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Medley Capital Corporation (NYSE:MCC)

F2Q13 Earnings Call

May 03, 2013 10:00 am ET

Executives

Brook Taube – Chairman and Chief Executive Officer

Richard T. Allorto, Jr. – Chief Compliance Officer, Secretary and Chief Financial Officer

Analysts

Troy L. Ward – Keefe, Bruyette & Woods, Inc.

Jonathan Bock – Wells Fargo Securities

Casey Alexander – Gilford Securities

John Hecht – Stephens Inc.

J.T. Rogers – Janney Capital Markets

Kevin Chen – JMP Securities LLC

Mickey Schleien – Ladenburg Thalmann & Company

Casey Alexander – Gilford Securities

Operator

Good morning, ladies and gentlemen and welcome to Medley Capital Corporation, Second Quarter Fiscal 2013 Financial Results Conference Call. Today’s call is being recorded for replay purposes. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference.

(Operator instructions) This conference call may contain statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements. Actual outcomes and results could differ materially from those forecast, due to the impact of many factors. The Company does not undertake to update its forward-looking statements, unless required by law. The second quarter 2013 investor presentation is available in the investor relations section of the company’s website at www.medleycapitalcorp.com.

I will now like to turn the call over to the company’s Chief Executive Officer, Mr. Brook Taube. Please proceed, Mr. Taube.

Brook Taube

Thank you very much and welcome everyone to Medley Capital Corporation’s quarterly earnings conference call. We appreciate you taking the time to join us this morning. And as a quick agenda for the call in our normal manner, we are going to discuss the following; first, the origination for the quarter, including the activity for the March quarter and an update on activity and targets for the current June quarter. We’ll also discuss our liquidity and capital availability for new investments for the balance 2013; second, we’ll discuss the recently declared $0.36 dividend and our outlook for the dividend in the next several quarters; third, an update on the issuance of the 10 year notes, and the expansion of the revolving and senior term facilities; and finally, an update on our SBIC license and the SBIC activity.

First, on originations on the quarter ended March, we originated $123 million in eight new investments and seven existing investments. We received amortization and repayments on $53 million resulting in a net portfolio growth of $70 million.

And as we communicated in prior calls, we had a concern I suppose that we might experience lower origination volume in this first calendar quarter of 2013, compared to the prior quarter in December. We are pleased that the first quarter origination volume was strong and the pipeline as we sit here today is strong as well. With the completion of our equity issuance in early April, the issuance of our baby bonds and the further expansion of the credit facility, we’re well positioned in terms of capital availability.

With respect to pricing and structure we have seen relatively stable yields in the non-sponsored deal flow. And as we’ve communicated now on several calls, we’re seeing more aggressive structures and pricing tightening in sponsored transactions. However, on balance we continue to find attractive risk-adjusted returns in the market. Our deal flow remains strong and we expect to continue to deploy capital in a steady and consistent manner.

Turning now to the dividend, we’re pleased to report that the board has declared a dividend of $0.36 per share. For the March quarter, the dividend will be payable on June 14 to shareholders of record on May 27.

As we’ve stated previously, we expect net investment income will meet or exceed the current dividend, as we look forward in this quarter and further into 2013, assuming we are able to deploy capital as planned.

Turning now, to the senior notes and the credit facility, in March we issued 63.5 million of 10 year notes priced at 6.125%. This pricing was 100 basis points tighter than the seven year notes we issued last March. We continued to see our overall cost of credit declining as we ladder and diversify our sources of financing. The proceeds of the most recent issue were used to pay down the revolver as well as fund new investments.

In late March we amended our credit facility by increasing the accordion feature to $400 million from $300 million. We have subsequently closed $30 million and $15 million of additional commitments from JPMorgan and AloStar Bank respectively. The combined $345 million credit facility is comprised of commitments totaling $230 million on the revolver and a $115 million on the senior term facility.

Turning now to the SBIC, in March we received approval for our SBIC license. This past quarter we contributed $50 million in regulatory capital to the subsidiary which will allow us to borrow as much as $100 million from the SBA. We may in the future increase the regulatory capital in the subsidiary to $75 million which would allow us to borrow an incremental $50 million from the SBA for a total usage of $150 million from the SBA.

We expect to begin utilizing the SBA leverage, once we have fully invested the regulatory capital. Over the past few years, we’ve successfully implemented the strategy of diversifying our liabilities by funding source and maturity. We now have credit availability of as much as $598.5 million, when you combine the revolver, the term-loan, the baby bonds and the SBIC facility.

