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Fifth Street Finance Corporation (NASDAQ:FSC)

F1Q2014 Earnings Call

February 6, 2014 11:00 AM ET

Executives

Dean Choksi – Head, IR

Len Tannenbaum – CEO

Bernie Berman – President

Alex Frank – CFO

Analysts

Terry Ma – Barclays Capital

Rick Shane – JP Morgan

Andrew Kerai – National Securities

Robert Dodd – Raymond James

Unidentified Company Representative

Ron Jewsikow – Wells Fargo Securities

Troy Ward – KBW

Casey Alexander – Gilford Securities

Operator

Good day ladies and gentlemen and welcome to the Fiscal Q1 2014 Fifth Street Finance Corp., Earnings Conference Call. My name is Mark and I’ll be your operator for today.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions).

I would now like to turn the conference over to Dean Choksi, Executive Director of Finance and Head of Investor Relations. Please proceed.

Dean Choksi

Thank you, Mark. Good morning, and welcome to Fifth Street Finance Corp.’s fiscal first quarter 2014 earnings call. I’m joined this morning by Leonard Tannenbaum, Chief Executive Officer; Bernard Berman, President; and Alexander Frank, Chief Financial Officer.

Before we begin, I would like to note that this call is being recorded. Replay information is included in our January 14, 2014 press release and is posted on the Investor Relation section of Fifth Street Finance Corp.’s website, which can be found at fsc.fifthstreetfinance.com.

Please note that this call is the property of Fifth Street Finance Corp. Any unauthorized rebroadcast of this call in any form, is strictly prohibited.

Today’s conference call includes forward-looking statements and projections. We ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website or call Investor Relations at (914) 286-6855.

The format for today’s call is as follows. Len will provide an overview of our results and outlook. Bernie will provide an update on our capital structure. Alex will summarize the financials. And I will provide high level commentary on the BDC sector. Then, we will open the line for Q&A.

I will now turn the call over to our CEO, Len Tannenbaum.

Len Tannenbaum

Thank you, Dean. We are pleased with our December quarter results which benefited from robust originations leveraged within our target range, and the covering of our monthly dividend with net investment income.

Our investment pipeline began building in late summer and early autumn as sponsors were motivated to complete transactions before calendar yearend.

Several deals we expected to close in the September quarter, slipped into October. This provided a solid start of the December quarter which has historically been our strongest quarter for new originations.

We found attractive investment opportunities despite a competitive environment by utilizing our sponsor relationships and offering a broad range of debt financing solutions across the capital structure and hold sizes up to $150 million.

We remain disciplined on loan pricing choosing to lose many deals as one-stop pricing temporarily drop below the 8% threshold.

For the December quarter, we reported $0.26 of net investment income per share. We’d exceeded the current quarterly dividend run rate of $0.25 per share.

We also reached our target leverage range, albeit the low end of the target range, of 0.6 to 0.7 debt to equity, excluding SBA debentures after funding approximately $645 million in originations for the December quarter.

We anticipate maintaining leverage in the March quarter with inner target range based on the current investment pipeline and anticipated items. We are focused on covering our dividend with net investment income per share.

To demonstrate their confidence of the dividend level, our Board of Directors declared this morning, monthly dividends for an additional three months from June through August of 2014 at the current run rate of $1 per share, or 8.33 cents per month.

At yesterday’s closing stock price, this implied a dividend yield of about 10.5%. We continue to see better value in the senior secured part of the capital structure.

The credit performance of the portfolio is strong. And we reported three quarters in a row with no loans or non-accrual. This excellent credit performance is a result of our deep bench of experienced underwriters and portfolio managers and our multi-million dollar investment in the systems.

Our overall portfolio remains health, as borrowers are benefiting from modestly growing economy and support from the private equity sponsors.

We are moving forward on several initiatives intended to improve net investment income per share over time. While the progress has been slower than expected, we continue to move in the right direction and expect these initiatives to collectively benefit growth investment income in future quarters.

One of these initiatives is our venture lending team which is gaining momentum since joining the Fifth Street platform about six months ago.

Our Palo Alto and Dallas based team closed another deal in the December quarter, and have several more deals in the final stages of documentation that are expected to close in the March quarter.

