 2007. Our weighted average balance of our interest-bearing portfolio for the year ended December 31, 2008 was $336.8 million, up 13% from $298.5 million during 2007.

The weighted average balance increased in 2008 as a result of the following

first, the majority of the net originations in 2007, which was $127.5 million that occurred in the third and fourth quarters of 2007; and second, the majority of the unrealized depreciation recorded in 2008, $40 million was recorded in the third and fourth quarters of 2008.

Our net asset value per share at December 31, 2008 was $8.65 as compared to $10.73 at December 31, 2007. The NAV decreased $2.08 per share during the year, of which $1.93 per share related to changes in unrealized depreciation on our investments and $0.11 per share was due to changes in unrealized depreciation on our interest rate swap agreements.

Now let us move on to a discussion of our earnings for the fourth quarter and full-year.

Interest and dividend income for the quarter ended December 31, 2008 was $9.6 million as compared to $9.4 million in the third quarter of 2008. Fees and other income for the fourth quarter of 2008 was $593,000 as compared to $790,000 in the third quarter. That brings total investment income for 2008 to $42.3 million, which was an increase over the $39 million of investment income for 2007, an increase of approximately 9%.

Investment income increased in 2008 primary as a result of an increase of approximately 13% in the weighted average balance of our interest-bearing portfolio for the 2008 year, as I previously explained, offset by a slight decrease in our portfolio yield. Included in investment income are fees and other income, which totaled $2.2 million, up from $1.8 million in 2007. The increase in 2008 was primarily due to an increase in prepayment, structuring and amendment fees. Fees and other income will fluctuate from quarter to quarter, depending upon the level of investment activity and changes in our portfolio. Loans based on non-accrual during the quarter reduced our fourth-quarter interest income by approximately $537,000.

Operating expenses were $4.2 million in the fourth quarter of 2008, as compared to $3.7 million in the third quarter. Interest expense was $2.4 million in the fourth quarter of 2008 as compared to $1.8 million in the third quarter. Our weighted average borrowings were $151.1 million for the fourth quarter of 2008 as compared to $122.4 million during the third quarter. Compensation expense was $533,000 in the fourth quarter of 2008 as compared to $835,000 in the third quarter.

Professional fees and general and administrative expenses were approximately $1.3 million in the fourth quarter of 2008 as compared to $1 million in the third quarter. That brings our total operating expenses for 2008 to $16.6 million as compared to $16.2 million in 2007. The increase for 2008 related to higher interest expense of $737,000 as a result of an increase in our weighted average borrowings, which were $141.5 million for 2008 as compared to $106 million for 2007, combined with an increase in interest rates during the third and fourth quarters of 2008, and higher professional and general and administrative expenses of $1.1 million resulting from higher costs for benefits, proxy solicitation fees, printing costs, compliance costs, compliance costs in connection with the adoption of Statement of Financial Accounting Standards number 157, fair value measurements, which we adopted on January 1, 2008 and write-off of legal and accounting costs related to the 2008 filing of a shelf registration statement, for which we did not sell any securities.

These increases were offset by lower compensation expense in the amount of $1.4 million, principally from the elimination of bonus accruals during the third and fourth quarters of 2008 as our bonus pool decreased from $2.8 million in $2007 to $658,000 in 2008. Our net investment income was $6 million or $0.29 per basic and diluted share for the fourth quarter of 2008, as compared to $6.6 million or $0.32 per basic and diluted share for the third quarter.

For the full year of 2008, our net investment income was $25.7 million or $1.24 per basic and diluted share as compared to $22.7 million or $1.22 per basic and $1.21 per diluted share for 2007.

During the fourth quarter of 2008, we recorded net unrealized depreciation in our investments of $19.6 million, which brings our total net unrealized depreciation to $40 million for the year. In a few moments, Tim Hassler, our Chief Investment Officer will discuss the components of the unrealized depreciation recorded during 2008.

