Solar Capital Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 1.13 | About: Solar Capital (SLRC)

Solar Capital (NASDAQ:SLRC)

Q2 2013 Earnings Call

August 01, 2013 10:00 am ET

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

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

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

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

Kevin Chen

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

Boris E. Pialloux - National Securities Corporation, Research Division

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Solar Capital Ltd. Earnings Conference Call. My name is Lisa, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host, Mr. Michael Gross, Chairman and Chief Executive Officer. Please proceed, sir.

Michael S. Gross

Thank you very much, and good morning. Welcome to Solar Capital Ltd.'s earnings call for the quarter ended June 30, 2013. I'm joined here today by our Chief Operating Officer, Bruce Spohler; and our Chief Financial Officer, Richard Peteka.

Rich, before we begin, would 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 our 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. Despite the blip in the market following Bernanke's commentary in June, we continue to be in an environment where the risk trade is on. The inflows in the liquid credit markets, coupled with investors appetite for yield, have resulted in an environment where many investors are willing to stretch for return by taking on more risk. That approach is not consistent with our investment philosophy.

As 25-year veterans in the industry and large shareholders of the company, our management team has been through enough market cycles to have an appreciation for the importance of adhering to our stringent underwriting criteria rather than sacrificing credit quality for incremental yield.

Given the current market dynamic, we are managing our portfolio to include a higher percentage of secured loans, which we believe currently offer a better risk reward proposition. We're placing a huge priority in being higher up in the capital structure and receiving floating-rate cash paid coupons.

The modernizations we announced last week of our 2 largest legacy portfolio companies, both of which were unsecured and fixed rate, marked the near culmination of our effort to shift our portfolio mix from its high risk composition at the time of our IPO to the low-risk composition it has today.

To go back in time, at the time of our IPO in February 2010, our roughly $800 million market value portfolio was only 20% secured debt, 30% floating rate debt and over 20% of our interest income came from all pick investments. The 3 large put positions at that time accounted for approximately 25% of our portfolio fair value.

Today, pro forma for the exit of DS Waters and MidCap Financial, our June 30, 2013, portfolio with a fair value of approximately $1.2 billion, is composed of approximately 43% secured loans. However, when you couple Crystal Financial's portfolio, which is 100% secured loans, 68% of our total fair value is now invested in secured assets, with 54 % of portfolio, income-producing portfolio is floating-rate. And now today, approximately 97% of our growth investment income comes from cash-paid securities.

Our commitment to maintaining our underwriting standards, while reinvesting approximately $237 million of growth proceeds from the recently announced monetization [ph] , rapidly increasing risks by chasing yields drove our Board Director's decision to reduce our quarterly dividend to $0.40 per share and to implement a $100 million share repurchase plan, which we announced last night.

We believe that $0.40 per share approximates our portfolio's current run rate net investment income. And thus the reduced dividend is better aligned with the current earnings power of our now lower risk portfolio. Our objective is to increase that investment income by prudently deploying our over $500 million of investable capital in both new investments and opportunistic purchases of our common stock.

Given the lumpiness of our business, this may take a few quarters to fully achieve. In an effort to further increase shareholder value, we recently were able to reduce our volume costs with our relationship banks. We amended our $525 million credit facility, reducing the rate from LIBOR plus 2.50% to LIBOR plus 2.25%. And importantly, we extended the maturity 2 additional years to June 2018.

Total capacity of the facility today stands at $490 million and is expandable to $800 million under its accordion feature. Additionally, we retired a higher cost $100 million revolving credit facility, which carried a rate of LIBOR plus 2.75%. As a result, our total borrowing capacity is now $665 million with a weighted average maturity of more than 8.5 years, well into the year of 2022.

