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Triangle Capital (NYSE:TCAP)

Q1 2013 Earnings Call

May 9, 2013 9:00 am ET

Executives

Garland Tucker – Chairman, President, Chief Executive Officer

Steven Lilly – Chief Financial Officer

Brent Burgess – Chief Investment Officer

Sheri Colquitt – Vice President, Investor Relations

Analysts

Robert Dodd – Raymond James

Greg Mason – KBW

Kyle Joseph – Stephens

Mickey Schleien – Ladenburg Thalmann

Bryce Rowe – Robert W. Baird

Jonathan Bock – Wells Fargo

Boris Pialloux – National Securities

Operator

Good day ladies and gentlemen and thank you for standing by. At this time, I’d like to welcome everyone to Triangle Capital Corporation’s conference call for the quarter ended March 31, 2013. All participants are in a listen-only mode. A question and answer session will follow the company’s formal remarks. If you require assistance at any time during the conference, simply press star then zero on your touchtone telephone. Today’s call is being recorded and a replay will be available approximately two hours after the conclusion of the call on the company’s website at www.tcap.com under the Investor Relations section.

The hosts for today’s call are Triangle Capital Corporation’s President and Chief Executive Officer, Garland Tucker; Chief Financial Officer, Steven Lilly; and Chief Investment Officer, Brent Burgess.

I would now like to turn the Sheri Colquitt, Vice President of Investor Relations, for the necessary Safe Harbor disclosure.

Sheri Colquitt

Thank you, Tyrone, and good morning everyone. Triangle Capital Corporation issued a press release yesterday afternoon with details of the company’s quarterly financial and operating results. A copy of the press release is available on our website. Please note that this call contains forward-looking statements that provide other than historical information, including statements regarding our goals, beliefs, strategies, future operating results, and cash flows. Although we believe these statements are reasonable, actual results could differ materially from those projected in forward-looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under our section titled Risk Factors and Forward-Looking Statements in our annual report on Form 10-K for the fiscal year ended December 31, 2012 and quarterly report on Form 10-Q for the quarter ended March 31, 2013. Each is filed with the Securities and Exchange Commission. TCAP undertakes no obligation to update or revise any forward-looking statements.

And at this time, I would like to turn the call over to Garland Tucker.

Garland Tucker

Okay, thanks Sheri and good morning everyone. Thank you for joining us for today’s call. I’d like to begin with some general remarks about the quarter, and then Steven and Brent will provide more detailed information about financial results and also our portfolio activity. Since our last earnings call was only two months ago, we will keep our prepared remarks today relatively brief and reserve plenty of time at the end of the call for your questions.

In terms of a few highlights during the first quarter of 2013, during the quarter we made new investments in existing portfolio companies in the amount of $10.3 million. We generated $0.56 of net investment income of a per-share business, and we again over-earned our dividend of $0.54. Also of note during the quarter was that we generated realized gains of approximately $1.9 million and we experienced net unrealized depreciation across the portfolio of approximately 1.8 million. From a credit quality standpoint, as Brent will discuss in more detail in a few minutes, our portfolio continues to perform extremely well. Finally from an operational efficiency standpoint, we continue to be among the leaders in the BDC industry with an efficiency ratio defined as total G&A expenses divided by revenues, which is meaningfully below that of our peer group of both internally and externally managed BDCs.

Our results during the first quarter of 2013 were very much a continuation of the primary trends we experienced during 2012. We increased our dividend to $0.54 per share from $0.53 per share during the prior quarter, and this was up from $0.47 per share during the first quarter of 2012. This marked the fourth time in the past five quarters that we have increased our quarterly dividend. Our dividend increase was underpinned by the new investments that we made during the fourth quarter of last year and the portfolio company investments that we made during the first quarter of this year. Indeed, if you average the net investments we made in the fourth quarter last year with those made during the first quarter of this year, then our investment portfolio expanded by $38 million, which is exactly equal to the average quarterly net investment pace we’ve experienced over the last three years.

In many ways, our first quarter results encapsulate the operating strategy that Triangle Capital has always had, and that’s to provide shareholders a stable predictable dividend which is supported by a conservative capital structure and which is funded by a disciplined measured pace of investing. So again, the first quarter 2013 was a very steady quarter for Triangle, and we are very pleased with how the new year has started.

With that, I’d like to turn the call over to Steven for some specific comments with regard to our financial and operational performance.

Steven Lilly

Thanks Garland. As most of you know, we filed our earnings release and 10-Q after the market closed yesterday. During the first quarter of 2013, we generated total investment income of approximately 24.5 million, representing a 28% increase over the 19.1 million of total investment income we generated during the first quarter of 2012. The increase in investment income is primarily attributable to a 5.4 million increase in loan interest, fee and dividend income.

Our total expenses during the first quarter were 9.2 million, consisting of interest expense and other financing fees, and general and administrative expenses compared to 6.9 million during the first quarter of 2012. For the three months ended March 31, 2013, interest expense and other financing fees totaled approximately 5.1 million as compared to 3.3 million for the first quarter of 2012. The increase of 1.8 million in interest expense and other financing fees was primarily due to our 7% senior notes issued in March of 2012 and our 6 3/8th% interest senior notes issued in October of 2012.