In addition, we also recorded $2.4 million of unrealized depreciation under our interest rate swap agreements during the fourth quarter of 2008, bringing our total unrealized depreciation to $2.3 million for the year. The unrealized depreciation in our interest rate swaps resulted from the decreasing interest rates during the quarter. If interest rates continue to decline, we will experience further unrealized depreciation on our swaps, as we had during the past two quarters. During the fourth quarter of 2008, we realized $905,000 of capital losses on our investments, basically due to the sale of two syndicated loans. Our net realized loss for 2008 totaled $883,000.

Finally, our net loss was $16.9 million or $0.81 per basic and diluted share for the fourth quarter of 2008 as compared to $316,000 or $0.02 per basic and diluted share for the third quarter. For the full year of 2008, our net loss was $17.5 million or $0.84 per basic and diluted share as compared to net income of $18.4 million in 2007 or $0.99 per basic and $0.98 per diluted share.

In February of 2008, the IRS granted us permission to change our (inaudible) tax year from July 31 to December 31, effective on December 31, 2007. Accordingly, we have filed a five-month short period of return. During 2008, we had distributable income of $24.7 million or $1.19 per share and paid distributions of $25.8 million or $1.24 per share. The difference of $1.1 million or $0.05 per share was reported as a return of capital.

Our Form 10-K will be filed today and you will be able to review our operating results in greater detail, including the uncertainty surrounding the renewal of our liquidity facility and our independent registered public accounting firm’s opinion, which is expected to include an explanatory paragraph that expresses doubt about our ability to continue as a going concern.

Now, I will turn things over to Tim Hassler.

Tim Hassler

Given the current economic environment, I would like to provide some additional color on our portfolio, performance metrics and trends. In the fourth quarter, as Bill mentioned, we have recorded unrealized depreciation on the portfolio of approximately $19.6 million, which can be broken down into four categories syndicated loans, credit-related, FAS 157-related, and equity related.

With the considerable dislocation of the syndicated loan market in the fourth quarter and a tended decrease in price quotes, we experienced a total of $2.8 million or 14% of our aggregate unrealized depreciation in this asset class. Since year-end, syndicated loan market appeared to have stabilized somewhat.

Second category of unrealized depreciation is credit-related marks on our loan portfolio, excluding equity securities. While this category represented $11.2 million of depreciation or 57% of the total, it was limited to write-downs in three of our 35 portfolio companies at year-end. These three companies continue to represent the bulk of our 4 and 5 rated assets. The vast majority of our portfolio is generally performing according to expectations.

The third category is FAS 157 adjustments on the loan portfolio, which represented $1.7 million or 9% of the total marks for the fourth quarter. As a result of increased spread in the referenced securities that we use in our bond yield analysis for the fourth quarter, the FAS 157 marks were broad-based across the portfolio, including many loans in our 1 and 2 rated categories.

And the last category of unrealized depreciation is equity related. This category includes both a company performance-related component as well as a market-related component, reflecting generally lower valuation multiples across most industries. Equity-related net depreciation in the fourth quarter was $3.9 million or 20% of the total, with over half of this depreciation related to one underperforming company.

For the full year, we had total unrealized depreciation on our investments of $40 million, which included $5.6 million of marks on our syndicated loan portfolio, $23.8 million of credit-related impairments, $6.9 million of FAS 157 adjustments and $3.6 million of equity write-downs. At year-end, we had loans from three of our portfolio companies on non-accrual status, which represented 2.8% of the total portfolio at fair value and 7.9% at cost. This compares to 0% at fair value and 2.5% at cost at the end of the third quarter and 0% at fair value and cost at year-end 2007.

For the three investments on non-accrual in the fourth quarter, two were already on non-accrual at the prior quarter-end and the last was put on non-accrual on November 1. For the first two non-accruals, we had not recorded any interest in the fourth quarter and for the third non-accrual, we have recorded total interest of $144,000 in the fourth quarter.