I would now like to turn the call over to Rick Allorto, our Chief Financial Officer to review the second quarter financial results.

Richard T. Allorto, Jr.

Thank you, Brook. For the three months ended March 31, the company's net investment income and net income were $10.4 billion and $11.5 million or $0.36 per share and $0.40 per share respectively. The net asset value per share was $12.73 at March 31, compared to $12.69 at December 31.

For the quarter, total investment income was $20.2 million and was comprised of $16.7 million of interest income and $3.5 million of fee income.

Total operating expenses were $9.8 million and consisted of $2.5 million in base management fee, $2.6 million in incentive fees, $2.9 million in interest and financing expenses and $1.8 million in professional fees, administrator expenses and general administrative expenses. For the quarter, the company reported net unrealized appreciation of $1million and net realized gains from investments of $152,000.

During the March quarter end, the company invested $123 million in 8 new investments and 7 existing investments and as of March 31, the investment portfolio consisted of 64% in senior secured first lien investments, 35% in senior secured second lien investments and less than 1% in equities and warrants.

As of March 31, the company had investments in 51 portfolio companies across 22 industries with an average portfolio of company investment size of $12 million. As of March 31, the credit quality of the existing portfolio remained stable and no loans were on non-approval status. The weighted average yield to maturity on the portfolio at March 31 was 13.9% and the weighted average loan-to-value was 55%.

That concludes my financial review. I'll now turn the call back over to Brook.

Brook Taube

Thanks, Rick. Overall we’re pleased with the performance in the beginning of 2013. The team remains focused on originating a portfolio of high-quality loans at attractive yields that will continue to generate a stable and consistent dividend for the shareholders in the quarters ahead.

I'd like to thank all the shareholders for their continued support, and we can now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Troy Ward, representing KBW. Please proceed.

Troy L. Ward – Keefe, Bruyette & Woods, Inc.

Great, thank you and good morning gentleman.

Brook Taube

Good morning

Troy L. Ward – Keefe, Bruyette & Woods, Inc.

Hey, Brook, can you just speak kind of on the market what you’re seeing specifically related to non-sponsored and sponsored, and then specifically on the first quarter closings, what percentage of those were non-sponsored transaction, as well as the backlog that we saw on the slide deck?

Brook Taube

Sure, let me start in reverse. So it was about 50% direct and then 50% of participation what I would call sponsor. I can get more specific but it was pretty balanced. It's interesting on the market, we looked at – I think it was 205 investment opportunities in the quarter. It was evenly balanced between first and second lien. We did close – the prior quarter was as you may recall largely first lien versus second lien, so the quarter-over-quarter pricing for our origination was about flat. I think it was minus maybe 10 to 12 basis points on the cover yield. So flat would be the description of what we've seen.

However, if you look at the pricing of that whole pipeline of 205 investment opportunities we clearly saw continued downward pressure although Q1 was not as significantly down as we saw in Q4 of last calendar year.

In terms of pricing, we get enough data points with our pipeline. I think you could say the direct yields are approximately 250 basis points wider than the – what I would call the sponsor flow. I don't want to be get too scientific here, but it's significant and I think what we're seeing now, which is what we had anticipated and has been our focus obviously for years at Medley is that the direct channel provides extra return, it's harder work for sure but in this type of market, you’re going to see continued differentiation if you have the capacity to do direct and direct loans. Does that answer the question, Troy?

Troy L. Ward – Keefe, Bruyette & Woods, Inc.

Yes it does. Thank you. And then – on one of the – I guess it would be considered an add-on. On the Calloway transaction it looks like a percent added on the Willow Laboratories in Boston. Can you speak to that transaction and whether or not that's kind of going down the path of a roll up in the industry and also that's how the Willow in the 10-Q is actually marked a low cost. So could you just talk about what's going on with the Calloway in particular?

Brook Taube

Sure, there was an additional fund rising of about – just over $5 million. It was funded disproportionally by the equity. We did participate, but the equity came in disproportionately on that incremental funding. Willow was out – or sort of merged into the platform. And it is a low-cost provider and I think what you all see is, it’s going to allow the completely to transfer some of that lower margin on profitable accounts. And the estimate is up to $6 million of potential savings as a result of the integration.

