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Executives

Michael S. Gross - Chairman, Chief Executive Officer and President

Richard L. Peteka - Chief Financial Officer, Treasurer and Secretary

Bruce J. Spohler - Chief Operating Officer and Director

Analysts

Richard B. Shane - JP Morgan Chase & Co, Research Division

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

Douglas Mewhirter - SunTrust Robinson Humphrey, Inc., Research Division

Christopher York - JMP Securities LLC, Research Division

Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Boris E. Pialloux - National Securities Corporation, Research Division

Arren Cyganovich - Evercore Partners Inc., Research Division

David J. Chiaverini - BMO Capital Markets U.S.

Solar Capital (SLRC) Q1 2013 Earnings Call May 8, 2013 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2013 Solar Capital Ltd. Earnings Conference Call. My name is Alex, and I will be your operator today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now, I'd like to hand the call over to Michael Gross, Chairman and CEO of Solar Capital. Go ahead, please, sir.

Michael S. Gross

Thank you very much and good morning. Welcome to Solar Capital Ltd.'s earnings call for the quarter ended March 31, 2013. I'm joined here today by Bruce Spohler, our Chief Operating Officer; and Richard Peteka; our Chief Financial Officer.

Rich, before we begin, could you please start off by covering the webcast and forward-looking statements?

Richard L. Peteka

Of course. Thanks, Michael. I'd like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Solar Capital Ltd., and that any unauthorized broadcast, in any form, are strictly prohibited. This conference call is being webcast on our website at www.solarcapltd.com. Audio replays of this call will be made available later today as disclosed in our earnings press release.

I'd also like to call your attention to the customary disclosures in our press release regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements, which relate to future events, or future performance or financial condition. These statements are not guarantees of our future performance, financial condition or results and involve a number of risks and uncertainties. Actual results may differ materially as a result of a number of factors, including those described from time to time in our filings with the SEC. Solar Capital Ltd. undertakes no duty to update any forward-looking statements, unless required to do so by law. To obtain copies of our latest SEC filings, please visit our website or call us at (212) 993-1670.

At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Michael Gross.

Michael S. Gross

Thank you, Rich. Credit market conditions and the economic trends that we witnessed in the second half of 2012 have continued into the first 4 months of 2013. The Fed's ongoing expansionary monetary policy extended the low interest rate environment leading to robust capital inflows into mutual funds and other investment vehicles that invest for yield. These inflows drove near-record new issuance of leveraged loan volumes in the first quarter. We believe the modest economic recovery has improved borrower fundamentals only at the margin, while lender liquidity has driven up leverage multiples especially with borrowers with attractive credit profiles. The result has been more aggressive lending at tighter pricing and at higher risk levels, particularly in the high yield and liquid leverage loan markets. Demand for capital continues to be dominated by secondary financings, tack-ons and dividend recaps. This excess capital and liquidity have put pressure on mezzanine debt terms and structures. In periods like this, we believe that lender discipline and adherence to core investment principles are critical. That said, we also believe that the middle market offers attractive risk return profiles on a selective and absolute basis.

Given these market conditions, we gradually and deliberately migrated the portfolio towards a higher percentage of floating rate secured loans to protect principal and reduce interest rate risk. In addition, we believe it is prudent to operate at lower levels than target portfolio leverage for the time being in order to have ample investable capital to take advantage of dislocations that will eventually arise. Given a significant harvest of undistributed taxable earnings, we do not feel any pressure at all to invest, and we'll continue to be patient and disciplined with the deployment of our capital.

We are quite pleased with the results in the first quarter of 2013. The strong performance of our overall portfolio and the favorable market conditions have allowed us to make further enhancement to our capital structure. In early January, we sold 6.3 million shares at a price of $24.40 per share, representing a 7.5% premium to our December 31, 2012 net asset value. The transaction raised approximately $147 million of net proceeds in an accretive transaction to our shareholders. In conjunction with the $100 million 30-year senior unsecured retail notes offering in November 2012, we have now effectively funded our $275 million investment in Crystal Financial with permanent capital.