Our entry into the market has been well received by the venture capital community resulting in the solid pipeline of potential opportunities.

We believe venture loans are attractive because they generally – they are generally senior in the capital structure, have higher yields than our core portfolio, and may include warrants which could contribute to NAV growth over time, and help offset existing capital loss carry-forwards.

While still small relative to our overall assets, our venture debt and warrant portfolio should make an increasing contribution to the growth in investment income and NAV over time.

Another initiative is our aviation financing team which continues to find transactions with attractive yields by focusing on the lower risk part of the market.

Our total investment in First Star Aviation increased to about $44 million at quarter end with additional yields in the pipeline.

We intend to grow First Star at a conservative pace which is consistent with its strategy to focus on niche transactions.

Our capital markets efforts are gaining traction. We closed three small syndication in the recent weeks, and are on advanced discussions on several more syndication and back levering opportunities.

The ability to syndicate and back lever loans, enable us to enhance the investment yields on the investments we retain, and better manage concentration risk and liquidity. Our capital markets initiatives have taken longer than expected to develop doing parts of the complex nature of the loan agreements between the different parties involved.

As we complete initial transactions with different parties, future transactions should be more efficient. We are also in the very early stages of forming a partnership similar to the senior secured loan program which is managed by some of our peers.

If successful, we would be able to add higher yielding assets to our portfolio that have structural protection similar to first lien loans. The yield on the SSLP will be higher yielding, the loans themselves are actually lower yielding loans from lower risk profile. Others in the industry are also exploring similar structures.

Our flexible and low cost liabilities enable us to originate assets across the debt capital structure to finance them in an efficient manner.

We continue to work on expanding our access to debt capital, lowering our debt funding costs, and improving the terms and flexibility of our borrowings which Bernie will discuss in more detail.

We’ve recently nailed our 2014 proxy to our shareholders which once again, did not include a request for authorization to issue stock at prices below NAV per share. Fifth Street is only one of a handful of BDCs that do not ask for authorization to issue stock below NAV per share.

I will now turn the call over to our President, Bernie Berman, to discuss our capital structure in more detail.

Bernie Berman

Thank you, Len. In 2013, we improved the terms of our debt capital, reduced the cost of our revolving bank debt, increased our assets to debt financing, and extended the maturity of a portion of our liabilities.

Since the end of the December quarter, we increased the size of our syndicated credit facility led by ING to $620 million. We are confident the facility will continue to grow this year.

We are also considering adding more unsecured fixed rate term debt to our capital structure, to better position our balance sheet for rising interest rates.

And now, I’m going to turn the call over to our CFO, Alex Frank.

Alex Frank

Thank you, Bernie. We ended our first quarter of fiscal 2014 with total assets of $2.5 billion, an increase of $382 million from the previous quarter.

Portfolio investments were $2.4 billion at fair value and we had available cash on hand of $42.6 million. Net asset value per share was stable at $9.85 at quarter end.

For the three months ended December 31, 2013, total investment income was $71.3 million. Net payment in kind income pick accruals recorded in excess of pick payments received, a key indicator of earnings quality was a low $1.4 million for the quarter or only 1.9% of total investment income.

Net investment income increased to $36.2 million for the quarter, a 36.4% increase as compared to $26.6 million in the same quarter the previous year.

We had a number of portfolio company exits and sales during the quarter. Five of the debt investments were exited at or above par and all were in line with previous fair value marks.

This reflected the credit quality of the portfolio which remained strong with an overall net loss of $2.5 million or only 0.1% of the investment portfolio.

The weighted average yield on our debt investments was 10.9% with the cash component yield making up 9.9%. The average size of our portfolio debt investment was $24.9 million at December 31, 2013, an increase from $22.1 million in the prior quarter-end. We had record gross originations of $912.7 million, $645.5 million of which were funded at close in 23 new and 8 existing portfolio companies, bringing the total companies in our portfolio to 111 at calendar quarter-end – calendar year-end.

During the quarter, we also received $155 million in connection with exits and sales of investments. We believe we are very conservatively positioned as compared to our peers with 95% of the portfolio by fair value consisting of debt investments, 81% of the portfolio invested in senior secured loans, 72% of the debt portfolio consisting of floating rate securities and no CLO equity.