General and administrative expenses for the first quarter of 2013 totaled 4.1 million as compared to 3.6 million for the first quarter of 2012. The $500,000 increase was primarily due to increased salary and compensation expenses, a portion of which was associated with an expansion of the operating team at Triangle.

Net investment income for the first quarter of 2013 was 15.2 million or, as Garland mentioned, $0.56 per share as compared to 12.2 million or $0.49 per share during the first quarter of 2012. As Garland mentioned, our NII per share of $0.56 compares favorably to the increased dividend we paid during the first quarter of $0.54 per share.

Our net increase in net assets resulting from operations during the first quarter of 2013 totaled 18.4 million as compared to 12.6 million during the first quarter of 2012. On a per-share basis, our net increase in net assets resulting from operations during the first quarter of 2013 was $0.67 as compared to $0.50 during the first quarter of 2012. Our net asset value on a per-share basis at March 31, 2013 was $15.32 as compared to $15.30 at December 31, 2012, and $15.12 at March 31, 2012. The increase in net asset value on a per-share basis was primarily attributed to net realized and unrealized gains of approximately $0.13 per share, partially offset by the issuance of shares of restricted stock during February of this year.

As we announced on our earnings call two months ago, on March 1 of this year we again took advantage of an opportunity to prepay a portion of our oldest SBA debentures in the amount of 20.5 million that bore interest at a rate of 6.44%, which were also our most expensive SBA debentures. As we moved through 2013, we hope to issue new 10-year SBA debentures at today’s prevailing interest rates. From a cost of capital perspective, we hope the issuance of these new SBA debentures will generate annual interest savings of approximately $600,000 per year.

From a liquidity standpoint as of March 31, we had approximately 37 million in cash on hand, 31.3 million in undrawn SBA debentures, and 165 million available under our existing senior credit facility for total liquidity of approximately 233 million, or said another way, approximately 33% of the value of our investment portfolio as of March 31. While our liquidity position provides us tremendous flexibility, we take great comfort that our annualized NII, or net investment income, on a per-share basis is $2.24 as compared to our current annualized dividend of $2.16 per share. Our strategy of maintaining an equity position in a meaningful percentage of our portfolio companies continues to be an important part of our overall investment strategy, and from a realized gain perspective, including the 1.9 million realized gain we experienced during the first quarter, we have generated net total long-term equity gains of approximately 15.3 million since our 2007 IPO, or said another way a little more than $0.50 per share.

With that, I’ll turn the call over to Brent for comments on our investment portfolio and trends we are seeing in the overall investing market.

Brent Burgess

Thanks Steven. I’ll also keep my comments brief today and be happy to answer you have any questions you have afterwards. During the first quarter, we made follow-on investments in six existing portfolio companies totaling approximately $8.5 million and equity investments in two existing portfolio companies totaling approximately 1.8 million. Also during the quarter, one portfolio company repaid at par for approximately $5.8 million and we received normal principal repayments and partial loan prepayments of approximately $2 million. Taking into account this investment activity, the fair value of our investment portfolio increased from approximately 707 million at year-end 2012 to approximately 715 million at March 31, 2013.

The weighted average yield on our debt investments during the first quarter was 14.8% as compared to 14.6% during the fourth quarter of 2012. This minor fluctuation in yield is normal in our portfolio as our weighted average yield on our debt portfolio has ranged since 2007 from a low of 13.7% to a high of 15.4%.

From a credit quality perspective, we are pleased that our investment portfolio continues to perform very much in line with our expectations. As of March 31, 2013, our non-accrual assets totaled 3% of the portfolio on a cost basis and 0.4% of the portfolio on a fair value basis. This non-accrual rate compares to 2.1% of the portfolio on a cost basis as of December 31, 2012, with the difference being our investment in Exchange Technology Group, or XTG, which we mentioned on our March earnings call was valued at 25% of cost at the end of the year last year and was likely to be placed on non-accrual during the first quarter of 2013. Thankfully, the financial impact of XTG is nominal as it equates to less than one-half of a penny of NII per quarter, or approximately $0.015 per share of NII per year. It also goes without saying that we took this information into account when we made the decision to increase our dividend to $0.54 per share in March of this year. So while we’re still hoping for the best from our investment in XTG, we thankfully are not dependent on it.

From a total investment portfolio perspective, as was mentioned earlier, we experienced realized and unrealized gains of approximately $3.6 million, or said another way, $0.13 per share. This portfolio appreciation was split relatively evenly between realized and unrealized gains, and we believe our portfolio is well positioned for future gains over the next several quarters.

As we mentioned on our earnings call in March, many of the lower middle market private equity firms were quite busy during the fourth quarter of 2012 as impending tax changes put pressure on buyers and sellers to close their transactions before year-end. As a result, a significant percentage of transactions that would have normally occurred in the first quarter of 2013 were pulled forward into the fourth quarter of 2012. In our case, we closed on 67 million of new portfolio commitments during the last two weeks of December; consequently, there was a reduction in available investment opportunities during the first quarter of 2013 because many of the funds with which we were routinely work were rebuilding their own pipelines during the early part of this year.