During the first quarter, we originated $75 million in loans across 3 different portfolio companies. We had prepayments and other exits of approximately $69 million. At approximately $1.4 billion, our portfolio grew marginally from the end of 2012. Our net asset value increased to $23 per share from $22.70 per share in the prior quarter. The portfolio generated net investment income of $0.58 per share on a higher share count resulting from the follow-on offering in January. Our financial performance also reflects the first quarter of operating results from our investment in Crystal Financial. Crystal paid a dividend of $7.7 million to Solar Capital in the first quarter, reflecting a cash-on-cash annualized yield of approximately 11.2%. The increase in net investment income was driven by our investment in Crystal, but was partially offset by the placement of our investment in Rug Doctor on nonaccrual status for the full quarter.

At December (sic) [March] 31, 2013, other than Rug Doctor, 98% of our portfolio was performing measured at fair value. We continue to benefit from our multiproduct capabilities and the ability to create a more diversified and defensive portfolio in a competitive climate. The Crystal investment gives Solar Capital the benefits of a more diversified direct origination capability while having little overlap with us at all. We expect continued benefits from our investment in Crystal, including the increase of portfolio exposure to floating rate senior secured assets, with less interest rate risk than a traditional mezzanine-oriented portfolio.

At the end of the quarter, our leverage was 0.34x debt to equity, and we had approximately $440 million of capacity amongst our credit facilities to invest in new opportunities. Finally, our Board of Directors declared a quarterly dividend of $0.60 per share for the second quarter of 2013, which is payable on July 1, 2013 to holders of record as of June 20, 2013.

At this time, I'll turn the call back over to our Chief Financial Officer, Rich Peteka, to take you through some of our financial highlights.

Richard L. Peteka

Thanks, Michael. Solar Capital Ltd.'s net asset value on March 31, 2013, was $1.0 billion or $23 per share, compared to $878.3 million or $22.70 per share at December 31, 2012. Our investment portfolio on March 31 had a fair market value of $1.42 billion as compared to $1.40 billion at December 31.

On March 31, we had investments in 40 portfolio companies in 22 industries. The weighted average yield on income-producing debt portfolio was 13.3% measured at fair value. For the 3 months ended March 31, 2013, gross investment income totaled $46.1 million compared to $41.5 million for the 3 months ended December 31, 2012. The increase in gross investment income from the prior quarter was primarily driven by the $7.7 million dividend from our investment in Crystal Capital Financial Holdings.

Expenses totaled $20.6 million for the 3 months ended March 31 as compared to $17.3 million for the 3 months ended December 31.

The company's net investment income totaled $25.5 million or $0.58 per average share for the 3 months ended March 31, 2013, versus $24.2 million or $0.63 per average share for the 3 months ended December 31, 2012.

Net realized and unrealized gains for Q1 2013 totaled $10.3 million. Results were driven by the sale of a portion of our equity investment in Seven West Media, the exit of our remaining equity position in NXP Semiconductors, as well as net appreciation in our overall portfolio, including from our investment in Crystal Capital Financial and Nuveen Investments, partially offset by the markdown on Rug Doctor, which was placed on nonaccrual status for the quarter. These results compared to a relatively flat Q4 2012 of $0.9 million of net realized and unrealized losses. Ultimately, the net increase in our net assets resulting from operations totaled $35.8 million for the quarter, versus a net increase of $23.3 million for the quarter ended December 31, 2012. Earnings per share totaled $0.81 for Q1 compared to $0.60 for Q4 2012.

At this time, I'd like to turn the call over to our Chief Operating Officer, Bruce Spohler.

Bruce J. Spohler

Thank you, Rich. Let me start by making an overall observation regarding our portfolio. Our management teams are optimistic about their respective businesses. However, they continue to be cautious regarding the economic fundamentals and ongoing macro uncertainties. The operating trends of our portfolio of companies remain stable, with steady deleveraging in an environment of muted top line growth and a continued focus on cost efficiencies. As we've highlighted before during our underwriting process, we will focus on a company's ability to generate free cash flow as the primary driver to derisk and repay our investment. The defensive portfolio that we've constructed at Solar, concentrated in noncyclical industries, continues to perform well in this low-growth environment.

Now let me touch on the portfolio. At the end of Q1, the fair market value of our investment portfolio was approximately $1.4 billion, consistent with our prior quarter. All but 1 asset, Rug Doctor, which I will discuss further, is performing. At March 31, the fair value weighted average mark on our portfolio, excluding common equity, was approximately $0.97 of par, and the weighted average yield on our income-producing portfolio was 13.3%. Our income-producing assets represent approximately 94% of the total portfolio, and the weighted average investment risk rating remained at approximately 2, measured at fair market value at the end of the year based on our 1 to 4 risk rating scale, with 1 representing the least amount of risk.