These modifications not only turned out our liability structure, but they also furthered our objective of providing for a highly efficient and low-cost capital structure. The onetime expenses associated with these modifications will be approximately $0.05 per share and will impact our third quarter earnings. Also, in the second half, we anticipate a significant amount of prepayment fee income, resulting from the exits of DS Waters term loan and MidCap Financial, which may drive net investment income per share higher than our near-term expected run rate.

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

Richard L. Peteka

Thanks, Michael. Solar Capital Ltd.'s net asset value at June 30, 2013, was $1.01 billion or $22.40 per share compared to $1.03 billion or $23 per share at March 31, 2013. The change in NAV per share was driven primarily by unrealized depreciation on our preferred investment in DS Waters and on Rug Doctor coupled with a second quarter dividend in excess of our Q2 net investment income.

Our investment portfolio at June 30, 2013, had a fair market value of $1.42 billion, in line with March 31. Pro forma for the monetizations of our investments in DS Waters and MidCap Financial, at June 30, we had investments in 39 portfolio companies in 24 industries. The weighted average yield on our income-producing portfolio was 12.0% measured at fair value and also excluding DS Waters and MidCap Financial.

For the 3 months ended June 30, 2013, gross investment income totaled $39.1 million compared to $46.1 million for the 3 months ended March 31, 2013. The decrease in gross investment income from the prior quarter was primarily related to not accruing income on the senior preferred DS Waters group investment, for which we announced the sale of on July 24, 2013.

Expenses totaled $19.9 million for the 3 months ended June 30, as compared to $20.6 million for the 3 months ended March 31. The company's net investment income totaled $19.3 million, or $0.43 per share for the 3 months ended June 30 versus $25.5 million or $0.58 per average share for the 3 months ended March 31.

Net realized and unrealized losses for Q2 2013 totaled $19.3 million, which was primarily driven by the difference between the final sale price of the DS Waters senior preferred investment and its fair value as of March 31. These results compared a net realized and unrealized gains for Q1 2013 of $10.3 million.

Ultimately, the change in net assets resulting from operations netted to negative $13,000 or 0 on a per share basis for the quarter ended June 30. This compares to a net increase in net assets of $35.8 million or $0.81 per share for the quarter ended March 31, 2013.

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

Bruce J. Spohler

Thank you, Rich. Before I take you through our current portfolio, I'd like to touch on our recent portfolio of developments, which were announced in our press release from last week.

Our portfolio company DS Waters has entered into a definitive sale agreement with the transaction expected to close within 90 days. We anticipate receiving approximately $150 million of gross proceeds for the combination of our second lien loan and preferred equity investments.

Our second lien loan will be redeemed at a premium to par and will continue to accrue interest until it is repaid. The June 30 fair value of our senior preferred units reflects our expected realized value. And therefore, we didn't accrue interest on it during Q2, nor are we doing so during Q3.

We are pleased with the outcome of our investments in this legacy portfolio company. Our full exit is expected to result in an IRR of approximately 10.3% and a 1.5x multiple on invested capital, since the initial investment date back in 2007.

Last week, our subordinated loan to MidCap Financial was redeemed in full at a premium to par. Proceeds totaled approximately $87 million. Since our initial investment over 3 years ago, the IRR in this investment is 16.5% and the multiple on our invested capital is 1.4x. With the monetization of our 2 largest legacy investments, we believe that our current portfolio, both from a risk reward, as well as a diversification standpoint, is extremely attractive.

Since our IPO in early 2010, we have significantly increased our percentage invested in secured loans, we've decreased our allocation to equities and meaningfully upped our percentage of floating-rate securities, and last, but not least, meaningfully reduced our pick income to now being a negligible amount of our gross investment income. At June 30, pro forma for the expected monetization of DS and MidCap, the weighted average yield on our income-producing portfolio was 12%. And the fair value weighted average mark, excluding our common equities, was approaching 99%.

Aside from Rug Doctor, for which restructuring discussions are ongoing, our portfolio companies continue to report solid financial performance. The weighted average risk rating on the portfolio remains approximately 2, when measured at fair market value in June 30, which is based on our 1 to 4 risk rating scale, with 1 representing the least amount of risk.