We like everyone are always conscious in modeling all of the synergies that might occur, but it's clearly going to provide cost synergies. I think the background of the story however is idiosyncratic in this case and it remains under pressure on balance reimbursement rate cuts among the commercial insurance providers and we’ve seen some off in this case pain care segment has had slightly below plan. So it's on the watch list, we are watching it carefully, it's actually on balance, appears to be doing fine, but like all of these takes a lot of careful attention. So does that give you enough color on it, Troy?

Troy L. Ward – Keefe, Bruyette & Woods, Inc.

It does and then, one last question of the company and I’ll get back in the queue. But in Geneva Wood Fuels we saw that looks like that's under pressure as well can you give us and update there?

Brook Taube

Yes sure. The story of Geneva is, we had been in the market on financing, what we told you guys last call was that we had looked to refinance the company, but its been put up for sale, so all our evaluations are as FAS 157 compliant. The valuation on the asset is clearly below part at this point. We will have more information in the coming few months about where the realization occurs, but that asset is for sale at in a process, and I expect we'll know the realized gain or loss on the sale, I would say the next several months

Troy L. Ward – Keefe, Bruyette & Woods, Inc.

Great thanks.

Operator

Your next question comes from the line of Jonathan Bock representing Wells Fargo Securities. Please proceed.

Jonathan Bock – Wells Fargo Securities

Good morning and thank you for taking my questions and congratulations on the SBIC. That's great news of course. Now with that meaningfully SBIC capacity, I’m just curious as to how you really want to grow the balance sheet, because on one hand you could place more second lien, mezzanine or let’s called higher yielding type of securities in that facility and boost your operating income meaningfully. But of course on the other hand you could focus more on senior secured debt that would still likely allow you to maintain your dividend yield, maybe not grow it as much, but meaningfully improve the perceived risk profile if I could call it that of the book of the asset. So, Brook, how do you balance between those two in light of the opportunities you are seeing and the funding sources that you now have to deploy capital?

Brook Taube

That's a good question. Thanks Jonathan. I don't think you will see Medley change its rates based upon financing. We have a measured approach to market. We’ve kept it the same for now 11 years as a team. In appearance of the market as we all can see it’s getting tighter, but the direct channel is still presenting attractive opportunities. I don't have a specific comment about the future of that subsidiary, but I think the general comment is, I wouldn't expect significant deviations from what is the core strategy here. So, they are very valid points, we’re looking at it carefully and will keep you posted as the next several quarters unfold.

Jonathan Bock – Wells Fargo Securities

Okay. That's great. Thank you for the color. And then as we look at a few portfolio investments, obviously Troy hit on a few. Modern Video in terms of VideoFilm, just a question there in light of the recent mark and I understand things move up and down. Is the only reason, I asked the question, it’s because it was a relatively recent origination in September 12. So, may be perhaps what the little color, was it operating or more mark-to-market, as it relates to the slight down-drop this quarter.

Brook Taube

It was both.

Jonathan Bock – Wells Fargo Securities

Okay.

Brook Taube

I think we saw a slowdown at the end of 2012. Part of that was the fact that the customers for the company were not active during the last part of December. We think it’s partly Christmas and New Year's timing. But it wasn't anything that I would call dramatic whether it is softness on the top line cash flow as a result. We're watching it carefully and the company is incidentally unrelated to this quarterly outcome. It’s focused on cost reductions. So we have reason to believe that we’ll see stabilization and at current year, we’re starting to, but I think nothing dramatic, but softness in the last quarter.

Jonathan Bock – Wells Fargo Securities

Sure. And then maybe another more broad portfolio question, Brook, with – was the meaningful exposure to what I referred to is kind of general commodities in the form of Harrison Gypsum or U.S. Well. How are you gauging the commodity risk in the portfolio in light of the volatility that we’ve seen just across the commodity space? And maybe just to explain kind of the risk mitigation that you have in both of those that assets and how you look at commodity risks, just because they are a decent size of the portfolio in our opinion?

Brook Taube

Okay. Well we don't share your opinion on that. But I think we look at the direct exposure as modest if and not significant. The exposure related to those assets it would be a derivative exposure. But we do balance it. I think if you look at the entire portfolio of construction, it wouldn't occur to us, but there is a – even an outsized weighting or a concern we have. But we have seen balance credit performance across the portfolio including those assets. The structure has remained sound. And at this point we’re looking at the overall market. This is the big part of the economy. It’s capital intensive. And there is opportunities if you're careful and selective in how do deploy capital.