From a broader market investing perspective, as you might expect, even though we did not originate any new investments during the quarter, we remained actively engaged with various financial sponsors, helping them analyze and structure new opportunities. One of the things that we have witnessed over the last few months is that while many BDCs and other investors that are focused on larger first lien syndicated debt transactions have agreed to accept lower yields, transaction structures in the lower middle market appear to be a little more in line with historical norms in terms of interest rates, interest coverage, fixed charge coverage, and total equity capitalization. As a result, we continue to believe, as we said in our last earnings call in March, that the near to intermediate term, defined as 2013 and 2014, will continue to be an attractive time both for private companies and financial sponsors to find mutually acceptable transactions.

However, as we have frequently experienced over the last six and a half years, the best transactions with the best sponsors and the best companies occur over their own natural timeline, and the best way for Triangle to participate is to continue to position ourselves as the investor of choice when it comes to the lower middle market. As Garland and Steven have both commented, we are thankful that we have the operating philosophy and the capital structure which afford us the opportunity to continue to be disciplined and selective in the transactions we choose.

With that, I’ll turn the call back over to Garland for any concluding comments.

Garland Tucker

Thanks Brent. Before we open the call for your questions, I’ll reiterate a few thoughts we share with our board of directors on a quarterly basis regarding our long-term goals. First, we plan to continue our focus on mezzanine debt investments in the lower middle market. We’ll strive to continue to earn our dividend. We’ll strive to continue to have net equity gains exceed principal losses. We will keep investments within our historical leverage and diversification parameters. We seek to maintain low non-accrual levels. We will continue to maintain a conservative balance sheet. We will continue to maintain our long-term relationship with the SBA, and we will continue to match our asset growth with appropriate staffing.

When we analyze these goals alongside our first quarter 2013 results, we are very pleased. As the balance of 2013 continues to unfold, we are equally excited about Triangle’s prospects for making investments in new portfolio companies in the lower middle market and also about the prospects of many of our existing portfolio companies to continue their positive performance.

With that, Operator, you can open the call for questions.

Question and Answer Session

Operator

Thank you. [Operator instructions]

Our first question is from Robert Dodd from Raymond James. Your line is open.

Robert Dodd – Raymond James

Hi guys. A question first on competition. Obviously you’ve got very long established relationships with your partners, as you talked about, into sourcing deals, et cetera. Are you seeing anything change, though, in terms of other players moving down market trying to avoid the—you know, just a shuffle of them moving down half a step with the CLOs getting out of control at the very top end, or is it just those relationships just outweigh everything?

Steven Lilly

Robert, it’s Steven. I’ll give you just a quick thought and let Brent maybe add to it if he’d like. I think the short answer is no to that in terms of people moving down market. If you look at our investment portfolio, approximately 70% of the companies that make up our portfolio, the total transaction consideration was under $100 million. So when you look at that swath of the market, as Brent said in his comments, it just tends to be a little less competitive and I think that owes to some of the reason that we’ve had some of the rates and structures that we’ve enjoyed over the years.

But Brent, would you add anything to that?

Brent Burgess

Yeah, I would just say the market is always competitive, obviously. I wouldn’t say that it’s more competitive now than it has been in the recent past. I think the big change in the market is on the senior debt side, that there’s a lot more competition because banks have come aggressively back into the market and there’s a lot of new senior lenders that have been funded and a lot of CLO activity, as Steven mentioned. That certainly affects our market in terms of pushing leverage a little bit up, but it’s really—that’s where the pressure from a competitive standpoint is. It’s what the senior debt guys and much less so with those of us focused on sub-debt.

Robert Dodd – Raymond James

Got it, okay. On Home Physicians – I mean, there’s a note in the Q that says basically it’s improving, it may come off PIC accrual if that improvement continues. Can you give us any thought on what’s driving that improvement? Is it they’re benefiting from some macro trends – that, I think would be a stretch – or is it things explicitly within their control that they’re working on in terms of rationalizing the structure internally, cost structure or whatever. I mean, can you give us an idea basically whether it’s in their control we’re not back on PIC accrual, or they just need a fortuitous economy?

Brent Burgess

No, it’s definitely in their control, and as I mentioned on the last call, Robert, the company is engaged in some significant initiatives, both internal and external. From an internal standpoint, they’ve done some things to improve their business model, improve their management team, and we are seeing some really nice developments in terms of their sales pipeline and the attractiveness of what they are doing in the healthcare space. There’s also some external efforts going on that I alluded to in the last call, and we’re seeing some early positive results from that just in terms of looking at some strategic options for the company. As it’s a private company, I’m not going to go into any more detail than that, but suffice it to say that obviously not only are we suggesting it’s going to be off PIC accrual probably more tangibly, there was a very substantial write-up, obviously, in the loan value.

So those factors, whether or not there is a transaction, we feel comfortable that the business has—which has always had the potential has had a variety of execution issues, is really starting to fire on all eight cylinders, so we’re reasonably confident there that one way or another, we’re definitely going in the right direction.

Steven Lilly

Robert, it’s Steven. Just to add one quick thing to what Brent said – I appreciate so much the fact that you found that in the Q. It means you, as usual, were reading it closely; but there was some discussion obviously around that account and the revenue recognition potentially of the PIC interest in the first quarter, so the language in the Q was really chosen with great specificity. We made what I think is sort of tilting, we hope long-term conservatively, to choose the treatment that we did, but certainly it probably wouldn’t have been overly aggressive to have gone ahead and recognized the PIC in the quarter. Certainly some folks may have made that decision. So as Brent says, there are definitely points of light in that arena.