The investment portfolio continues to be very well diversified by industry sponsor and individual company. Our largest single industry exposure continues to be healthcare, including pharmaceuticals at 22% of the total portfolio. Our investment in HFG, our healthcare finance portfolio company, is our largest single exposure at only 4.8% of total assets. And HFG itself holds a diversified portfolio of asset backed receivables.

Our top 10 portfolio company investments represent 32% of total assets. The credit profile of the investment portfolio continues to be as strong as ever. 100% of the portfolio was ranked in the highest one and two category, which is favorable versus a year ago period. During the quarter ended December 31, 2013, we had no investments in the portfolio on which we had stopped accruing income as compared to two at December 31, 2012.

Our Board of Directors has declared monthly dividends through August 2014 of $0.8033 per share reflecting an annualized rate of $1 per share. I’ll now turn it back over to Dean.

Dean Choksi

Thank you, Alex. As more investors learn about BDCs, one frequent question they ask is how BDCs are different from traditional closed-end funds. Although BDCs are a special type of closed-end fund, there are several important differences between BDCs and exchange-traded registered closed-end funds which we believe make some BDCs more attractive to certain investors.

One, an origination platform. A handful of BDCs, including Fifth Street Finance Corp are affiliated with leading origination platforms. This provides select BDCs with access to investments at origination. In contrast, many traditional closed-end funds purchase their assets in the secondary market.

The benefits to BDCs with access to an origination platform may include a more active role in structuring the transaction, potential fee income and a discounted price for the asset which is referred to in our market as an original issue discount or OID. These benefits are generally not available to investors in the secondary market. Fifth Street Management, our investment adviser, is one of the leading middle market origination platforms.

Two, disclosure. BDCs generally disclose a greater level of information more frequently than traditional closed-end funds. BDCs file annual and quarterly reports for the FTC with a detailed schedule of investments and a discussion of the results. Many BDCs also host conference calls to discuss quarterly results like this one and file 8-Ks and press releases in between quarterly reports to provide additional information.

At Fifth Street Finance Corp, we also file regular newsletters providing updates on trends in our business. The reporting requirements for traditional closed-end funds generally include less information and are more limited to annual and semi-annual reports and a quarterly schedule of investments.

Three, leverage. BDCs generally operate with leverage of up to 1 times debt-to-equity versus traditional closed-end funds which are downright limited to a regulatory leverage of 0.33 times debt-to-equity. Traditional closed-end funds use structural leverage which typically consists of issuing preferred stock or bank debt and portfolio leverage which typically includes certain types of derivatives, reverse repurchase agreements and tender option bonds.

The type of leverage utilized really depends on the underlying assets and the closed-end fund. Larger BDCs generally have greater diversity in their capital structure and do not utilize derivatives for leverage. For example, Fifth Street Finance Corp has several bank credit facilities with different costs, terms and maturities, secured debt provided now [ph] to small business administration and unsecured debt at different rates and maturities. The diverse funding sources for larger BDCs like Fifth Street Finance Corp help them to efficiently fund different types of investments and manage interest rate and liquidity risk.

Finally, while not specific to the structure themselves, there are more brokerage research analysts providing coverage of the BDC sector. This third party research is available to help investors navigate a growing industry that is filling the void in middle market finance as traditional lenders retrench.

Thank you for joining us on today’s call. Mark [ph], please open the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Terry Ma from Barclays. Please proceed.

Terry Ma – Barclays Capital

Hey, thanks for taking my questions. Can you just give us some color on your fee income this quarter? It was a little higher than I was expecting.

Dean Choksi

And we reflected the fact that we had a very robust quarter for originations which is typical for us. The fourth calendar quarter is typically our seasonal rate largest quarter.

Terry Ma – Barclays Capital

Okay, and can you maybe just give us a sense of how your originations were spread out in the quarter, whether or not they were back in later than that [ph]?

Bernie Berman

Actually, this is one of the few quarters, the fourth quarter, that it was evenly spread out throughout the quarter.

Terry Ma – Barclays Capital

Okay, and can you maybe give us a little more color on this SSLP that you’re contemplating, how it’s going to be structured and what – who the potential partner may be?