Jonathan Bock – Wells Fargo Securities

All right. Thank you so much guys. I appreciate it.

Operator

Your next question comes from the line of Casey Alexander representing Gilford Securities.

Casey Alexander – Gilford Securities

Hi, good morning.

Brook Taube

Hi, Casey.

Casey Alexander – Gilford Securities

One of the deals that you closed in this quarter, Flexera Software, it has coupon – a 5% coupon at least in the presentation deck. That makes it look sort of – kind of like an outlier in relation to the traditional deals that you do. What was different about that? Is there an offset to the low rate with some equity that was taken or how did that one come about?

Brook Taube

Yeah, that was bought and sold in the quarter, Casey. It's not really trading. We were in the credit and it refinance and we were very comfortable and we just thought it was an opportunity to support the credit, participate, it traded well and it was never intended to be a long-term position. So it’s not a trading activity, it’s supporting an existing borrower and it was a good outcome.

Casey Alexander – Gilford Securities

And so it's already gone.

Brook Taube

Correct.

Casey Alexander – Gilford Securities

Okay. Yes, the commodity question, so I think that's it. I think I am good. Thank you.

Brook Taube

Thanks Casey.

Operator

Your next question comes from the line of John Hecht representing Stephens. Please proceed.

John Hecht – Stephens Inc.

Good morning guys. Thanks for taking my questions. First one is that, Brook, you talked about the competitive markets. You guys have had a pretty consistent pipeline, pretty consistent capital deployment through the last several quarters. I was wondering at a higher level, what do you think the drivers of the investment opportunities are going to be in calendar years 2013? I mean as you guys survey your direct and sponsored pipeline in relationships due to think you're going to see an increase in middle-market buyouts, is this expansion financing, is it refinancing, where is it going to come from and how is it going to be in the context of recent years?

Brook Taube

Wow, predict the future, tricky. I think – we will try to give you our general flavor. It’s probably more driven by data that we’re seeing in our pipeline. So without going too far and getting to – giving you all too many on share arm chair (inaudible) here from Medley. If you look at the refinancing wave that still remains in the middle market, if you put a pin in the average amount of volume that might be in our potential markets, it’s sort of $80 billion to $90 billion per year from 2013 through 2016. This is a refinancing that is not been fixed by Bernanke and the large lever bond market.

Our view is that presents an opportunity. So if any thing – our anticipation of forward deal flow we would expect and it wouldn't surprise us if a meaningful contributor was just normal, run of the mill refinancing activity. So we're looking at that. I think as a direct lender you may in some capacity have more access to it because the private equity guys are not necessarily going to participate on the buy side of all of this stuff.

Second comment on acquisition, this is again by data. We have a lot of institutional relationships here over a number of years and it appears to us that the middle-market private equity players, the ability to raise additional capital meaning the number of funds and the amount of capital that’s going to form in the lower and middle-market private equity space, there is a headwind to that. And I think it falls into the bigger getting bigger backdrop. So it wouldn't surprise us as I suppose, if it look like there were fewer private equity – small private equity funds and smaller dollars. That’s on the radar. It’s tough to predict, but it’s on the radar.

In terms of growth and acquisition, I think our view and we said it now for probably six to eight quarters is that, we are modestly optimistic about the economy. And we see it in our revolvers. We see top line and EBITDA growth on average ahead of GDP at this point. If that holds or even turns a bit you’re going to see growth, you’re going to see acquisition, financing, plant expansion et cetera. So the three buckets are refinancing, acquisition and then growth, that they’ve always been the same three from our perspective. If there is a shift that’s probably more refi, smaller private equity sponsor and then, yeah, we hope for a meaningful growth story here, but I think that’s we all kind of do. And we can keep you posted on how our views here change, but does that answer the question.

John Hecht – Stephens Inc.

Yeah, I think that’s great color. I understand it’s tough to predict the future. Second question is, you did again, you commented on the competitive markets and the structural changes in deals. But is there been any shift in where the competition is coming from, any emerging new competitors or is it pretty much the same over the last couple of quarters?

Brook Taube

Yeah, it’s been pretty balanced. I mean this answer is probably it will sound a little self serving and that’s not the point. But we’ll give you the color obviously. A number of players that used to do deal sizes that were kind of $25 million to $75 million have really vaulted to $100 million, in some cases $200 million and even $300 million deal sizes and that’s a reflection of the fact that they have grown their asset base. And practically speaking, they need to focus on larger deals. It doesn’t mean they can’t do our deals, but we just – our observation is we’re seeing them less, in some cases not at all. So that’s been pulling a number of high quality prior competitors hire.