Robert Dodd – Raymond James

Okay, great. Thank you. That’s understood. Just one more if I can – on the follow-on investments, since that was all the activity in the quarter, can you tell us generally speaking what the drivers were there? I mean, is it these current companies? Are they starting to look to expand? I mean, obviously these are individually relatively small additions to the portfolio companies since they are follow-on investments, but are they looking to expand and they needed capital to withstand some issue? Can you give us some color on what were the kind of general drivers behind those investments?

Steven Lilly

Yeah Robert, maybe a quick answer and if Brent wants to go into more detail, then certainly we can. But I think in general when you look at the health of the overall portfolio and our statistics and ratios, I think you could conclude that the investments in existing portfolio companies were of a positive nature, certainly more so than a shoring up as you indicated.

Brent, I don’t know if you’d have any--?

Brent Burgess

Yeah, add-on activity, Robert, is very important to us and to our partners. Having the flexibility and the available capital to address any situation, whether it’s a growth opportunity, whether it’s an acquisition, whether it’s some form of recap or whether it’s shoring up, there is a bit of all of that kind of in what we did in the quarter. But generally speaking healthy activity, and we’re happy to have the opportunity to put more capital to work in these businesses.

Robert Dodd – Raymond James

Okay, understood. Thank you guys.

Operator

Thank you. The next question is from Greg Mason of KBW. Your line is open.

Greg Mason – KBW

Great. Good morning, gentlemen. First, can you talk a little bit about the loan interest, fee and dividend income? I was surprised that it was flat essentially quarter-over-quarter, given you had the massive growth in the fourth quarter. I thought a full run rate would see that up. It looks like the one-time income was the same versus the fourth quarter, so could you talk about any type of pressures in that number or benefits last quarter that would cause essentially that number to be unchanged this quarter?

Steven Lilly

Well Greg, this is Steven. In the fourth quarter, there were some—we did have more one-time fees, if you will, and dividends from portfolio companies, and this quarter was—I don’t know how I would characterize it other than to say there just wasn’t much of that in this quarter in terms of non-recurring income. We joke sometimes on calls that non-recurring income in the business is something that everybody has some amount of in the quarter, and obviously some quarters are larger than others and some quarters are smaller than others. So last quarter was maybe a little bit above average, I would say, and this quarter was more below average; but other than that, there’s nothing major. The weighted average on the yield on the portfolio was 14.8 this quarter, 14.6 last quarter. The only change there was just as Brent mentioned, you know, the move of XTG to non-accrual and it was an 8% interest carrier, so to speak, our investment, so it’s just the way the math works on that. But that’s really it.

Greg Mason – KBW

Okay, great.

Brent Burgess

I’d just add one comment to that, Greg. As we’ve said before, one-time fees come from multiple sources but the most common and typically the largest source is loan repayments, so given that we had very low level of loan repayments in Q1, that’s sort of indicative. Fourth quarter of last year, we had much heavier loan repayments.

Greg Mason – KBW

Okay, great. And then Brent, could you also talk about—you mentioned that the banks are becoming more aggressive, and clearly the first lien is more aggressive. Are you seeing any leverage expansion where they are going further in the capital structure? That could be one way they could negatively impact your sub-debt position. What are you seeing there in terms of how deep they are going, and then is that pushing you further down your last attachment point in the capital structure?

Brent Burgess

Yeah, we’re definitely seeing a change in their behavior, Greg. I would say it’s probably long overdue. We’ve enjoyed—you know, I think the hardest part in the lower middle market in the last three, four years, the most difficult part of the capital structure to fill has been the senior debt, and obviously that’s given us a lot of attractive opportunities to get into companies with relatively low attachment points. I would say the market is rotating more to historical norms. Certainly what we’re seeing today is well within the bounds of historical norms, but you’re absolutely right – it’s pushing our attachment point down the balance sheet. Not anything that we see as great concern yet – I wouldn’t call it bubblicious in any way. But certainly, again, a change and a fairly marked change from what we saw in 2012.

Greg Mason – KBW

Great, and then one last question – on the potential SBA legislation change, I know you guys are tied in with the SBA and the Small Business Investors Alliance. Is there any updates that you guys are hearing about on Capitol Hill for expanding the SBIC debentures program?

Steven Lilly

We remain as hopeful as ever.

Greg Mason – KBW

Is that blind hope or hope based on some evidence?

Steven Lilly

I think, just like every other quarter, I think we’re as blind as everybody else on whether it will get done. But gosh, we do remain hopeful!

Brent Burgess

We don’t have any more evidence than you do. What we are unable to assess is the quality of that evidence.

Greg Mason – KBW

All right, appreciate it, guys.

Garland Tucker

This is Garland. You’d mentioned we are plugged into the SBA, which we are. Unfortunately or fortunately, we’re not any more plugged into Congress than anybody else, and I guess that’s where it will be determined. So we’re hopeful.

Greg Mason – KBW

Great, thanks guys.

Operator

Thank you, our next question is from Kyle Joseph of Stephens. Your line is open.