At June 30, pro forma for the expected monetization of DS and MidCap, the portfolio consisted of 39 companies operating across 24 industries. When measured at fair value, 54% of our investments are floating rate. The pro forma portfolio is invested 43% in senior secured loans measured at fair value. However, when you include Crystal Finance, 100% -- which is 100% senior secured loans themselves, close to 68% of our exposure is across secured investments.

Before I touch on portfolio activity in Q2, I'd like to give you a brief update on Crystal. As of June, Crystal had a diversified secured loan portfolio, totaling approximately $364 million, consisting of 22 funded commitments to 19 different borrowers. Again, all of its investments are floating rate.

The average exposure per issuer is approximately $19 million, and the weighted average yields on the loans is close the 13% at June 30. The Crystal portfolio is 100% performing as of June.

The slightly lower portfolio of size versus Q1 is consistent with our expectation that it may vary quarter-to-quarter, given the shorter average loan life and more rapid amortization characteristics of Crystal's asset-based loans.

At the end of the quarter, total debt on the portfolio at Crystal was $142 million for a net debt to invested equity ratio of 0.4x. Crystal had over $150 million of available capital subject to borrowing based on its underlying facilities. We believe that this investment offers a highly attractive risk return profile, given the senior secured nature of its underlying loans. During Q2, this investment paid Solar a cash dividend of $8.3 million, or a 12% cash-on-cash annualized yield, which has been included in our net investment income.

Turning to the origination front. During the second quarter, despite the challenging market conditions, we were able to maintain our average origination run rate of $100 million per quarter. Our origination platform sourced approximately $100 million of new investments across 5 portfolio companies. We believe that these new investments have attracted risk reward profiles and are consistent with our objective of investing higher in the capital structure and on a floating rate basis, in this environment.

Let me highlight a couple of these new investments.

During the second quarter, we funded a $21.5 million investment in the first lien unit tranche of Robbins, a provider of tunnel-boring machines, primarily used for large infrastructure build-outs, including metro systems, underground tunnels and water pipelines. Solar's investment was part of a Crystal Financial lead unit tranche facility, which were used to refinance of the company's existing capital structure and provide capital for working capital needs.

At closing, the loan was levered approximately 2.5x through the first lien security. In addition, we invested $20.5 million in the second lien term loan of Blue Coat Systems, which is a web security software provider. The company's owned by Thoma Bravo, a strong sponsor for the software sector, and offers an all-in yield of close to 10%.

We also made a $13.5 million investment in the second lien loan of Global Tel*Link, which is the largest provider of inmate phone services in the U.S., which is part of American Securities' refinancing of the company.

During the second quarter, we received full sales and repayments of approximately $73 million. Our $35 million first lien investment in Paradies Shops was redeemed at a premium to par, resulting in an IRR of just over 15%. In addition, in connection with the sale of the company, our $20 million second lien investment in Transplace was repaid at a premium to par, resulting in an IRR exceeding 14.5%.

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

Michael S. Gross

Thank you, Bruce. In conclusion, we feel very confident of the current composition of our portfolio and our disciplined approach in navigating the current investing climate. In general, particularly, in the liquid credit market, the terms and recent new deals have been less investor friendly, with higher leverage ratios and little to no covenant protection.

Our origination team is continuing to source proprietary investments high on the capital structure that meet our stringent underwriting standards, that we are being more selective. Ultimately, these higher risk deals, which we've been passing on, they very well be repaid in full, which is a great outcome for those invested in them.

However, we believe that relying on an improving economic environment in order for what we view as an over-levered company to meet its obligations is more akin to an equity bet. As credit investors with an emphasis on principal protection we are not willing to rely on an upside case.