We’ve seen a few new players and we have the same folks that you would expect to see around. The capital formation in the limited partnership world is slow. Our observation is that the – these sort of private capital formation that come after our stuff is not as much as you’d expect. And secondly, smaller players getting bigger, there is some headwinds to that as well. So we feel pretty good about the competitive dynamic of as I said, we are seeing some pressure on the sponsor deals, but on balance, we feel pretty good in a market that on the headline public credit looks like it’s getting more challenging.

John Hecht – Stephens Inc.

Okay, that’s great. And then last question. Historically you’ve been fairly balanced between fixed and floating rate investments, and I know you have a fairly fixed liability structure, but just given your outlook on the interest rate environment and kind of portfolio planning, should we expect the mix to be consistent or is there any targets internally there as a deal by deal?

Brook Taube

Well, as we’ve said, we’re going to be balanced. If you look today on our liabilities, if you kind of aggregate all potential debt, it have 40% fixed and 60% floating. Right now, as you can see, the revolver is what’s used last. So you see more fixed rate and from a utilization standpoint, which is also slightly higher cost. As we scale and diversify and get more usage on the revolver, we’ll migrate towards 40% fixed and 60% floating on the liabilities. So balance is the word as usual. That’s a little bit more organic. We don’t have a strategic plan here, although I think generally having a balanced approach make sense, it certainly has for us as we built the portfolio to-date.

On the fixed floating side of the assets, as we have commented, we are going to migrate toward more floating on balance, but again I would say still 60%, 40%. At the end of the quarter, if I am not mistaken, it’s 60% at above, 40%, excuse me just under 50% fixed. It was just (inaudible) under 50% fixed. That’s down from I think mid-50s fixed as of 12/31. So we are shifting to more floating, it will take time and I think you will see more floating on the assets and a balanced approach in the liabilities, but again given the duration of our assets and the growth of the portfolio, by being balanced, we are not going home at night with a significant concerns about the interest rate exposure. Does that answer your question?

John Hecht – Stephens Inc.

Absolutely. Thanks a lot.

Brook Taube

Okay.

Operator

Your next question comes from the line of J.T. Rogers representing Janney Capital Markets. Please proceed.

J.T. Rogers – Janney Capital Markets

Good morning, Brook. I had a question on sort of more generally, what is the quality of the borrowers that you are seeing coming to market? Looking through some of your new loans, there are some – I see a retailer in there that is been somewhat troubled and a couple other credits that are higher on the LTV side. Just wondering just generally as competition increases, are you seeing the quality of potential borrowers stay the same or decline?

Brook Taube

We don’t really shift. Again I will get back to the more broad answer first, which is we don’t really shift how we look. In any given quarter, we assume depending on the origination pipe. So you feel much more first lien last quarter, it’s a little bit more risk if you will. This quarter, I wouldn’t characterize a strategic shift at taking more risk.

Our view on the credit today is that the overall backdrop is favorable as I mentioned. We are at a stable market environment, lender values are sensible, credit metrics are sensible. I think clearly all of the positioning in the market is, it has a higher amount of value or higher debt to EBITDA than we did 18 or 24 months ago, but in the context of historical levels, I would say, we are at or slightly below average in terms of overall credit risks.

So there is certainly a trend we’re watching it. We feel very comfortable deploying capital today, and I wouldn’t read too much into any given quarter on a signaling basis. We kind of look at this stuff on a longer arc, so that’s my answer to that.

J.T. Rogers – Janney Capital Markets

Okay, great. And then just one other question. There was $150,000 organizational expense during the quarter, I was just wondering what that was and if there is any, is that something that’s occurring?

Brook Taube

No, it’s the SBIC, so non-recurring.

J.T. Rogers – Janney Capital Markets

All right, great, thanks for taking my questions.

Brook Taube

Thanks J.T.

Operator

Your next question comes from the line of Chris York representing JMP Securities. Please proceed.

Kevin Chen – JMP Securities LLC

Good morning, this is Kevin Chen for Chris York. My first question is threefold. First, what is your mix of sponsored versus non-sponsored investments? Secondly, could you briefly talk about process of sourcing your non-sponsored investments? And lastly, are non-sponsored operator is demonstrating a resistance to covenants or personal guarantees given they are potentially a void on the middle market?