Kyle Joseph – Stephens

Morning guys. Thanks for taking my questions. Brent, can you give us an idea on the revenue and EBITDA growth trends you’re seeing from portfolio companies?

Brent Burgess

Yeah, I would say definitely a little better than what you’re seeing in the public companies. In the public companies, I think the most recent quarter revenue growth was kind of in the 2% range and earnings growth kind of in the 7 to 8% range, and a lot of that earnings growth being driven by stock buybacks. We’re seeing a little bit better revenue growth in the portfolio but generally not a lot of double-digit revenue growth. In a portfolio of 82 companies, of course you’re going to see everything – you’re going to see companies that are shrinking, companies that are relatively flat, companies that are growing very rapidly. But I’d say in aggregate, what we’re talking about is kind of high single digit-types of growth rates.

Margins – you know, margins in general are at all-time highs, and so I wouldn’t say we’re seeing a lot of margin pressure but we’re also not seeing a lot of margin expansion.

Kyle Joseph – Stephens

Understood, thank you for that. And then Steven, on the SBA debt you bought back, what are the new coupons you’ve seen most recently on SBA debt? I guess the new coupons and then the all-in costs on the most recently issued SBA debt.

Steven Lilly

Yeah Kyle, I think around 3.5%, plus or minus, is what we’ve seen in terms of the LOC, so I think for modeling purposes that’s probably a reasonably fair assumption for you.

Kyle Joseph – Stephens

Okay. And then last question – actually, let me preface it by saying that I do commend your disciplined investment approach in the quarter, but I was just hoping to get a little more color on exactly what was going on in the market. So were you guys at least being shown some deals in the quarter, or did you just not see any deal activity in your sorts of markets?

Brent Burgess

We had a hard time seeing the deals because they were covered by sand. No! We were not on the beach. We were working hard. Definitely the number of deals we saw was down significantly, and I think that’s pretty much generally been the case for most everyone, obviously because of the tax changes that drove the activity in the fourth quarter, as I mentioned before.

So yeah, we had activity. There were deals that we hoped to get that we didn’t get for competitive reasons and whatnot, as in any quarter. But it was definitely slower activity. We’re seeing the pipelines building, and I anticipate again that we’re going to have a very active, particularly active probably third and fourth quarter of this year, because again I think from a macro standpoint the fundamentals are good. There should be a lot of lower middle market M&A activity this year, and as usual we’ll participate in our share of those transactions.

Steven Lilly

Kyle, it’s Steven. Just to add one thing to what Brent said, I think we remarked internally several times during the first quarter that we were delighted that we are thankfully not a company or a BDC that is in a position where we’re growing into a capital structure or had just raised a bunch of equity capital and needed to grow into a new dividend obligation or something like that. It’s just great to be capitalized the way we are and to have the dividend coverage that we’ve had historically, and as you know better than a lot of folks in the market because you’ve known us a long time, we just really don’t think about the business on a quarter-to-quarter deployment schedule and really focus on quality over quantity. So it was nice for those things to come together this quarter.

Kyle Joseph – Stephens

All right, guys. Thanks a lot for answering my questions.

Operator

Thank you. Our next question is from Mickey Schleien of Ladenburg. Your line is open.

Mickey Schleien – Ladenburg Thalmann

I was really impressed with the operating leverage in the business in the first quarter. Just curious on the G&A expense line, it was down from 4.5 million in the fourth quarter to 4.1 million in the first quarter, so in my model you’re reaching down to about 2.3% of average—the portfolio on an average basis. So I’m trying to get a sense of over the long term, meaning the next two, three years, can that ratio continue to decline or is there some point where efficiencies are maxed out?

Steven Lilly

Mickey, it’s Steven. Thank you for your question. In terms of the difference in the quarter, quarter-over-quarter there, they are normal fluctuations you get and some of it timing difference of when things—like you hate to admit it, but as a smaller public company, audit expenses are pretty significant and those types of things, really whether something hits one quarter or the next is meaningful in terms of a needle mover, I guess I would say. So from that perspective, I think in the business there is some level of base SG&A that you just have to have, so I don’t think we see the number in terms of an efficiency ratio is defined as G&A divided by revenues, being able to go much lower, and when you look at some of the external guys versus a lot of the internal guys and certainly Triangle, I think we all kind of run the business at maybe half of the total SG&A level that many of the external guys run it.

So whether you’re exactly half or slightly less, slightly more than half one quarter or one year over, it’s hard to predict; but I think our commitment, as Garland has always said, is we want to be among the most efficient operators in the space and think we’ve hopefully done that and earned that reputation, and would hope to keep it. But last year’s SG&A, I guess, was an 18% efficiency ratio and translated into maybe 2.2% of assets under management for the year. Certainly both of those metrics are really healthy and, I think, compare well, and we’d hope to stay in that range.

Mickey Schleien – Ladenburg Thalmann

Steven, was there anything seasonal from the fourth quarter to the first quarter that accounted for the decline?

Steven Lilly

Well Mickey, if you look back at our SG&A over a number of years, the second quarter tends to be a heavier quarter from an SG&A perspective, and the fourth quarter tends to be heavier from an SG&A perspective. The first and the third tend to be a little lower. This may sound funny to you, but the first quarter is two days shorter than anything else in the year, so it does—some of those things come into play even for a company of our size. But there is nothing specific that I point to quarter over quarter. I think if you looked back and lined up the last 12 quarters for Triangle, you’d see a decent amount of variability quarter-to-quarter, but if you look at it on a year-over-year basis, you’d seen kind of nice trend lines.