With its high proportion of secured loans, floating rate debt securities and substantially all cash-pay interest, we believe our portfolio is the lowest risk it has been since our IPO. As such, we view our portfolio as more attractive than many new issue opportunities currently available in the marketplace.

At the right price, we intend to use our $100 million share repurchase to increase exposure to our existing portfolio. We, the management team, will now be participating in this buyback. However, we welcome this opportunity to increase our ownership stake. As significant shareholders of the common shares, we believe that the stock should trade at a dividend yield more consistent with other investment companies that hold predominately secured assets.

Our expected $0.40 of run rate net investment income per share on a more defensive diversified portfolio should enable us to prudently and patiently deploy all of our $500 million of available capital and investments, as well as to the opportunistic repurchase of shares in order to continue to build long-term shareholder value.

We are continuing to find opportunities with attractive credit and yield profiles. In addition, to our objective of growing our portfolio to increase our net investment income, we are focused on maintaining an efficient and low-cost capital structure.

By reducing our borrowing costs and being opportunistic in buying back share, we carry a much higher -- which carry a much higher cost of capital, we are seeking to generate value for our long-term shareholders. We intend to raise our dividend once we've achieved what we believe to be a sustainable net investment income growth.

11:00 this morning, we'll be hosting an earnings call for the second quarter operations for Solar Senior Capital or SUNS.

Thank you, all, for your time. Operator, please open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Troy Ward with KBW.

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

Quick, on one of the modeling questions. I just saw the admin expense was up pretty big in the quarter. You may have mentioned that and I missed it. Can you tell me what was in that number this quarter, and kind of what we should expect going forward?

Richard L. Peteka

Yes. This is Rich. If you look at our 6 months number in our financial statements, that kind of 2.2, 2.3 number, that's a good 6-month run rate. So right now, you should model about $4.5 million for the year.

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

Okay. Great. And then, Michael, I know, obviously, MidCap's done. But would the final -- can you just kind of outline what are the final steps necessary to get DS closed? And do you believe that's truly just a formality at this point, and would you say it's 95% chance of closing here?

Michael S. Gross

I would say there's 95%. I think that where they are in the process is. they are taking advantage of-- from the credit markets are launching the bank deal Monday of next week. And then they intend to follow up the following week and launch the bond deal. So they're hoping to get this closed before Labor Day. It could slip, but that's the intent, and they're literally hitting the road next week.

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

Okay, great. And then on the Crystal dividend up, did the dividend this quarter represent 100% of the earnings from Crystal? Was it all dividend up, or was some retained?

Michael S. Gross

Some were retained.

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

Okay. And as you think about growing the company, I know you said, you had, call it, $150 million available capital at Crystal. Today, will you continue to retain some money down at Crystal for future growth? Or will you look to kind of continue to dividend up kind of these kind of numbers?

Michael S. Gross

We'll continue to dividend these kind of numbers. It was substantially all. We left a little bit behind, not significant.

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

Okay. And then one final one. Michael, you talked about kind of what's available -- I'm sorry, Bruce did -- what's available out there in the market today. One of the comments you made that I haven't heard much about the high risk due to the structure. Are you seeing that kind of across the capital structure? We've heard there's very little mezz [ph] really available out there that's attractive at all. But, second lien, and more stretched senior, are you seeing structural issues on the second lien and stretched senior as well?

Bruce J. Spohler

Yes, I think that when we speak to structure, what we're really speaking to is the leverage ratios to which these securities are funded, as well as some of the fundamental terms embedded in these securities, whether it's covenant packages, liens, what have you. So I think those terms have gotten looser as we've mentioned over the last several quarters. And I think, yes you're right, there is not much in the way of new mezzanine, because again, so much capital has been provided through these alternative capital structures.

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

Okay. And you said the weighted average yield on the portfolio, ex DS and MidCap, was around 12%. Where do think -- as you redeploy this capital, what do you think the going rate is on new investment you're likely to add over the next 3 to 4 quarters?