At March 31, our portfolio consisted of 40 companies operating across 22 industries, and was invested 36% in senior secured loans, 28% in subordinated debt, 11% in preferred equity, and 23% in common equity and warrants as measured at fair value. If we were to include Crystal's underlying portfolio of loans, 61% of our total investment exposure across the entire portfolio is in secured investments, and 50% of the portfolio is floating rate investments measured at fair value. This reflects our concerted effort to move higher in the capital structure and shorten duration risk in response to the frothy credit market environment. Solar Capital has invested approximately $3 billion across 85 portfolio companies. Over this period, we have completed transactions with more than 70 different financial sponsors.

Before I give you an overview of Q1's activity, I'd like to spend a moment on a couple of portfolio developments. As Rich mentioned, subsequent to year end, we placed our investment in Rug Doctor on nonaccrual, as we had passed on during our earlier earnings call. We're in active discussions with the company, as well as the sponsor, and view our attachment point for our investment, which is in the low-3x EBITDA, as a positive factor in maximizing our realizable value. Discussions are underway and we will keep you apprised as we move forward.

As of March, Crystal Financial had a highly diversified secured loan portfolio totaling approximately $411 million, consisted of 26 loans to 21 different issuers, representing a slight increase from the size of the portfolio at year-end 2012. Again, all of their loans are floating rate. The average loan size approximately $16 million, and the weighted average yield is in the mid-12s at 3/31. The Crystal portfolio is 100% performing.

At the end of the quarter, total debt on the Crystal portfolio increased modestly to $158 million, resulting in a debt-to-equity ratio of 0.54x. Given its available credit capacity of an additional $115 million, subject to borrowing base limitations, Crystal has additional room to grow its portfolio without requiring an additional equity investment. We believe this investment offers a highly attractive risk return profile given the senior secured nature of Crystal's underlying loans.

During Q1, our investment in Crystal paid Solar Capital a cash dividend of $7.7 million or an 11.2% annualized yield, which has been included in our net investment income for Q1. Crystal's asset-backed loans tend to have a shorter duration and greater amortization than does the loans in Solar's other portfolio. Given the shorter average life of these loans and more rapid amortization, we expect the size of the Crystal portfolio and the cash dividend distributed from Crystal to vary from quarter-to-quarter.

Lastly, DS Waters continues to perform well. The integration of Standard Coffee, an acquisition made 1 year ago, is complete. And the cost efficiencies, as anticipated by management, have been realized in line with expectations. DS Waters' strong customer growth continues to drive an increase in organic revenues and the EBITDA performance over the prior year.

On the origination front, during Q1, we invested $75 million across 3 portfolio companies. Our principal repayments and sales totaled approximately $69 million during this period. Let me highlight some of our first quarter investments. During Q1, we funded a $37 million first lien investment in Quantum Foods, which is a leading processor and distributor of ready-to-cook beef, pork and other poultry items. The all-in yield on this first lien floating-rate investment exceeds 11%, with leverage of approximately 3.5x at closing. Additionally, we invested approximately $20 million in the second lien term loan for TravelClick, which is a leading provider of resolution solutions, business intelligence and marketing solutions to the hospitality industry, particularly for the independent hotels that are trying to compete effectively with the larger chains. It's majority owned by Genstar Capital. The loan carries a yield in excess of 10%.

During the first quarter, we received full repayments on 2 investments at a premium to our cost. First off, our $36 million investment in the mezzanine notes of CIBT Solutions was repaid at a premium to par. As you may recall, Solar Capital invested in CIBT, the leading global provider of expedited travel document processing services, back in December 2011 as part of ABRY Partners' buyout of the company. Our IRR to realization on this investment exceeded 20%. Finally, we were also repaid at a premium to par on our $17 million second lien investment in Asurion, as part of a comprehensive $4 billion refinancing of the company's first and second lien loans. Solar's IRR to realization on this investment was 11.5%. We continue to have a $13 million investment in the Asurion Holdco notes, which carries a coupon exceeding 11%.

Now I'd like to turn the call back over to Michael.

Michael S. Gross

Thank you, Bruce. We are pleased with the underlying performance and credit quality of our portfolio of investments, and believe the current portfolio, with the addition of our investment in Crystal Financial, is more defensively positioned and more broadly diversified to preserve shareholder value while delivering strong risk-adjusted returns.