Mickey Schleien – Ladenburg Thalmann

Very good. I appreciate your time.

Steven Lilly

Thanks so much, Mickey.

Operator

Thank you. Our next question is from Bryce Rowe of Robert W. Baird. Your line is open.

Bryce Rowe – Robert W. Baird

Thank you. Have a few questions here. The first one – Steven, you talked about the expansion of the Triangle team there. Just wanted to get an update on any plans to add folks to the team, or if you added folks to the team here in the first quarter.

Steven Lilly

We have folks, as you know, certainly last year. We added, I guess, two folks to the team in the first quarter as I guess I’d call it on the investment side, and then one person on the financing reporting side. We continue to, as Garland has always said, on a percentage basis if you look back at the time of our IPO six-plus years ago, the headcount’s certainly grown a lot on an individual level, person-to-person basis. It’s gone from 7 or 8 to about 25 now, so still a relatively small shop. But I think our commitment has always been that we’ll add selectively as we need to with expansion in the business, and hopefully we’ve been true to that and will continue to be over the balance of this year. But we don’t have anything on the drawing board to add, say, 10 people or anything like that.

Garland Tucker

This is Garland. I think it goes back, as Steven was saying, really that list of things that I mentioned right at the end of the call, that we regularly reiterate to ourselves and to the board. It starts with our commitment to staying in the lower middle market, and we see growth opportunities to increase our penetration in that market, it’s going to mean additions in staff, and that’s what it meant over the last six years. The growth in staff has been pretty commensurate with our growth in the portfolio, and I think that’s what we see in the future. If we continue to have growth opportunities and we stay in the lower middle market, then it will mean we’ll add staff. But the driver of any increases in staff is going to be exactly what it’s been the last six years. We don’t see anything unusual on the horizon.

Bryce Rowe – Robert W. Baird

Okay, that’s helpful. Steven, I saw in the Q there was a re-class of some senior debt into the subordinated debt category. Just wondering what was behind that, and any color you could add with respect to that move.

Steven Lilly

Thanks Bryce. Thank you for reading the Q so thoroughly. Sometimes when we make investments in a portfolio company, it will be a—even though the yield is equal to kind of our average yield, we will have a first lien from a collateral standpoint and we will permit the portfolio company, with our approval certainly, to add at a date after our closing, to add a sort of working capital revolver or something of that nature because we’re not really set up to be a revolver lending shop. I think what you saw there was we’ve had a couple, two or three portfolio companies that have done that and we permitted the bank or whoever it is to have a lien on accounts receivable and inventory, that type of thing.

So that’s really from a re-classification standpoint, that’s what it is, and obviously when a portfolio company is doing that, it’s something that we talked about, we allowed for in our documentation, and is usually a good sign, I guess I would say, of a portfolio company pursuing more of some growth opportunities that they see in their market.

Bryce Rowe – Robert W. Baird

Great, okay. And then last question for Brent – Brent, you talked about being well positioned for continued equity gains from your positions. Just wondering, are you hearing anything specifically from companies about selling so you can generate those equity gains, or is that more just a function of looking at where the equity—the unrealized positions in the equity portfolio are today?

Brent Burgess

It’s some of both. With 80-some odd portfolio companies, there’s always some companies that are in some transaction process, and so we are certainly aware of some companies and some transactions that will be attractive for us. But we are seeing again in some subset, obviously, not all the companies as from my comments before about growth rates, we are seeing some companies that are performing exceptionally well. In general, the equity portion of our portfolio continues to increase in value, and I think there’s going to be some multiple expansion this year related to the expansion in senior debt that I mentioned before. I think that’s going to make things a little bit more difficult for sponsors going forward, and it’s probably not going to bode well for future equity gains or equity returns from 2013 vintage, but I think it’s going to really benefit equity positions that were originated in prior periods.

Bryce Rowe – Robert W. Baird

Yeah, okay. Thanks Brent. Appreciate it.

Operator

Thank you. Our next question is from Jonathan Bock of Wells Fargo. Your line is open.

Jonathan Bock – Wells Fargo

Thanks, good morning and thanks for taking my questions. Real quick – as we start to look at the model, and I know we’re a little newer to the story but are very happy to follow you, walk us through the equity capital or the equity account and its potential for growth over the intermediate and long term, and this of this more as a philosophical discussion because at some point you’ll have investors asking the question. There is a substantial amount of credit facility available, leverage from a regulatory basis is low. How do you view growing earnings relative to growing the equity account on the balance sheet and delivering sustainable levered returns over time?

Steven Lilly

Jonathan, it’s Steven. I’ll start, and Garland and Brent, as you say, being a philosophical discussion can certainly chime in. I think I would say that I would hope what we would be able to accomplish in the future from a total capital structure standpoint would be exactly equal to what we have been able to achieve in the past, which is when we have raised equity capital, we have invested the proceeds of those equity offerings typically within 90 to 120 days of the offering, so we’ve been able to have sort of a just-in-time inventory of equity capital, and we’ve been able to do that because we thankfully have had other forms of capital to buttress us in those other periods.

