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Executives

Jonathan H. Cohen - Chief Executive Officer, Director and Member of Investment Committee

Bruce L. Rubin - Senior Vice President, Controller and Treasurer

Patrick Francis Conroy - Chief Financial Officer, Chief Compliance Officer, Principal Accounting Officer and Corporate Secretary

Analysts

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Boris E. Pialloux - National Securities Corporation, Research Division

Greg M. Mason - Keefe, Bruyette, & Woods, Inc., Research Division

TICC Capital (TICC) Q1 2013 Earnings Call May 7, 2013 10:00 AM ET

Operator

Good morning, and welcome to the TICC Capital Corp. First Quarter 2013 Earnings Call. [Operator Instructions]

I would now like to turn the conference over to Mr. Jonathan Cohen, Chief Executive Officer. Please go ahead.

Jonathan H. Cohen

Thanks very much. Good morning and welcome, everyone, to the TICC Capital Corp. First Quarter 2013 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President and Chief Operating Officer; Patrick Conroy, our Chief Financial Officer; and Bruce Rubin, our Controller and Treasurer.

Bruce, could you open the call today with a discussion regarding forward-looking statements?

Bruce L. Rubin

Sure, Jonathan. Today’s call is being recorded. An audio replay of the conference call will be available for 30 days. Replay information is included in our press release that was released earlier this morning. Please note that this call is the property of TICC Capital Corp. Any unauthorized rebroadcast of this call, in any form, is strictly prohibited. I’d also like to call your attention to the customary disclosure in our press release this morning 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 at the SEC for important factors that could cause actual results to differ materially from these projections.

We do not undertake to update our forward-looking statements unless required to do so by law. To obtain copies of our latest SEC filings, please visit our website at www.ticc.com.

With that, I'll turn the call back to Jonathan.

Jonathan H. Cohen

Thanks, Bruce. For the first quarter, TICC reported core net investment income of approximately $0.24 per share, $0.23 per share on a GAAP basis and a core net increase in net assets resulting from operations of $0.46 per share. That was the same earnings per share as earnings per share on a GAAP basis.

At March 31, 2013, net asset value per share stood at $10.02 compared with the net asset value at the end of the fourth quarter of $9.90. We reported total investment income of approximately $21.7 million for the first quarter of 2013, representing an increase of approximately $1.4 million from the fourth quarter. That increase was largely due to greater interest income and distributions from our CLO equity investments during the first quarter.

We also recorded net realized capital gains of approximately $6.6 million and net unrealized depreciation of $3.6 million for the quarter.

Our first quarter GAAP net investment income was approximately $10.7 million or $0.23 per share, which includes the impact of the capital gains incentive fee accrual of approximately $215,000. Excluding the impact of that accrual, our core net investment income was approximately $10.9 million or $0.24 per share. Our weighted average credit rating on a fair value basis was 2.1 at the end of the first quarter of 2013, which remains the same from the credit rating at the end of the fourth quarter of 2012.

During the first quarter of 2013, we made additional investments of approximately $217 million. For the same period, we received proceeds of approximately $65 million from repayments, sales and amortization payments on our debt investments.

For the quarter ending March 31, 2013, TICC recorded earned income from our investment portfolio as follows: Approximately $8.8 million from our CLO equity investments; approximately $1.2 million from our CLO debt investments; and approximately $11 million from our syndicated and bilateral debt investments.

At March 31, 2013, the weighted average yield of our debt investments was approximately 9.2% compared with 9.4% at December 31, 2012. I would note that we currently have 2 investments on nonaccrual status with an aggregate par value of approximately $24.7 million and a fair value of approximately $8.1 million.

Of those amounts, $17.8 million and $6.1 million, respectively, representing 72% and 76%, respectively, resulted from the investment in a senior secured loan executed in 2 purchases at a weighted average price of 32% of par during the quarter ended March 31, 2013, which was expected to be nonaccruing at the time of purchase.

While we do not generally focus on distressed debt investments, we have been and remain open to those opportunities where the potential for attractive risk-adjusted return exists.

On February 25, 2013, we completed the sale of $60 million of incremental senior debt, in connection with the collateralized loan obligation transaction that originally closed on August 23, 2012. The issuance of additional notes was proportional across all existing classes of notes originally issued.