As mentioned earlier in the call, we further enhanced our capital structure in the quarter through a follow-on equity offering at a premium to NAV. The offering enabled us to complete the permanent financing of our strategic investment in Crystal Financial. Importantly, the investment in Crystal provides us with a new source of net investment income from an asset class which we believe offers attractive risk-adjusted returns that are less correlated to economic and market conditions than traditional mezzanine loans. Clearly, middle market leverage levels have increased and spreads have tightened over the last 10 months. We understand the importance of being patient investors and the need to be highly selective in periods of frothy markets. As one of Solar Capital's largest shareholders, our interests are well-aligned with our fellow shareholders. We are focused on delivering stable, steady income in the form of consistent dividends, while managing downside risks.

At a current dividend yield of 10.1%, we continue to offer an attractive risk-adjusted return profile relative to other high current income alternatives. As of yesterday's close, for example, the Barclays U.S. Corporate High Yield Index is yielding just 5.02% on assets that generally are unsecured, generally do not have maintenance covenant protection, and typically carry significant and higher levels of leverage and have duration risk through fixed coupons. We are somewhat surprised that many BDC yields have not yet compressed as much as other yield products and believe Solar Capital offers compelling risk-adjusted returns.

We have a diversified portfolio, a strong balance sheet and significant capital available to take advantage of investment opportunities. While current markets are competitive, we continue to believe the outlook for middle market direct lending is extremely favorable. We will remain focused on leveraging our relationships and multiproduct platform to source new investments that meet our risk return requirements and to build long term shareholder value. At 11.:00 this morning, we'll be hosting an earnings call for the first quarter 2013 operations for Solar Senior Capital or SUNS. Our ability to provide senior secured financing through this vehicle enhances the origination team's ability to meet our clients' capital needs. We continue to benefit from this value proposition in Solar Capital's deal flow.

Thank you for your time. At this time, operator, would you please open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Rick Shane from JPMorgan.

Richard B. Shane - JP Morgan Chase & Co, Research Division

It seems like a long way from where we were just a few years ago. But with values on most investments now approaching par, as spreads continue to tighten, are valuations basically bounded by par? How do you look at that and how should we think about NAV as spreads continue to tighten where we are right now?

Michael S. Gross

Yes, thanks for the question. I think, in general, our valuations are bounded by par. Where you do see things being marked above par is where there is call protection or call premiums that are in existence. But if we don't have significant call premium, or non-call periods, you will not see us mark it up much above par.

Bruce J. Spohler

I think as you think about the potential for additional NAV appreciation, it would obviously come from any of the loans that for technical or other reasons we have marked below, as well as some of our equities. So we still do see the potential for NAV appreciation.

Operator

Our next question comes from the line of Mickey Schleien from Ladenburg.

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

I was wondering if you could give us a sense, at least broadly speaking, of the current portfolio activity this quarter in terms of net investments?

Michael S. Gross

I'd say, the theme I would use is very, very cautious. I think we continue to struggle to find things that fit the risk reward that we're comfortable doing. And so we are, again, as you know, investing this as if it is our own money because it is our own money. And to the extent we're not seeing good opportunities, we're going to wait patiently on the sidelines.

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

All right. Can you remind me how much spillover taxable income you have?

Richard L. Peteka

In excess of $24 million.

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

$24 million. So Michael, when you said you're comfortable with the dividend in light of that spillover, I guess you're referring to avoiding return of capital, is that -- and not necessarily earning the dividend from NOI, am I correct?

Michael S. Gross

Correct.

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

Okay. Moving on to DS Waters. They announced an acquisition of the water and coffee business from a firm I'm not familiar with, called Matilija, I think. How does that impact the outlook for the company and potential exit for you?

Michael S. Gross

Yes, the company has been looking at tuck-in acquisitions as they have over the last 6, 7 years that we've been an investor. So they continue to see good opportunities. It think what you'll find Mickey is, coming out of the recession and credit crisis, there are a number of mom-and-pop operators in-market for DS. Historically, on the water side, and now with the acquisition of Standard Coffee, they're looking at tuck-in acquisitions for owners of small coffee businesses. They don't have the same access the capital and have been selling. And given that DS can effectively buy these customers and layer them on to their routes. Occasionally, they may have to add additional assets truck operators, et cetera. But generally, these are very synergistic, and they can create these acquisitions in the 3, 3.5x EBITDA multiple, pro forma for the synergies. So you will continue to see them make these tuck-in acquisitions. And I think it's consistent with the company's growth strategy in addition to the good organic growth they're seeing. And so from our perspective, as it relates to our monetization, it just adds, I think, to the growth opportunity that others will see in the business.