Our troubled assets at year-end, which are those investments rated either 4 or 5 on our ratings scale, represented approximately 6.5% of the total portfolio versus 6.6% in the third quarter and 3.9% at year-end 2007. Our troubled assets at year-end included five companies, which compares to four in the prior quarter and one at year-end 2007. Through the exercise of rights and remedies available to us in our loan agreements, upon our portfolio company default, we continue to aggressively manage our underperforming assets to maximize recoverable proceeds for shareholders.

On balance, we are pleased with the level of support and guidance that our equity sponsors are providing to our portfolio companies, both operationally and financially to get through this difficult economic period.

And now, I am going to turn it back over to Rich.

Rich Buckanavage

Operator, that concludes our prepared remarks. Would you please open the lines for any questions at this time?

Question-and-Answer Session

Operator

(Operator instructions) Our first question is from the line of John Hecht from JMP Securities. Please go ahead, sir.

John Hecht – JMP Securities

Good morning, guys. Thanks for taking my question. Just really wanted an update of what you can tell us in terms of what type of terms you are looking at, where are you guys in the negotiation and what are the sticking points, where does there appear to be flexibility?

Rich Buckanavage

Yes, John, as you can tell, the way we have characterized the term sheet, I think it is a little premature to discuss the terms and conditions. It certainly is fluid, and within a securitization, there are many restrictions that are housed in the securitization; tweaking one restriction has an impact on all and that is what has led to some of the elongated period of time here. You know, we are looking, for obviously certain things to be relaxed and obviously, our lenders are trying to tighten some of the restrictions and as we said, I think on the earlier, the most previous quarter call, our implied rating is AA+, and the intent of the lenders to get that to AAA. So, we are working with them, the dialogue is still ongoing. We talk to them daily, if not multiple times a day, in trying to craft a solution. But I think it is a little premature to discuss the terms and give the marketplace any sort of guidance on those terms. We are certain we will do that as soon as we think it is prudent to do so.

John Hecht – JMP Securities

Okay. And just in terms of kind of a natural de-levering. What was the pay-down rate in Q4? What do you guys expect in the near term?

Bill Alvarez

Q4, I think the only unscheduled repayment in Q4 was actually our voluntary sale of two syndicated loans, which totaled $2.8 million in the aggregate. The remainder was all scheduled amortization. Going forward, John, it is very difficult to anticipate unscheduled repayments. I will make the observation that given the M&A market, or lack thereof, we certainly wouldn't expect to see a whole lot of portfolio repayments through sales, and because of where spreads are today and where leveraged points are today, I think it is reasonable to assume that you are not going to see much in the way of just straight refinance as well. So I guess, in total I would say our expectation is not for that much in the way of unscheduled repayments, but that being said, I think we didn’t expect nearly the amount of repayments that we saw in 2008. So we could be wrong, but it is pretty difficult to give any kind of guidance on what that number might be.

John Hecht – JMP Securities

Okay, then, on that front, what is the scheduled amortization, what you get on a quarterly basis on average?

Bill Alvarez

It is between $3 million and $3.5 million. That will pick up a little bit as the portfolio amortization schedules begin to ramp up on some deals, where there was back-ended amortization. I think as we outlined in our press release, we did receive one unscheduled repayment subsequent to quarter and, which was a company called Keltner, where we received approximately $4 million of repayment. Perfect case, we didn’t expect to lose that company. That company was sold and we were fully repaid. So, there are going to be repayments, John, I don't think it is going to be zero, but it is hard to put a number or even a range of potential outcomes there.

John Hecht – JMP Securities

Okay. Thank you guys very much.

Operator

Our next question is from the line of Greg Mason with Stifel Nicolaus. Please go ahead, sir.

Greg Mason – Stifel Nicolaus

Hi, good morning. Can you talk about the two investments of syndicated loans you sold? Why were you motivated to sell them and what rating bucket where they in last quarter?