Also, during the first quarter, we issued approximately 11.1 million shares of our common stock and received net proceeds of approximately $110.4 million in 2 equity raises and in connection with an at-the-market share issuance plan.

Our Board of Directors has declared a distribution of $0.29 per share for the second quarter of this year, payable on June 28, 2013, to stockholders of record as of June 14.

With that, we'd be happy to start taking questions.

Question-and-Answer Session

Operator

.

[Operator Instructions] Our first question comes from Mickey Schleien of Ladenburg.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Could you walk me through some yield calculations? Your investments at cost were up about 25% from December to March, but your interest income and distribution income together were up only about 7% quarter-to-quarter, that excludes fee income. I understand that the weighted average yield was effectively flat. So I can't reconcile why your interest in distribution income wasn't significantly higher than what you reported.

Jonathan H. Cohen

Sure, Mickey, I think the largest component of that difference is attributable to the new purchases that we have made in recently issued or primary issuances of CLO equity tranches. As you know, the market practice in the CLO market is for newly issued CLOs to make their first payment, their initial equity tranche distributions, roughly 2 quarters after that initial issuance. So there's a meaningful lag with respect to our recognition of those revenue streams and our receipt of those revenues and income streams following those new purchases. As you can imagine, we made new purchases of CLO equity, both in the fourth quarter of 2012 and then with the benefit of the new cash that we raised with -- during the first quarter of 2013 and wouldn't -- in the ordinary course, have received any income from those investments yet. As you also know, under GAAP, we don't actually accrue for the distributions that we are scheduled to receive or that we're expecting to receive until we've actually received the cash from our CLO equity investments, unlike our corporate or direct corporate debt investments where we would be accruing those revenues.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Okay, that's very helpful. And speaking of cash, you've finished the first quarter with $60 million of cash and $19 million -- I'm sorry, $27 million of restricted cash, it's still a pretty significant amount. Can you give us a sense of how much longer it'll take to put that money to work, assuming no additional capital is raised on the balance sheet?

Jonathan H. Cohen

Sure, I wouldn't think very long at all, Mickey, I mean, given that we deployed $217 million of capital in the first quarter, we deployed more than that, right around $250 million of new capital in the fourth quarter. So our rate of deployment is sufficient to account for the cash that we have on the balance sheet, hopefully, in a fairly short period. You can also note, Mickey, that the cash balances, both restricted and unrestricted on balance sheet and within the CLO structures, was not hugely different March over December 2012, meaning that of the $110 million of new equity that we raised and the $60 million of restricted cash within the CLO structures, that the vast bulk of that, essentially the entirety of that, was deployed successfully during the first quarter.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Fair enough. And we haven't seen the Q yet but could you tell us a little bit more about the distressed investment that you made, what was it, what attracted you to it, it's something that I haven't seen you do before, so anything you could tell us about that would be helpful.

Jonathan H. Cohen

Sure, I'd have to refer you, Mickey, to the 10-Q, which should be out expeditiously, but the details of that will be in the document. I mean, I think that the right way to frame it is, as I've said, we really don't make a dedicated practice of investing in distressed debt securities but we remain open on an opportunistic basis to that model and during the first quarter, we were able to make such a purchase at a price of 32% of par in the context of understanding and expecting that, that would be a nonaccruing asset from the time of purchase.

Patrick Francis Conroy

And Mickey, just to add, going back a few years, prior to making our first CLO investment, we haven't made any CLO investments and then when we did make one, then we made a few more and it's actually become an incredibly profitable segment of our business. I'm not saying that, that's going to happen here. I'm just saying that we are opportunistic debt investors and this was a good opportunity.

Operator

Our next question comes from Boris Pialloux at National Securities.

Boris E. Pialloux - National Securities Corporation, Research Division

I have 2 quick questions. First one is, how much of the $216 million invested was actually in a CLO equity during the quarter? And the second question is, what's your view on the investing abroad? I know that you're also investing in, you have a U.K. domicile fund, so what strength if you go out if you see opportunities in Europe in the most investments.

Jonathan H. Cohen

Sure, Boris. I'm sorry.

Patrick Francis Conroy

Hold on a second, we have an affiliated management company that previously managed a part of our business.

Jonathan H. Cohen

The answer, Boris, to the question is, that we don't invest internationally to any meaningful extent. I'm sorry, Boris, what was the first part of the question?