Len Tannenbaum

Obviously that’ll be a positive if we can get it done. We’re not going to give you more color on this call now but we do want to introduce the fact that we are exploring this option and have proceeded down the road with a number of parties and talking about it. Obviously this is a couple of other BDCs with SSLPs. If you look at those structures, it’s going to be something similar.

Terry Ma – Barclays Capital

Okay, thanks.

Operator

Your next question comes from the line of Rick Shane at JP Morgan. Please proceed.

Rick Shane – JP Morgan

Guys, thanks for taking my questions this morning. One thing we should probably address is – and Len, you’ve been very clear in terms of your policy about both your interest and your actual governance issues around issuing stock below NAV. At this point, the stock issue [ph] is trading below NAV and you’ve had a really strong pipeline. What flexibility do you have as you move through the quarter if the stock price does improve?

Len Tannenbaum

That’s a great question. And actually, it’s a similar question for both of our public entities, both – as we manage both FSC and FSFR. As we get into our leverage target range, fortunately, so many of our assets can actually be sold at a premium because we’re originating these assets below par and we can actually sell them above par.

Even better, now that we have a full syndication effort with Fred Buffone who has run [ph] syndication over at TD, merit [ph] trade before – TD Bank, sorry, before he joined us, has taken a little bit to ramp [ph] but we’re able to syndicate down and skim fees from a number of parties. In fact, we have a nice backlog of that.

So this quarter, you can expect us to fall. In the March quarter, I think you can expect us to turn a number of assets. So while we’re still going to have to help the originations, we’re also going to be selling assets in the same quarter.

Rick Shane – JP Morgan

Terrific, that’s very helpful. Thank you, guys.

Operator

Your next question comes from the line of Andrew Kerai of National Securities. Please proceed.

Andrew Kerai – National Securities

Yes, good morning. Thank you for taking my questions. The first thing that I had, Len, is so you’re lucky you had $650 million of fundings in Q4. That’s roughly about a quarter or so of your portfolio if you look at it as of December 31st.

So I noticed the yield was down modestly about 20 basis points in the quarter, so if you run the math on that compared to the 11.1% from last time, that implies that the yields on your new loans were roughly about 10% to 10.5% in the quarter. I was just hoping maybe you could kind of confirm on that – the logic on that.

Len Tannenbaum

It’s math. Your logic is right on. I mean, nothing really to comment on.

Andrew Kerai – National Securities

Okay, great. Thank you. And then just kind of given that Q4 obviously is a seasonally strong quarter for loan demand and sponsor [ph] just kind of with the close deals, I was just kind of hoping to maybe get some color on – to the extent you guys feel like you can kind of hold the yield steady, kind of moving along here given that you’re not going to have the yield support that the strong demand in Q4 kind of typically brings.

Len Tannenbaum

Well, a lot of the Q4 deals, first we close our deals and then we syndicate our back lever. So I think a lot of those deals are yield enhancements during the March quarter. I don’t know, the timing is always very difficult. There’s something called an AAL or agreement among lenders that’s – that has to be negotiated.

But we expect to stabilize, as I think I’ve said in the past, we’re stabilizing our weighted average yield. And the way to do that is by efficiently levering what we have in the portfolio and stay in lever through the quarter. We still – just because we ended the quarter at the low end of our leverage range, we weren’t through the quarter on average in that leverage range.

Staying an entire quarter in the leverage range should generate additional income first from less of used [ph] fees which we pay. And second, obviously, from a higher average balance that’s going to earn excess income. So I think those – a combination of those two things, the shareholder should enjoy in the March quarter.

Andrew Kerai – National Securities

Great. Thank you. And then just a question from what you guys have been hearing from your sponsored partners and regards to kind of their outlook and appetite for M&A and what their pipeline for deals kind of looks like yours if 2014 kind of moves along.

Len Tannenbaum

The pipeline is there. The multiples are higher. And we’re staying very disciplined, like you see our senior secured percentage go up over 80%. And it went up over 80% not because I don’t like mezzanine loans, I personally – that’s not a [indiscernible] fee but I personally am not – do not believe that lower middle market, middle market mezzanine loans are good risk adjusted return, yielding 11% seven times deep.