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

Okay. And lastly, just a quick question. Is there any seasonality in your operating expenses? They were up pretty strongly quarter-to-quarter.

Richard L. Peteka

Mickey, for the Q1, it's a very good run rate for you to model for the rest of 2013.

Operator

Our next question comes from the line of Chris York from JMP Securities.

Operator

Our next question comes from the line of Doug Mewhirter from SunTrust Robinson Humphrey.

Douglas Mewhirter - SunTrust Robinson Humphrey, Inc., Research Division

I had 2 questions, but 1 of them was answered. So I'll just ask my other one. About Crystal Financial, looks like they got out of the gate pretty well. And they also had, looks like a little bit of net growth in their portfolio. In talking with management, what is their appetite for further net growth? I mean, you explained that they have the capacity to grow, are they seeing opportunities to grow in excess of amortizations and exits over the year? Or do they, I guess, share your guarded outlook? I know that their sector's a little specialized, so maybe conditions are better.

Michael S. Gross

I'd say the conditions are definitely better. That said, it's a very opportunistic business. It's a very hard business to predict where their portfolio will be 6 months to 12 months now, for example. But we set the company up for growth. And as we mentioned, we have $115 million dry powder. So the expectation is that if we find collectively fair risk reward opportunities, you'll see us deploy that capital.

Operator

Our next question comes from the line of Chris York from JMP Securities.

Christopher York - JMP Securities LLC, Research Division

All right, so could help you understand your investment selectivity during the period? So what I'm trying to get at is, what was the percentage of term sheets extended to investments reviewed? And what is more normal production rate for you guys?

Bruce J. Spohler

I think that, fortunately, we've been able to invest in anything we wanted to invest in, and there has been no shortage of opportunities. We've just said no a fair bit. So historically, if we were saying yes and actually funding on 2% or so of the investments that we evaluate, I would say that number is down materially in this environment.

Christopher York - JMP Securities LLC, Research Division

Okay, so historically, I guess, maybe 2% was a rate for you, and now just essentially maybe investment by investment, and that's not applicable, is that a good way of thinking about it?

Bruce J. Spohler

Yes.

Christopher York - JMP Securities LLC, Research Division

And then the weighted average yield on investments fell 90 bps quarter-over-quarter. And then from Bruce's comments, it appears that a couple of the new loans in Q1 were funded at 11% and 10%, but was there anything else that could have caused that decline?

Richard L. Peteka

Yes, Rug Doctor going on nonaccrual.

Christopher York - JMP Securities LLC, Research Division

Okay, that's what I thought. And then forgive me if I missed this, but what was the weighted average cost of borrowings for the quarter?

Richard L. Peteka

I have that right here. It was 4.68%.

Christopher York - JMP Securities LLC, Research Division

Okay. And then fully funded, what was -- do you have any thoughts on what that would be by using all the capacity on the revolver?

Michael S. Gross

It would come down dramatically because we're dominated right now by our term borrowings, which are our 30-year notes and our 5-year notes. So that's the basket of our borrowings today. So our marginal cost of borrowing is L-plus 250. And given that we're already paying undrawn fee, and that it's really 2.5%. So it will come down dramatically.

Operator

Our next question comes from Troy Ward from KBW.

Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

Just a quick question on Crystal. Can you tell us what the $7.7 million dividend, how that relates to the kind of the free cash flow generation at Crystal for the quarter?

Michael S. Gross

Yes, the answer to your question, it approximates it, and that's kind of the intent going forward. That we will pay plus or minus what the cash flow or net investment income is coming out of the portfolio.

Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, so when you -- so the dividend, as you see the portfolio change, the dividend, quite honestly, will be variable quarter-to-quarter to Solar as well?

Michael S. Gross

Yes. And we're not going to manage it. We're going to -- if the portfolio shrinks, you'll see earnings shrink. If the portfolio grows, you'll see our earnings grow.

Operator

Our next question comes from Jonathan Bock from Wells Fargo Securities.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Real quick. Could you give us some insight on the amount of nonqualified assets that you have post the attractive Crystal acquisition on the balance sheet today as a percentage of the total portfolio?