Bruce J. Spohler

Well, I think, today, you're seeing rates between 9% and 11%.

Operator

Your next question comes from the line of Mark Hughes with SunTrust.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Given the pace of originations here, Bruce, $100 million per quarter. How long should we anticipate it'll take for you to put the proceeds back to work? Are there any steps you can take to accelerate that? Or could this be a fairly lengthy process?

Bruce J. Spohler

Well, I think, to your comment, it's, in part, about the origination pace. But that seems to be relatively consistent for us to your comment. I think it's really about repayment activity, which we have said for the last quarters, we hope it is abating, given the churn we've had. Again, it's okay to get repaid on these loans. But I think that's really going to be the driver of the timeframe here in terms of net portfolio growth is -- will some of the prepayments, given the recency of many of our investments at this point abate, so that we can actually achieve some net portfolio growth. But, obviously, in the simplistic view, $400 million plus or so a year of originations should take us a year, if that's a consistent number, and then it's subject to repayments.

Michael S. Gross

And I think that what we are doing to supplement that or accelerate, to use your word, is to use $100 million of capital to buy back stock. I think, again, our portfolio is yielding 12% today. We load the risk rewards, so if we can -- at the right price, buy back hundreds of stock that's going to help accelerate that growth and that investment income per share.

Operator

Your next question comes from the line of Mickey Schleien with Ladenburg.

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

Just first, a big picture question. Could you give us some insight as to your willingness or propensity to perhaps lend to some smaller companies to help insulate Solar from the more difficult environment at the higher end of the leverage loan market?

Richard L. Peteka

Yes, I think that, as we've talked about over the last couple of quarters, there was a lot of drivers. But one of the impetus for us being fortunate enough to bring the Crystal platform on to Solar's platform is they do provide us access to generally mid-size, mid market issuers, but also some smaller issuers, but those that have large asset bases. And so we are more comfortable that we're going to go to smaller businesses, as you know, having assets that we can look to underwrite for our principal source of repayment as opposed to relying on cash flows when we get to the smaller companies. And so that's a good example. I think, of how we've been able to go down market, so to speak, and yet still feel like we're not taking on incremental risk, given the asset intensity of those issuers. So we will continue to look for opportunities like that, that allow us to look at niches, where we think we can get good risk return, but stay true to our strategy.

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

Bruce, can you give us a sense of the average EBITDA at Solar of the borrowers in your portfolio versus Crystal's borrowers?

Bruce J. Spohler

Yes, I would say that for Solar's, it's 50 plus. And I would say, Crystal, it's more likely 25 plus. But EBITDA is an odd metric because there's a wide range in that average for Crystal, because you will have businesses that don't have EBITDA, but are asset rich. And we are way over-collateralized. And so as we talked about in the past, the investment thesis for Crystal is, look first and foremost, to a liquidation as a base case and make sure that the assets can cover their capital, as well as a return on their capital. So EBITDA is not necessarily the appropriate metric when we look at all of their borrowers, because they may have as many assets as our businesses do in terms of scale and size and breadth of operations.

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

Okay. And just a couple of housekeeping questions. You mentioned the $0.05 per share of amendment costs. Is that bottom line after fees? Or is that a gross number?

Bruce J. Spohler

That's a gross number. That includes not only the new facility, but the extinguishment of the other facility we noted in our press release.

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

Okay. And then the fee income. I didn't catch up when it was a prepayment fee for both DS Waters and MidCap, or was it just DS Waters? And are we talking about the...

Michael S. Gross

We'll be getting a prepayment fee on MidCap, and we'll be getting a prepayment fee on the DS Waters second lien.

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

All right. Is that a typical...

Michael S. Gross

That should flow through in Q3.

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

And is it a typical sort of somewhere between 100, maybe 200 basis points for that?

Bruce J. Spohler

Yes.

Michael S. Gross

Yes.

Operator

Your next question will come from the line of Christopher York with JMP Securities.