Brook Taube

Sure. I am going to pull up this sponsor number. It’s generally balance for us with the majority of non-sponsor, but I don’t have the number in front of me. In terms of sourcing, we’ve talked about this with most, but I am going to reiterate, I will do it quickly. We have three basic channels. They’re pretty balanced in terms of the number of deals that we get in the pipeline. I would say that the reason it’s balanced is because if you point your attention, you get what you look for. So we look in the sponsor world, so a third of our volume tends to be sponsors, a third is by an intermediary of some kind, so this will look like a deal broker of small investment bank or someone else, these are relationships we have. I would characterize, the average intermediated deal is not a process. It’s not a big bank book, it’s already been written, but it’s rather a referral in and out itself. So the intermediation process in the lower part of the market does not look like a classic investment banking process in the upper part of the market.

And then the final is a repeat and referral. This is the channel where we have networking place over 11 years as a team and over 20 years in the business for our senior guys. We do focus on referrals and we do look to finance repeat borrowers as well as repeat management teams. So, those are the three channels, it’s important. The mix is typically 70% non-sponsor and 30% sponsor and then in terms of pricing or structure in the non-sponsored world, but I think if anything today, the perception that a deposit taking institution or other capital is going to form here has not entered the market. What that means is borrowers are aware that there are alternative source of capital with somebody that’s like Medley that has a cost of capital inside a private fund or a public market across the capital for a company like a BDC.

So although we’ve seen top line pricing come in a bit, we have not seen any concern or any diminution in our ability to get structures and terms that we think are appropriate. Like any large pipeline, if you look at 205 deals this quarter, there will be some that we don’t get there on, because of structure, but it doesn’t get to a funnel to a worst structure or worst terms and I don’t think – I think I will be able to say that consistently for quite sometime. In terms of the mix today, I think from a sourcing, I just have the numbers here. The sourcing of the sponsor piece migrated higher this quarter, I guess that’s not a surprise, because we are all aware of the – the equity guys are more active and that’s been the case for the last couple of quarter.

So since Q4, which was about a third, maybe it was a little higher than a third. I think 45% of our total volume that was 205 investments that we talked about capable sponsors. The intermediated part was slightly down and so was – our repeating referral was pretty constant, which is not a surprise at about 20%. So slight uptick in volume from the sponsors, that ebbs and flows I think from our perspective, we don’t see that as an indicator necessarily it was actually higher volume that we would anticipated at frankly, post the tax change that we thought might have pulled dealer into Q4. So, interesting, whether that is a signal about the economy is for other people to decide, but we’re seeing good pipeline and we’re seeing a balance between the sponsor and non-sponsor.

Does that answer the question?

Kevin Chen – JMP Securities LLC

Yeah, that’s more than helpful. Thank you.

Brook Taube

Okay, thanks.

Kevin Chen – JMP Securities LLC

Just one more question. How do you think about the trade-off between investing in new portfolio companies versus refinancing or extending investments to current portfolio companies and also how were the quarter one loans reflected?

Brook Taube

We just have a very disciplined mechanized credit process, so I think in the big picture, a credit has to come through the system and be scrub clean every time. On balance I think this is probably true for any investment. If you know the management team and you have experience with it, it’s going to be easier to make the decision. But we don’t really change our process. The re-underwriting process which happens for us really quarterly at Medley is pretty much the same process as a de novo, the caveat being that it takes less work to re-underwrite an unknown credit. So I think if you can just do that on the good credits, it certainly makes life easier, but the process and the level of work doesn’t really change.

Kevin Chen – JMP Securities LLC

Great, thanks for color. Thanks for taking my questions.

Brook Taube

Thank you.

Operator

Your next question comes from the line of Mickey Schleien representing Ladenburg. Please proceed.

Mickey Schleien – Ladenburg Thalmann & Company

Good morning, Brook. Lot of questions this morning, but I just want to quickly circle back to the SBIC. Can you give us a sense of what the all in sort of rates are expecting on the debentures to be, whether the target leverage for the company changes now that you have the SBIC license and given the pace of your originations, how quickly do you think you can exhaust the funding available in the SBIC subsidiary?