Like any company, we really enjoy having—well, I don’t know if I should say any company, but we like having all three legs of the capital markets stool available to us – the bank market, the bond market and the equity markets, hopefully. So I think as Garland has mentioned before and we’ve certainly said time and time again, continuing to increase dividends per share with any capital structure growth that occurs, that really has to be the focus. And if you don’t think you can increase dividends per share, you shouldn’t raise equity, whether you’re internally managed, whether you’re externally managed. So from that standpoint, we’re glad we have the incremental capacity we do on the debt side now and think it would be reasonable to assume that over the balance of this year, we would utilize certainly some of that capacity and just have a continued measured approach.

But I think you’ve always got to go back to can you reasonably believe that you can increase your earnings and dividends per share, make things accretive to people, before you would undertake ever raising additional equity capital, or even baby bonds or levering on the bank side.

Garland, would you add anything to that?

Garland Tucker

Yeah Steven, just to reinforce what you’re saying, I think one of the things we’re proudest of and enjoy using as a slide from time to time is the history of—it plots our asset growth but also overlays on it the accretive or incremental growth in NII per share. It’s certainly our commitment internally to only take advantage of growth opportunities if we’re convinced that it can be accretive on a per-share basis. In the past, we’ve been able to do that. It’s been a combination of using leverage appropriately, and again that ties in with another one of our commitments and that’s to use—to support our investment in long-term illiquid assets with long-term liabilities and permanent equity capital. But the appropriate use of leverage has helped us do that. Also, the operating efficiencies that we’ve been able to generate as an internally managed BDC have helped us as we’ve grown the asset base. A combination of those things has resulted in incremental per-share NII and consequently dividends.

So our commitment to delivering that has not changed at all, and if we are able to do it in the future, which we believe we can, it will be a combination of using those same levers that we’ve used in the past.

Jonathan Bock – Wells Fargo

I appreciate that. I think the crux of the question kind of gets to I don’t think anyone would ever question the ability to grow NII per share. The question is the magnitude of that growth, because in terms of financial modeling one can project one way without an equity raise, which is extremely high; one could go with an equity raise which is still high and more moderate, and so I appreciate the color in trying to help us understand maybe how you’re viewing substantial ROE versus more of a moderate pace.

That actually gets to my next question – refinance risk. Given the subordinate focus, which has generated outsized returns over time, we understand that the middle market is certainly insulated, I think is the term a lot of managers use, but not immune from competitive pressures in the market. Just looking at, I believe it was Trusshouse’s (ph) sale recently, maybe walk us through some of the refinance risks that are posed to investors in the current portfolio as a result of the tighter spread environment. We know you have as many protections as possible, but would it be fair to assume the spread compression is going to be maybe a given in the current environment?

Steven Lilly

Yeah. Clearly with heightened senior lender activity in our market, that increases refinance risk. Companies obviously have several options when they have performed well and market levels of leverage increase. They can repay the sub-debt or they can pay themselves a dividend, or they might remain under-levered, relatively speaking, if they believe they have acquisition opportunities in the relative near term. We see all of those things going on in our portfolio. When we get refinanced, that’s a success. Obviously when you put the money out, you hope to get it back at some point in the future.

So do I think we’re going to see a heightened level of refinancings? I think that’s fairly likely. I think that will probably be offset at the same time by a heightened level of activity, so I would say that’s a neutral factor for us. And again, I think healthy senior debt markets are a really important ingredient for healthy M&A markets, and so we’re thankful that the senior debt markets have really recovered, and really for the first time in five years, I would say, are functioning what I could call normally.

Jonathan Bock – Wells Fargo

Appreciate that. In terms of a follow-up, though, to the extent that repayment or refinance risks increase, that would imply that senior debt lenders, obviously to your point, are getting more aggressive and/or companies are getting more aggressive in terms of the pricing at which they believe is the appropriate rate to be charged, which would signify that there’d be increasing risks in the new capital that would be deployed relative to what we’ve seen in deals past. Does that make sense, or is there a way kind of to buck trends?

Steven Lilly

Yeah, the point I made to Greg Mason earlier – I agree with you. I think attachment points are going to be moved down the balance sheet, total leverage is going to go up, and how do I think about that? The way that I think about it is that we’ve enjoyed really above average, better than normal total leverage and attachment rates in the most recent past, and I think that we’re returning more to a normal type of market going forward. Obviously we’ve enjoyed it when leverage has been lower and attachment points have been better, but I don’t—it’s not time to wave the red flags yet, that’s for sure.

Jonathan Bock – Wells Fargo

Okay, great. Thank you so much.

Operator

Thank you. Our next question is from Boris Pialloux of National Securities. Your line is open.

Boris Pialloux – National Securities

Hi, thanks for taking my question. Just a quick question – concerning the SBA debentures, I think your March 2013 was at 15%. Are there any restrictions to actually prepay your other—like, the March 2011 or March 2009 tranches? And second is what’s your view of the use of LMI debentures versus 10-year debenture?