Rich Buckanavage

Greg, I think the motivation to sell them was that, as you know, those are not core to our strategy. They were investments that were made at a time when we had excess liquidity and we were looking to deploy some capital that we had sitting on our balance sheet. In retrospect, it wasn’t the best position to make, given where that market has gone. We did exit those I think primarily for liquidity purposes and those two assets that we sold were in the 2 rated bucket.

Greg Mason – Stifel Nicolaus

Okay, could you talk about, your current headcount, has that changed, and where do you look at your operations going forward in this type of environment?

Rich Buckanavage

We have not made any further headcount reductions since the ones made in the early fourth quarter, but that being said, given the outcome of the line of credit renewal, that could clearly dictate that we make further reductions to our cost structure and we would do so proactively as much as we did last quarter, once we became aware that we needed to do that, we will go and look at our headcount in light of a non-renewal, which obviously would be a steady decline in portfolio, which would not warrant the same level of staff. Clearly, that is not the path we are going down right now, the discussions have been more towards an ongoing functional line of credit, which would imply that the portfolio would maybe shrink slightly, but not more aggressively through asset sales or other activities that you might actually expect in a wind-down.

Greg Mason – Stifel Nicolaus

And you have any unencumbered assets not pushed a facility or is everything pledged?

Rich Buckanavage

Well, we have the equity investments, which are never part of the securitization, because we don't get any advance there and we have a small sub-debt (inaudible) that is unencumbered.

Greg Mason – Stifel Nicolaus

Okay, and you know, I know you can’t discuss the details of the term sheet, but as it stands today, is it something that is acceptable to you guys or preferable versus just going into the non-renewal of the facility and winding it down?

Rich Buckanavage

I think it is safe to say that it is a better outcome than a wind-down. We are not at the position yet where we feel it is something we can immediately sign up to. There are some things that we need to get some flexibility on. We think the portfolio justifies the flexibility, as Tim outlined, with some further color on the portfolio. The portfolio does continue to perform well, given the backdrop of this economic climate. But it is superior to a wind down, but not quite where we are, where we want to sign up, and to extend that, we can't come to a middle ground, then clearly, the best option for shareholders might just be to take the wind down and reduce the portfolio over the remaining two years.

Greg Mason – Stifel Nicolaus

Okay, and then you mentioned filing for an SPIC license. Can you talk about the SPA’s, your perceived willingness of the SPA to extend SPIC licenses today?

Tim Hassler

Yes. First of all, as far as the application goes, we are going to need to update our – large percentages away through the application process. We are going to need update for fourth-quarter, so that will take us probably a few weeks to go to that process, but there is some, we understand some guidance coming out, not exactly sure when, but regarding BDCs and the SPA licensing process, some guidance, just specifically for BDCs and until we see that, it is hard to comment on the willingness or the ability of the SPA to grant additional licenses.

Greg Mason – Stifel Nicolaus

Can you talk? I know you are postponing the decision on the dividends until you get more clarity. Can you talk about your how you philosophically view paying the dividend and stock versus maybe just continuing to wait on dividends? I believe, technically, you wouldn't have to pay any dividends out till the end of the year and potentially if you want to pay excise tax, spill it over even further. How do you view that option in light of stock dividends and where your stock is today?

Rich Buckanavage

Just one point of correction we actually have until September 15 of 2010 to declare those dividends on the current tax year. We are going to weigh the impact of electing the 9010 mechanism versus just deferring those dividends and we have gone through the analysis to see what that looks like and it is something that obviously has profound impact, the stock price. So it is not something that we think is in the best interest of shareholders at this time, but again, certain factors might dictate that all options get put on the table. One can argue that the shareholders, while it creates delusion, if you hold the stock, you get the benefit of that delusion because you are receiving the same shares.