Brook Taube

We don’t know. If you look at it now, the pricing was – on a fixed rate basis this was in the low-teens. The price hit semiannually. So as we originate and use leverage in the quarters ahead, we’ll join the group that prices at the next fixing. So I don’t really have a comment, I mean all-in today, it’s probably high twos, low threes, fixed if you look at the predecessor, six months tranches that they are issuing. I mean from a modeling perspective on a static basis, you guys can turn up. My sense is we use historical. I think the forward curve is pretty steep, so you should anticipate based on the forward curve, which – that is not a good predictor of future rates. But clearly that’s steep right now. But it’s certainly cheaper than what we have in our fixed rate and its long duration with no covenants. You’ve said in prior calls and I will reiterate.

The relationship with the SBA is now specifically we are glad to have, we worked hard at and it’s been a very positive experience to-date. As we use the capital, I think it will give us comfort to use more leverage on the balance sheet, but it’s not, I wouldn’t anticipate that we are just going to necessarily step on the gas and expand it and go up, much higher than risk. So maybe we will think about it as we deploy it and we will address in the quarters ahead, but you should think that our leverage will creep slightly higher.

Mickey Schleien – Ladenburg Thalmann & Company

So you are still targeting this sort of 0.6, 0.7?

Brook Taube

Yeah, 0.6, 0.7 will remain the target on balance sheet, maybe we migrate to the lower end of that range. We are still in the issue and growth base, so it kind of, as you know it’s a little bit leap frog quarter-to-quarter, but we have been able to manage it. We have committed to get it levered before we issue, which we have done successfully and we will continue to do.

Mickey Schleien – Ladenburg Thalmann & Company

Fair enough. And you got a very healthy backlog, it seems – I don’t know within the backlog, how many of those deals may fit within the SBIC, but it seems like you could use that capital relatively quickly or am I missing something there?

Brook Taube

I think this is a good profit. Two third of our flow maybe 70% typically would be SBIC compliant. So we're going to be measured in how we do it and – but I think you would expect us to use that facility in a measured way in the quarters and years ahead.

Mickey Schleien – Ladenburg Thalmann & Company

Fair enough. Thanks for your time Brook.

Brook Taube

Thanks Mickey.

Operator

Your next question comes from the line of Casey Alexander, representing Gilford Securities. Please proceed.

Casey Alexander – Gilford Securities

Sorry, I did have one more question. Within the SBA – because there are specific type of loaned structures that are more appropriate for the SBA. Does that lend itself better to direct origination type deals or you maybe can control the structure of the loan a little better or is there something about sponsored deals that works better there?

Brook Taube

I don't think it matters Casey.

Casey Alexander – Gilford Securities

Okay, great thank you.

Operator

Your next question comes from the line of Troy Ward, representing KBW, please proceed.

Troy L. Ward – Keefe, Bruyette & Woods, Inc.

Thank you. Brook a follow up, something you said, you talked about how certain players have grown the asset base which has pulled them market, if we look at slide nine in the investor presentation in the right-hand side of that obviously is the portfolio growth for you. And now that I understand that this has been a growth process since you became public, but you’ve doubled the portfolio from 300 to roughly 600 in the current quarter. So how do you view your portfolio growth and your ability to kind of stay within your kind of target market without having to move up?

Brook Taube

I think we're years away from having to move up.

Troy L. Ward – Keefe, Bruyette & Woods, Inc.

Why – I mean – that's a bit surprising, I mean for years. I mean what is the optimal size of the balance sheet in your opinion for you to be able to stay in your sweet spot?

Brook Taube

Well, I don’t know what optimal is. You guys can decide that. I think it’s an origination question at its core. If you look at our average deal size over 11 years, it’s about 23 million. I think if you looked at the – if you took that as an average meaning we stayed in basically the same deal flow. And you could end up on a fully loaded basis somewhere between 80 names and 100 names. You are talking about a portfolio that’s over $2 billion, practically. At some point you get a amortization off of a book that size. We have the good fortune of having to distribute all our net investment income. So there is no in-place growth in the book. And at some point, the expected annual deal amortization would meet expected annual origination volume. So I think there is if you stayed at the exact same deal size there is a moment in time when you find a happy balance there. But as I mentioned that’s a long time away for Medley.

Troy L. Ward – Keefe, Bruyette & Woods, Inc.

Do you think you could run a portfolio of a 100 names with a kind of $25 right size that’s doable?