Michael S. Gross

It's close to 30%.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Okay. And maybe I missed it in the footnote because we were kind of reading through this a little quick. Is MidCap still counted as a nonqualified asset?

Michael S. Gross

Yes, because it's a finance company.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Okay. Okay. So then the next question just relates to all-in repayment or refinance risk. And in an environment where, I mean, we exchanged the term a few times on several calls related to drive by refi, obviously has people questioning the earnings impact to Solar and other companies that have earned high yield in this financing environment. Walk us through how you're trying, beyond the Crystal acquisition, other ways that you mitigated prepayment risk and whether or not you're going to continue to -- within Solar, focus on some of the deals that will likely end up refinancing, maybe perhaps they'll go to SUNS, but do you think Solar might chase after or continue to defend its incumbent lending position in a few deals that might be slated for repayment?

Bruce J. Spohler

Well, I would say that your comment's a good one. Regarding SUNS and the Solar's relationship, we have seen assets migrate from Solar into SUNS. We've also seen assets migrate from SUNS to Solar. So we have an opportunity to put additional junior capital on assets in connection with refinancings over at the SUNS portfolio. So they both have expanded the opportunity set. And I think your point is well taken. We are proactive in terms of approaching our issuers in order to try to extend our duration and sometimes that means taking down yield a little bit. But in the contrast of losing an asset that we feel good about from a risk return perspective, that's a great outcome. So things like MidCap, as you mentioned, we actually had approached them proactively about a year or so ago, took our rate down from the 14% range to the 13% range, which I think everybody would still argue is incredible risk return given we're only levered through just over 3x on that asset of diversified $1.2 billion of underlying loans. So we will take that approach, and we continue to do so. Our team is going through both portfolios, looking at how we can extend our duration across either portfolio. But I think, as we've talked about in the past, whether it's something like DS Waters or MidCap. These are significant investments. We do have substantial returns. At some point, we will lose them. And as we saw in the first quarter of 2010, coming out of our IPO, where we had substantial repayments, we were disciplined and prudent in rebuilding our NII, so I think your point is a good one. Should we lose something like a DS Waters or a MidCap, we would see a short-term compression on our NRI, but we will be patient and deliberate in redeploying that capital.

Michael S. Gross

But I think just to hit on a word you said, we're not going to chase things. We don't feel the need to maintain our portfolio size just to keep our portfolio size. So if we do get taken out from a large investment and our portfolio dips back down, that's perfectly fine with us. We'll be very patient and redeploy the capital at the right time to get the right return.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

I appreciate that. And as we -- just trying to look at in terms of what happened related to some of the test and I'll just back to the diversification issue or we'll call it the nonqualified bucket. Bruce or Rich, can you walk us through, let's say, fair value of a certain portfolio company declined in the quarter, and through no fault of your own, the fair value of the assets that are in these attractive nonqualified investments stays the same, what occurs if that diversification test is triggered? And how does one kind of manage the business to, one, not trigger it? Or two, if it's not that big of a deal if it goes up and down? Maybe just some additional color on how you manage the book in relation to that 30% cap?

Richard L. Peteka

Jonathan, that's a great question. I think that it's our view in talking to counsel and others in the space that, if on no action on your own, you go up and down, above and below 30%, clearly there's no violation because you haven't taken any action to initiate anything and values do change. I think that we should just keep in mind that to the extent we are over at any one point in time, over the 30% basket, then you're just not allowed to make new investments that will fit that basket until you're back under.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Okay, so the -- really, the only major limiter is the fact that you couldn't make another nonqualified asset, not that it would matter if you were already at that level.

Michael S. Gross

Yes, it's an incurrence, not maintenance test.

Operator

Our next question comes from the line of Mickey Schleien from Ladenburg.

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

Just a quick follow-up, and actually related to the last question. You marked up Crystal in the quarter, and I was curious what was the basis for that mark up?

Bruce J. Spohler

Yes, as you know, all of our investments on a private basis are valued independently each quarter. So Crystal was valued by a third-party valuation firm, who then receive the support and opinion from our independent board, but their methodology was very much focused on looking at the underlying yields and price-to-books of both Crystal, as well as other finance companies out there. And it was their determination that given the 11.2% yield that we received on the underlaying portfolio, 100% performing senior secured, that the valuation fell out of their view of the appropriate yield and the appropriate value to book.