Boris E. Pialloux - National Securities Corporation, Research Division

You invested $216 million and how much was in CLO equity?

Jonathan H. Cohen

I think we don't -- yes, roughly, I mean if you call it roughly 1/3, our goal is to stay fairly close to that 30% statutory maximum with respect to the BDC test on nonqualified assets. Obviously not to exceed it but roughly 1/3, which you would expect to be the case in any given period, roughly.

Boris E. Pialloux - National Securities Corporation, Research Division

So if you invest in new CLO equities, [indiscernible] you may have this 2 quarter lag, am I correct?

Jonathan H. Cohen

Precisely, yes.

Boris E. Pialloux - National Securities Corporation, Research Division

So one of your investments.

Jonathan H. Cohen

Precisely.

Operator

Our next question comes from Greg Mason of KBW.

Greg M. Mason - Keefe, Bruyette, & Woods, Inc., Research Division

To follow-up on Mickey's question just on this new distressed opportunity. From a modeling perspective, how should we be thinking about kind of the long-term impact of -- is that going to be restructured back into debt or go to equity? Obviously, as a non-performing loan today, it doesn't impact earnings at all. So how should we be thinking about that going forward?

Jonathan H. Cohen

Sure. I mean, I think that we want to withhold public comment on the state of that investment, especially, Greg, given that we haven't even revealed what it is yet. So we don't want to talk about our strategy or about how that may ultimately return economic value to us. But we're certainly looking at this opportunity in an expansive way. So if we ended up with an equity position, if we ended up with simply cash pay debt securities, if we ended up with a repayment closer to par than our purchase price, all of those things could be acceptable outcomes.

Greg M. Mason - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then the capital gains in the quarter $6 million, to me, it seems like a pretty big number on the $65 million of exits in the quarter. Is there anything particularly driving that $6 million gain?

Jonathan H. Cohen

There is, Greg. We've been fairly active, I think, as we've looked at our legacy CLO debt and equity portfolio. We've entered a world now where 2.0 CLO transactions have ramped very, very quickly, the transaction volume is vastly greater than it was a year or two ago, and many 1.0 CLO structures, as you know, have exited their reinvestment periods and are beginning to return principal from the top of the waterfall down to their various respective debt tranches. So all of those things lead us to think more actively about the way in which these portfolios should be weighted and in certain cases, as you've seen, where gains should be realized within the balance sheet. So that's all part and parcel, I think, of the same way of thinking.

Greg M. Mason - Keefe, Bruyette, & Woods, Inc., Research Division

So it's more coming from exits of the CLO debt and equity versus your kind of core syndicated bilateral loans?

Jonathan H. Cohen

Yes, yes.

Greg M. Mason - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, great. And then finally, just kind of your last thought on the dividend coverage, the last 3 quarters operating income has been light of the dividend. What are your thoughts on coverage of the $0.29 dividend and how do you think about that going forward?

Jonathan H. Cohen

Well, the overarching philosophy, I think, is that our dividend should be fully covered on a taxable income basis.

Patrick Francis Conroy

On an annual basis.

Jonathan H. Cohen

In any given calendar year. So that's the abiding mandate and our expectation is that we will manage to that outcome or something fairly close to that outcome.

Greg M. Mason - Keefe, Bruyette, & Woods, Inc., Research Division

And do you, sir, consider capital gains as portion of that coverage of the dividend?

Jonathan H. Cohen

We don't, for the purpose of that definition and that mandate. It does, however, though, raise an interesting point, which is to what extent is it or isn't it appropriate to consider realized or unrealized capital gains as an element of your dividend distribution strategy. It's probably a longer and more involved conversation than most people on the call would want to have this morning, but it's something that you have written about and I think it's worth thinking about.

Greg M. Mason - Keefe, Bruyette, & Woods, Inc., Research Division

So, but when you set the $0.29 dividend, you didn't set it knowing that you're going to have large capital gains to support that? Or that wasn't baked into your $0.29 estimate? Is that a fair assumption?

Jonathan H. Cohen

That is a correct assumption.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Cohen for any closing remarks.

Jonathan H. Cohen

Thanks very much. We appreciate everyone's interest and we look forward to our second quarter 2013 earnings conference call in a few months' time. Thank you, all, very much.

Operator

This conference is now concluded. Thank you for attending today's presentation, you may now disconnect.

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