But again, we think at the end of the day, we are trying to look at the business at the end of the tunnel and at that point, having added somewhere between 15 million shares and 16 million shares to the current flow is probably not in the best interest of shareholders. So it is not an option that we think is advisable at the time. I think our preferred would probably be to postpone dividends and then pay those at a time at a later date. At some point, we do expect to have distributable income in the first quarter and in 2009. So there is going to be a distribution that needs to occur, whether we postpone that in the short term to create some additional liquidity, or address concerns from our lenders and they will pay those in 2010 or do it as an ongoing 10% cash. Again, some of that is going to flush out in the negotiations with our two lenders.

Greg Mason – Stifel Nicolaus

All right. Thank you for that and just personally, we would applaud the delay in dividends and paying in arrears, makes a lot of sense. So, first as a stock dividend. Thank you guys, appreciate it.

Operator

Our next question is from the line of Derek Bobby [ph]. Please go ahead, sir.

Derek Bobby

Good morning, gentlemen. I have just one follow-up question on the renewal of the liquidity facility. Have you considered exploring the new facility with anyone else?

Rich Buckanavage

About 50 other lenders, and unfortunately, there are just no institutions out there that want to lend to a financial company today. There might be a participant or two at very de-minimus levels in what would termed a more traditional, on-balance sheet revolver. Unfortunately, ours is a securitization. Certain smaller local or regional lenders do not have the capability to participate in the securitization. So we are not able to take advantage of maybe some of that capital. But we have $225 million line with two bags, one of which holds $175 million. There just isn't an institution out there that wants to hold $175 million at a financial services company today.

Derek Bobby

Understood. Thanks a bunch.

Operator

(Operator instructions) Our next question is from the line of David Chiaverini from BMO Capital Markets. Please go ahead, sir.

David Chiaverini – BMO Capital Markets

Hey guys. A couple of questions for you

the first is, given your strategy to deleverage and your leverage at 0.9:1, why did you guys go about originating that $22.5 million investment last quarter?

Rich Buckanavage

Well, if you remember, Dave, that was originated in the summer and closed in early October. Our liquidity situation was significantly different, than it was mid fourth-quarter and certainly at the end of fourth-quarter. You have to remember, we don't know exactly what the book equity is going to be, which is obviously a function of asset values until late in the fourth quarter if not right after the fourth quarter completes. So, we don’t have that perfect of a crystal ball to see what is going to happen. The fourth quarter, obviously, from an economic perspective, it caught everyone by surprise. I think it was far weaker than anyone anticipated. We did plan for further degradation in the portfolio. We did not plan for the type of degradation of the portfolio that we experienced. In retrospect, maybe we would've sold off more, maybe we will subsequent to this phone call. As you can see from the updated numbers on liquidity, we are now at 0.83 and we do have significant amount of cash on our balance sheet that we could use to pay down the line to further improve our liquidity. So the 0.9 was at year end, we are at 0.83 today, not including the cash on our balance sheet, we would be below 0.81 if we were to use that cash to further reduce outstandings.

David Chiaverini – BMO Capital Markets

Okay. That makes a lot of sense. And then with the new nonperforming assets, can you talk about the industry and what happened with that investment?

Tim Hassler

Yes, Dave, we have not historically given specific information on portfolio companies in the 4 and 5 rated categories, but we did give a little more, wanted this quarter to provide a little more color on the rating categories and sort of the trends in the portfolio, but historically, we have not provided specific information with regard to the assets in those ratings.

Rich Buckanavage

So I say, Dave, it is consumer discretionary, and those related to construction.

David Chiaverini – BMO Capital Markets

Okay.

Rich Buckanavage

As in those are the weakest parts of our portfolio, not generally speaking to the non-accrual but those sectors, we are seeing the greatest amount of weakness in.

David Chiaverini – BMO Capital Markets

Okay, that is all I had, thanks.

Operator

Our next question is from the line of Vernon Plack, BB&T Capital Markets. Please go ahead, sir.