Kevin Chen

This is Kevin Chen for Chris York. With 48% of your portfolio in fixed-rate investments as of Q2, how are you managing the risk to net interest spread compression in a rising rate environment?

Bruce J. Spohler

One of the things that we did just proactively was again go back to our banks and talk to them about our relationships and what they could do for us. So not only did we lock in some additional tenure in that facility, they were amendable to reducing our borrowing rates. So that was one way to help with that. But right now, it's also -- it's really a focus on risk, and it's not necessarily about coupon. Our yield is really all inclusive of an upfront fee that we get, which we amortize over the life. It's a coupon, and it's a cov protection, so it's an overall IRR, and where that reward is based on risk we take. And again, we, very consciously, moved up the capital structure, taking lower yields to protect principal and NAV.

Michael S. Gross

We also have a little under $200 million of fixed-rate debt on our balance sheet, in terms of obligations.

Kevin Chen

Okay, great. And also, in terms of originations, will the ratio of floating-rate investments continue to increase quarter-to-quarter? And is there like a target range?

Richard L. Peteka

Yes, it will increase. And no, we don't have a particular target range. I mean, if we find some outsized risk return on a fixed-rate basis, we will take those as well. But the only point worth mentioning is your percentage of floating rate does not include a look through to Crystal's portfolio, which is all floating rate. So it's, actually, higher across the whole portfolio.

Kevin Chen

Great, okay. And last quarter, you have spoken about potential for Earthbound Farms, prepay. Are there going to be any new discussions with the borrower? And are there any other large prepayments expected in the next few months?

Bruce J. Spohler

No, I think the -- there aren't any other large prepayments only, because with the exits of DS and MidCap, the average investment size has come down materially. So there are no significant large investments. I think specific to Earthbound, it has been rumored in the marketplace that the company may pursue strategic alternatives. So we're watching that in the second half of this year.

Kevin Chen

Okay. And just lastly, how much undistributed taxable income do you currently hold?

Richard L. Peteka

The last reported number we had was in our 10-K. And for tax purposes, taxable E&P doesn't get measured until next year, so it's really hard for us to tell you right now. We had a significant carryforward, but there'll be some significant adjustments based on some of the transactions we've announced, so we can't give you a number right now.

Operator

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

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

Just 2 questions to add on top of Mark's earlier questions. First, just to, I guess, clarify some math and make sure I understood the language in the announcement of the DSW exit, as well as your buyback authorizations. You mentioned that with -- in your announcement with DSW and MidCap, that you would be using the proceeds to pay down debt, which is just north of $237 million. Then you announced -- you separately announced a buyback authorization of $100 million. Does that change the math on how much debt you would repay? In other words, would you now have a $100 plus million debt paydown on top of the $100 million buyback? Or would you still do a $200 million debt paydown and still the $100 million buyback, assuming that you were able to buy back all the shares as planned.

Richard L. Peteka

In order -- when we get repaid investments, whether small or large, we near term pay down the revolver. That's why we have the revolver. It gives the ability to kind of reborrow again. So, basically, depending on the [indiscernible] cash. Cash comes in. We'll draw down revolver. And then we'll borrow again, either for new investments, or we may hold some cash on the balance sheet for the buyback, depending on where the opportunity is.

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

Okay. I see what you mean. So it's -- the math will work out how it does. But the process might be out of order, I guess, with the way the cash -- because you just use the cash as it comes in. That makes sense. The second -- and this is more of a hypothetical math situation. I guess, it's pretty clear on how your sensitivity interest rates, which is fairly low, especially including Crystal. Have you ever looked at scenarios on credit spread expansion in terms of, if the high-yield markets, credit spreads increase measurably, would that have a certain hit to your, I guess, mark-to-market valuations in your portfolio since you sort of -- you have sort of a committee-based valuation on your investments?