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

Okay. So Bruce, if the current trends hold where spreads are compressing and that has a positive impact on the valuation of Crystal, just to make sure I understand this qualified asset bucket question, if you do not make further investments in nonqualified assets, you will still be allowed to make qualified investments given that Crystal was being marked up for technical reasons, not that you've made a follow-on investment at Crystal. Is that correct?

Bruce J. Spohler

That's absolutely correct, yes.

Operator

Our next question comes from the line of Boris Pialloux from National Securities.

Boris E. Pialloux - National Securities Corporation, Research Division

Just a quick question regarding the CLO market. I mean, you mentioned that it's very ebullient and some of the other BDCs have actually invested -- I mean, in their nonqualified part in the equity piece of CLO or the lower rated pieces of the CLO -- of new CLOs. So just was wondering what your views were regarding this type of investments?

Michael S. Gross

I think -- here's what I think. The rate of return and risk reward that we are getting on Crystal is far superior to that. And it's a business that we now control, can grow and manage as opposed to being a passive CLO investor.

Bruce J. Spohler

To Michael's point, at CLO, you're looking at fundamental leverage of 7, 8, 9x in some vehicles and you have the equity underneath that across a pool of loans that you haven't underwritten directly, you've delegated that to another manager. Whereas at Crystal, we're operating at 0.5x leverage, and we have a veto on every investment.

Operator

Our next question comes from the line of Arren Cyganovich from Evercore.

Arren Cyganovich - Evercore Partners Inc., Research Division

You talked a little bit about being cautious during this quarter. Are there any identified portfolio companies that are expected to repay during the quarter?

Michael S. Gross

I don't know about -- again, it's hard to pinpoint the exact quarter, but I think the ones that are kind of up on the list potentially are in Earthbound Farms, DS Waters, MidCap. I'd say those are all potentially probable in the next 3 to 4 months.

Arren Cyganovich - Evercore Partners Inc., Research Division

Okay. And then also you mentioned getting paid out at a premium to par on a few investments during the quarter. Were there any material amount of prepayment income that you booked in revenues this quarter or any other fee income that was kind of nonrecurring?

Richard L. Peteka

Yes, I think our exit in CIBT was the large one, probably $0.035 to $0.04 in prepayment penalties for the quarter in total.

Michael S. Gross

But we always -- people always mention whether that's "nonrecurring" or not, inevitably every quarter, we end with repayment premium because we're getting taken up, and that's part of the business.

Richard L. Peteka

Keep in mind, we're adjusting our upfront fees for GAAP as well. So we look at it from an IRR perspective, and that includes the upfront fee, the coupon and the prepayment penalty because most loans don't last to maturity.

Operator

Our next question comes from the line of David Chiaverini from BMO Capital Markets.

David J. Chiaverini - BMO Capital Markets U.S.

My question relates to Crystal Financial also. You mentioned about how the dividend is going to vary from quarter-to-quarter based on the size of the portfolio. Could you just give us a sense over the past few years, kind of the endpoints or the low end of the portfolio and perhaps the high end? Like did it get down as low as say, $300 million or as high as $450 million, just could you comment on that?

Bruce J. Spohler

Sure. Unfortunately, Dave, the portfolio has been in ramp mode over the last 3 years. So it's only directionally increased quarter-over-quarter. So unfortunately, looking back is not indicative necessarily. I think it's important to note that while it does have a higher churn rate than we do in our underlying assets. Their average duration tends to be closer to 18 to 24 months. They were able to replace anything they lost in Q1. As you see the portfolio's in the aggregate relatively stable. So we have provided them with additional credit capacity, given the equity investment we made, exceeding $100 million of room for growth. But they've done a great job of running in place and directionally taking the portfolio up in size.

David J. Chiaverini - BMO Capital Markets U.S.

Got it. Thanks. And my follow-up was more of a housekeeping item. You mentioned about the $24 million of spillover income, was that as of December 31 or March 31?

Richard L. Peteka

That was December 31.

Operator

[Operator Instructions] We have no further questions in the queue at this time. I'd now like to hand the call back to Michael for closing remarks.

Michael S. Gross

All I'd say is, thank you, and thank you for participating this morning. We look forward to speaking with those of you who are involved in Solar Senior or SUNS in 15 minutes. Thank you.

Operator

Thank you for your participation today. This concludes your presentation. You may now disconnect. Good day.

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