Vernon Plack – BB&T Capital Markets

Thanks very much. Rich, in the event of a wind down, what are we looking at in terms of an amortization schedule, is it sort of straight line over 24 months?

Rich Buckanavage

No, actually Vernon, there is no scheduled amortization. It is a bullet at the end of two years. So whatever is outstanding at the end of two years needs to be repaid. Obviously, we wouldn't wait till the end of two years, we would – we have obviously scheduled amortization in the portfolio and then we would look at more aggressive ways to accelerate the repayment of that facility by the end of the two-year period.

Vernon Plack – BB&T Capital Markets

Right. So if there is no renewal, you basically owe around 150, about 150 will be due in April of 2011, assuming nothing else has changed, correct?

Rich Buckanavage

That is correct.

Vernon Plack – BB&T Capital Markets

Okay, and the easiest thing obviously to – I would think the easiest thing to sell would be your syndicated loans. What is the amount that would be in that bucket right now, is it about $25 million?

Rich Buckanavage

I think it is a little less than that, Vernon, Bill is just looking through his information.

Bill Alvarez

Syndicated bucket is about $20 million.

Vernon Plack – BB&T Capital Markets

About $20 million.

Bill Alvarez

At fair value.

Vernon Plack – BB&T Capital Markets

At fair value. Okay great, thanks very much.

Operator

Our next question is a follow-up question from the line of Greg Mason from Stifel Nicolaus. Please go ahead, sir.

Greg Mason – Stifel Nicolaus

Could you talk about just some general trends that you are seeing in the operating performance of your portfolio companies, EBITDA values, are they stabilizing yet, continuing to decline, what are you seeing in the macro trends in your portfolio?

Rich Buckanavage

I think as we highlighted, we actually had more upgrades than downgrades this quarter. So there continues to be strong performance in certain sectors of our portfolio. So it is tough to say if the overall, if I were to take all of the EBITDA, then my guess is it would wind up somewhere flat, because we had certain companies that upgraded to 1 or from a 3 to a 2 versus a downward rating and as I just got done saying to the previous question, the industry, the sectors that you would expect to be experiencing weakness in this environment, consumer discretionary, construction, capital equipment, those sectors are the most problematic for us. The ones that don't necessarily jump off the page is being that cyclical, some of those companies continue to perform very well. Our healthcare portfolio continues to perform very well, and so it is not we are not seeing a broad-based overall reduction and some are more significant than others, there are actually companies that had a better 2008 than they had 2007. There are certain companies in our portfolio that are having a better first quarter in 2009 that they had in the first quarter of 2008. I know it is hard to believe in some cases that companies could be doing that well, but that is the case.

Greg Mason – Stifel Nicolaus

And can you talk on your new investment, the new yield and what kind of points you are able to get upfront on that investment?

Bill Alvarez

Yes, the yields were – as I mentioned, senior secured debt where it used to be in the 3.50 to 4 range, we are nearly double that. Sub-debt hasn’t trended up that significantly, but call it 200 to 300 basis points higher than our average sub-debt portfolio. And then, also, given those increased returns, we also lend at substantially lower levels than we were, I think almost 30% was the senior and total leverage point relative to that same financing in early 2008 or 2007.

Greg Mason – Stifel Nicolaus

And were you also able to get higher fees upfront on that transaction?

Rich Buckanavage

We were.

Greg Mason – Stifel Nicolaus

Thank you very much.

Rich Buckanavage

About 50 basis points, Greg.

Greg Mason – Stifel Nicolaus

Okay, thank you.

Operator

Since there are no further questions at this time, you may resume with your presentation or closing remarks.

Rich Buckanavage

Thank you everyone for your interest in our firm. We certainly appreciate your time this morning and we look forward to updating you, I think primarily on our line of credit extension and certainly updating you on our first quarter results in early May. Thank you.

Operator

Thank you ladies and gentlemen. This does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a great day, everyone.

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