Brook Taube

I think that’s right, 8200, it’s kind of our team is scaled already. It has been to do that business. We are producing at a velocity that is consistent with our history, not more not less. And we have more resources than ever. So as we sit here positioned in the market, Medley does not need to experiment, expand or do anything to achieve that objective. And I think I look at page 9 and to me that’s measured and consistent. I think I agree with your statement of doubling but that would be very consistent with our annual production and the resources we have.

Troy L. Ward – Keefe, Bruyette & Woods, Inc.

Okay. And then one last question again on slide 9, obviously if you look at those two graph side by side, you’ve seen the asset growth continue to move like you say measured and definitely enough or slow. In the left hand side, this is the dividend and which follow closely with the earnings. Obviously they will level off. When can we expect the shareholders that would start to follow the asset trajectory?

Brook Taube

I’m not sure. It occurs to me that we are paying out your net investment income, you will achieve a stable – that has to stabilize. So, one graph can’t follow the other in a limit, is that or it might miss it, I am sorry.

Troy L. Ward – Keefe, Bruyette & Woods, Inc.

Well as you grow the portfolio through new equity and levering that equity, our hope is that it would be accretive to shareholders and therefore you should see some growth to that dividend. I was just trying to understand kind of how you view the co-relation between the two – between balancing….?

Brook Taube

Yeah, I think, I see what you’re saying. I think if the sector as a whole, we see multiple stable or expanding and issuance is accretive which I think is true. And I think you definitely would see net investment income could go higher. I think at some point if you have constant origination even the NII has to stabilize. So I think well clearly, I think there is (inaudible) you look at last quarter NII was higher, but on a stabilized basis, our assumption is you can’t bank on accretive issuances, it’s not something we’re planning for as we grow. If it comes it will certainly in order to benefit of the shareholders and we will definitely deliver net-excess net investment income back to shareholders, that’s for sure.

Troy L. Ward – Keefe, Bruyette & Woods, Inc.

Put in another way, you’ve done three equity offerings. I think your first one was August of last year and December and then one beginning of April. All those going to be accretive to the earnings and dividend for the shareholders. And if not if it’s just keeps us stable, how did the shareholders benefit?

Brook Taube

Well, the book value growth does it not?

Troy L. Ward – Keefe, Bruyette & Woods, Inc.

Yeah, because it’s accretive, but at the end of the day, I mean like you said I mean the BDC is a net game on the book value other than again slight accretion from equity above book, but shouldn’t those equity offerings with additional leverage provide earnings growth at some point?

Brook Taube

Well, I think like I said I think you’re right. The net investment income can go higher if that persist, there is no question and we will definitely return that excess net investment income to shareholders. We have no intention of keeping that. In terms of dividend policy we are not going to tell you how at this point what that means because that’s projecting the future. But I think everyone should feel very comfortable if net investment income exceeds a dividend for a period of time for any reason performance, accretion, growth in the book we are going to return it to books.

Troy L. Ward – Keefe, Bruyette & Woods, Inc.

Okay great. Thanks Brook.

Brook Taube

Thanks.

Operator

Your next question comes from the line of Jonathan Bock representing Wells Fargo Securities. Please proceed. Mr. Bock, your line is open.

Jonathan Bock – Wells Fargo Securities

I apologize. Yes, so Brook, I appreciate your discussion that previously with Troy. Maybe trying to bull it down is, right now with the SBIC in your current debt and cash. Debt capacity what’s the target leverage limitation? What’s the target leverage that you’re employing on a regulatory basis? And now with the SBIC on a non-regulatory basis and how do you view equity capital in light of where you are – I know there is – we all understand the bumps, fits and starts to the business. But maybe just give us some sense of target ranges because that allows us to fully model earnings growth going forward, because as leverage is employed earnings do go up.

Brook Taube

Sure. I think I said it before and I’ll repeat. We are going to keep the balance sheet target at 0.6 to 0.7.

Jonathan Bock – Wells Fargo Securities

Okay.

Brook Taube

And you should expect the SBIC debt to come on to into the Medley sphere off balance sheet on a measured way after we deploy the regulatory capital.

Jonathan Bock – Wells Fargo Securities

Okay, great thank you.

Operator

This concludes the question-and-answer session. I would now like to turn the call back over to Mr. Brook Taube for closing remarks.

Brook Taube

Well, thank you everybody. I appreciate the time, we are always available and look forward to speaking as necessary and if you don’t hear from you we will speak to you on the next call three months later. Thank you very much.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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