Michael S. Gross

A couple of things here. The average unit portfolio is 12% today. The average in the high-end market is 6%. So we have a huge cushion throughout the high-end market today, as it is. So yes, if there's a blowout of spread. You would see some mark-to-market adjustments on the technical side, nothing from a credit perspective. But, frankly, we would welcome that. I mean, sitting here 2.5 million of dry powder [ph], it would mean, we'd just go into the market and buy highly tracked investments that have blown out and spread for tougher reasons. So we would love that scenario to happen for us.

Operator

[Operator Instructions] Your next question comes from the line of Boris Pialloux with National Securities.

Boris E. Pialloux - National Securities Corporation, Research Division

The first question I have is in term of unrealized loss, these $18 million you had this quarter, is that only DS Water or other investments that you -- let's say, readjusted?

Michael S. Gross

It's predominantly DS Water. The other one that we took an additional small adjustment to was our one investment that is in payment default, which is Rug Doctor.

Boris E. Pialloux - National Securities Corporation, Research Division

Okay. And the second question is regarding Crystal. What's the impact of the hedge funds in the asset-based lending market?

Michael S. Gross

De minimis. We don't see them at all.

Boris E. Pialloux - National Securities Corporation, Research Division

So they're not...

Richard L. Peteka

This is a specialty niche business, where you really -- a hedge fund would have to go out and a find a team like Crystal. There are a couple of teams out there. Some of whom like Crystal, were at one point in their lives backed by a hedge fund. But it's a small niche business, and it's driven by the team and their expertise and less by who might be the capital behind it.

Michael S. Gross

And generally, some of -- to Bruce's point, some of these themes were backed by hedge funds, the trend is actually the other way. We're seeing hedge funds that divest [ph]their interests in these businesses.

Operator

Your next question comes from the line of Jonathan Bock with Wells Fargo Securities.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Thank you for taking my questions, most of them have been asked already. But Bruce, just a point of clarification, did you mention leverage levels in the Blue Coat Systems transaction?

Bruce J. Spohler

I did not, but they're in the 5x range.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Okay. So I appreciate it. So as we think about where we sit in, focusing on senior secured transactions, which makes total sense, given the lack of mezzanine paper, the question remains as to the quality of the senior secured paper that one would be buying today, given that most people are buying that asset class. And so could you give us a sense right now today what percentage of loans that you originated of that $100 million are related dividend recap? And how many would you classify as covenant like?

Bruce J. Spohler

I think just to contrast your question on Blue Coat, if you look at Robbins, the leverage ratio is in the mid-2s. So it is going to be a little bit all over the map, depending on the business, and as well as the underlying sector that they operate in. But the -- I'm sorry, your second part of your question?

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Yes, so the percentage of originations that are dividend recapped, as well as covenant-light?

Bruce J. Spohler

Yes, as we think about covenant recaps, Jonathan, for us, it is -- obviously, you'd love to never finance a dividend recap. But I think as we have looked at them here, they tend to be investments, where the sponsor has not taken out all of their capital. So that we know that they're still incentivized to get repaid their capital and not only to get a return on that capital as well. So they were not a large percentage of dividend recaps. Blue Coat was not, I'm sorry, Robbins was not. Blue Coat was a partial. So generally speaking, it was a small percentage of the portfolio. But for us, it's really looking at that sponsor and how much capital remains invested in the business.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

I appreciate that. And in terms of control, what kind of normally assume as a direct origination capability? I mean, Ark, obviously, that's a very unique transaction, despite the fact that it is a little short dated in terms of maturity. You mentioned Robbins as well. But when you look at Blue Coat or Global Tech, both of which, the tranches are $330 million and $615 million -- or excuse me, $330 million and $230 million, respectively, of which Solar owns $20 million or $13 million. How do you kind of weigh the risk reward in that environment, right? The larger those tranches are, the higher the likelihood those were sold by large broker-dealers, like Jeffrey, Credit Suisse, Deutsche. And if that's happening at a point when liquidity is high and demand for loans is higher, as Michael mentioned, how should we kind of get comfort with the fact that those deals aren't necessarily subjected to some of the, we'll call price concessions and/or covenant concessions that everyone's been talking about in the middle market as of late?