Steven Lilly

Boris, it’s Steven. Thank you for your question. With the SBA, we can prepay. It is not a given, so to speak, that you will be a recommitment. Obviously it’s, I’ll say out of deference to the SBA and their investors, that if you were to issue paper with them and then two years later turn around and try to arbitrage rates or something, at some point they might say hey, that’s not really in the spirit of what we’re seeing to do. And so we’ve always tried to take it on a chronological basis and just used it as balance sheet management in terms of just traditional maturities, so the pieces that we have repaid have all been in years six, seven and eight, that type of thing, whereas you look at the recommitments that we make on two portfolio companies that that capital to be sure that we’re match funded. So from that perspective, that’s been our approach and we certainly always—the SBA has just been a wonderful partner to us, as you know, and we certainly hope that will continue.

In terms of the LMI debentures, those are five-year debentures as opposed to 10-year debentures, and we experimented with that program because it’s a way for the SBA to try to focus dollars to areas of the country where they divine it as kind of a less economically active or vibrant area, so there are even some additional incentives that they have there. That made sense, because we happened to have a portfolio company opportunity that was headquartered in one of those areas. So I think whether we would do that again when those mature and we refinance those or not, I think will depend on portfolio company activity at the time, frankly, more than anything.

Does that help?

Boris Pialloux – National Securities

Yes, thank you.

Steven Lilly

Great, thank you.

Operator

Thank you. Our next question is from Bob Martin. Your line is open.

Bob Martin

Yes. Home Physicians – will there be a catch-up on the PIC non-accrual that will hit NII, or will that hit gains?

Steven Lilly

Bob, thank you. This is Steven. When the PIC interest is again accrued, there potentially are two steps that a company would take. One would be to begin accruing PIC in the quarter and then there is a question of, as you say, the legacy PIC that was on non-accrual for a period of time, and that sometimes can come in the same quarter. It sometimes could come in a later quarter. So tough to tell exactly when it would hit, but the short answer to your question is yes, contractually we would have the right ultimately to claim all of the PIC that had been accruing contractually but that we had not been recognizing on our books yet. And it would fall into NII for us, so it would be above the line, so to speak, as additional revenue and earnings that would flow through for dividend purposes.

Bob Martin

Thank you. What portion of your 11% investments in equity are currently paying a dividend?

Steven Lilly

Well, in a portfolio like ours, the equity investments typically do not pay a contractual dividend that we would recognize into earnings, but we might selectively have in certain portfolio companies what’s known as a dividend recapitalization, or the company may say Triangle, you own – I’m just making this up for example purposes – 10% of our company and we’re going to pay a million dollar dividend to all shareholders, so our portion of that would be $100,000. And then we would recognize that as a dividend if the company has sustainable earnings, or if for some reason they did not have earnings it would be recognized as a return of capital.

So I think over our entire portfolio, we’ve only got sort of taxed distributions that are evidenced on a recurring basis from three of our 81 or 82 companies.

Bob Martin

At present, you have a policy of not revealing your portfolio debt to EBITDA and interest rate coverage ratios because you believe the companies to which you are investing want to have that privacy. You’re already at 80 portfolio companies. To what degree do you need to grow your portfolio so that you could reveal that information? They have some anonymity because of the number of portfolio companies that you have.

Steven Lilly

Well, it’s not really a preference but just sort of a requirement that these are privately held companies. For example, if you were to have a family-owned company and we were to have an investment in your family-owned company, you would certainly like to keep your financial information private and would have certainly a right to do that, and we need to be respectful of that privacy. And that’s regardless of whether our portfolio is 80 companies or 100 companies or any other number of companies.

So from that standpoint, we really need to keep information private and we’ll continue to do that on a company-by-company basis, but one thing that we have talked about publicly, and Garland has mentioned on prior calls, is what our sort of average portfolio-wide leverage is on an aggregate basis, so to speak, and that has ranged from a low, I think, of about three times and a high of approximately four times, and right now as Brent has alluded to, we’re kind of right in the middle of that fairway with, I think our average portfolio company leverage is about 3.5 times through our debt, so really kind of right in the middle of the fairway, if you will. And the same is true from an interest coverage and a fixed charge coverage basis – we’re really right in the middle of what we have experienced over our entire life cycle since 2007.

Bob Martin

This investor does not want to have those ratios company-by-company, but a weighted average number. I thought there would be some anonymity given that you have 80-plus portfolio companies in giving a weighted average number. For example, your non-accrual metrics paint a very high quality picture of your portfolio, but it would be nice to have it reinforced by having your weighted average debt to EBITDA and interest coverage ratios. And other BDCs are providing that transparency.

Steven Lilly

Well Bob, thank you for that suggestion. We will certainly take that into account. I think as you look back and would compare Triangle to other companies in the space, I would certainly hope that you would come to the conclusion, as many others have, that we’ve been a leader in transparency in the information that we provide, and we’ve used the average numbers that I just gave you historically. But again, thank you for your suggestion and we will take that into consideration.

Bob Martin

Okay, thank you for your time and thank you for answering my questions.

Steven Lilly

Thank you so much.

Operator

Thank you. There are no further questions at this time. I’d like to turn the call over to Mr. Tucker for any closing remarks.

Garland Tucker

Okay, I’d like to thank everybody for being on the call. We’ve had a good group, and particularly we appreciate your questions. We look forward to being on the call next quarter, but in the meantime as always, if you have additional questions, call us and we’ll be glad to hear from you. Thanks again.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now all disconnect. Have a wonderful day.

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