Bruce J. Spohler

Yes, I think, a couple of comments. First of all, as we've always said, the reason -- one of the main reasons we've stayed away from the syndicated market, in general, across both portfolios is the access to due diligence. Do we have the ability to go in and do direct due diligence the way we like to as owners of the business and owners of the assets, as opposed to syndicated due diligence, which you know is abbreviated 2-week style off the trading desk or syndication desk. So Global, it's a business that we've looked at for years with a couple of different sponsors. So we've been on the inside and felt this was an opportunity to leverage our knowledge. It's, as we mentioned, the #1 provider of telecom/communication services to the intimates in prison. So it's a nice credit story. It's a little bit tough to see where the equity return will come from, other than deleveraging, because it's a nice key free cash flow business. But that's one where we feel comfortable, given the underlying business, which is really what drives your fundamental risk, right? I mean, it's nice to have covenants. But what's first and foremost, is the fundamentals and stability of the underlying business you're underwriting and having prudent leverage for -- in that capital structure for the free cash flow profile of that company, so that's first and foremost. And so in this environment, it's important for us to be highly selective on the businesses when we have to accept less than ideal indenture terms, perhaps. I think the other key risk mitigant is, to your point, we only invested $13 million and $20 million, respectively -- so in those 2 investments. So we are a little bit smaller when we're going to look at things that we might not love the covenant package as much.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Okay, okay, great. And just a question regarding the portfolio breakout composition. Moody's, obviously, did study on second liens and found that the recovery rate on second lien loan is just marginally higher than mezz, right, like 3.6% better. Now BDCs are doing quite a bit of second lien transactions, particularly in this market, when that's all that's available. Yet I don't necessarily see the second lien breakout in your portfolio, as you kind of classify it as bank debt and senior secured. So of your senior secured portfolio, what percentage is second lien?

Bruce J. Spohler

We haven't disclosed that in the past. But I would say it's a good mix of second lien and stretch first. And I think your comment about recoveries. Again, not all companies are created equal. It's not just about the security. I think, in part, second liens get a higher recovery than mezz just because by having virtue of the second lien, they have increased negotiating leverage, vis-à-vis, a first lien lender. They are in the room, so to speak, as opposed to an unsecured lender, who is kept at bay by the banks. And additionally, it all, as we've talked about in the past, it goes to attachment point. Where is your second lien attaching? As you know, with DS Waters, for example, we're getting repaid, as we mentioned, at a premium to par. On a second lien, we attached at 2.6x and went to 3.2x. So we'd argue that where you sit in the capital structure is more important than whether you have a first lien, a second lien or unsecured from that perspective.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Appreciate that. And I know, Bruce, as you mentioned, maybe mid-5s on the Blue Coat Systems transaction. In terms of volume debt-to-EBITDA, how would you compare the leverage levels that you're seeing today, particularly on deals, compared to where they were in 2007? Are you near those levels?

Bruce J. Spohler

I would say, look, our portfolio, as you know, consistently has been in the mid- to high-4s in terms of leverage level. That's where we're comfortable. The market on some deals today, even though we might do a Blue Coat at 5.5x [ph], or a Robbins at 2.5x [ph]. The market for certain credits is as high as 6x [[ph], 6.5x [ph]. But obviously, those are not assets that we've been comfortable playing in.

Operator

There are no additional questions at this time. I would now like to turn the presentation back over to Mr. Michael Gross for closing remarks.

Michael S. Gross

Thank you very much, and thank you for all your great questions and your attention this morning. And those of you participating, we'll talk to you in 15 minutes on the Solar Senior call. Thank you.

Operator

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!