It just doesn’t make any sense to me how to reach for yield on those types of products. So we’ve taken the yield degradation and moved up the structure while efficiently levering that part of the structure and working on skimming or using our syndications capital markets efforts to turn off [ph] the additional yield.

I think you can see that consistent in the March quarter. And –

Andrew Kerai – National Securities

Sure.

Len Tannenbaum

– there’s still a lot of first lien and a little bit of second lien loans. I really don’t see in the current pipeline all the mezzanine loans.

Andrew Kerai – National Securities

Sure. Thank you. And then my last question, Len, this issue [ph] kind of look at the venture lending market, from your experience so far, what’s – what have you kind of encountered from your ability to kind of – work some of your – a couple of your BDC peers that have been more kind of entrenching that market over obviously a longer period of time?

Len Tannenbaum

So, look, the market was dominated by one or two players or three players for a long time. You have several entrants to the – new entrants to the market. The market yields have to come down. But all our other market yields have come down. This one’s coming down too.

We – but yes, they’re very, very juicy relative to the other business units. It takes a long time.

Andrew Kerai – National Securities

Right.

Len Tannenbaum

These are smaller deals. In fact, it takes a big crew to go do this. To open Palo Alto cost us quite a bit of money, cost the national [ph] company a lot of money but well worth it because as you see – we see these deals starting to close – I mean, you’ll see some announcements in the March quarter on this topic.

These are very interesting deals from a yield perspective, but also from an equity upside perspective. So I’m really excited. And look, the only way we could have entered this is acquiring the talent that we did. Many – I think Michael David who runs the group out at Palo Alto was at – works for 12 or 15 years, Alex?

Alex Frank

Yes.

Len Tannenbaum

Something like that.

Alex Frank

Yes.

Len Tannenbaum

And so you had – he had to have – him and his crew had to have those deep relationships for many years in order for us to be able to enter this at all. There’s high barriers to entry and benchmark it.

Andrew Kerai – National Securities

Yes, certainly. Thanks for taking my questions, guys.

Operator

Your next question comes from the line of Robert Dodd from Raymond James. Please proceed.

Robert Dodd – Raymond James

Hi, guys. Congratulations on [indiscernible] very good. On the SSLP discussions, kind of continuing that momentarily, I mean, as you said on – you don’t particularly find mezzanine attractive. You’ve got a lot of cilia [ph], you obviously – implicitly, an SSLP type structure where you’re taking mezzanine certificates or however we want to define that, you’d be moving your portfolio much more towards – well, less straight first lien in that mix.

Only, what’s your target there whether it’s through an SSLP vehicle [ph] or something else in terms of how much pure vanilla, if I can put it that way, first lien and senior secured you’re looking to keep on the portfolio?

Len Tannenbaum

So, Robert, when you look at the statistics, that may be technically correct. But what underlies all the assets of an SSLP for us, the way we’re considering, it is all senior assets – almost all senior floating assets. So regardless of what shows on the balance sheet, what’s backing it up, which generate the income, it’s all senior floating assets.

Now, the yields might be 7% or 8% or 6% but these are bigger companies, three, four times deep in the structure, often rated, often have recovery ratings of 3 or less. So I mean, these are great companies – I’m sorry, great assets that just need to be properly levered in order to generate the ROEs necessary for FSC.

And there are some other BDCs out there that are very successful in doing this and we’re going to also enter this and be able to create higher ROEs. So I don’t agree. I think I consider this the same as HFG which is one of our assets, in fact, our largest asset. We spoke to the rating agencies about it and they often view as a look through, right?

HFG is consisted of – it shows up as a portfolio asset of ours, it’s consisted of senior loans, in fact, the senior revolvers. And HFG in 15 years hasn’t lost money on one of them. So they look at that underlying asset base, not necessarily the asset that’s on the books.

Robert Dodd – Raymond James

Okay, fair enough. On the fee components, if I can just go back to that book for one moment, I mean, the – if we look at the fees to originations, there’s about 2.5%. Obviously that’s actually lower than it was last year, so – but can you give us any indications about the trends you’ve seen on upfront fees recently, whether those are coming down or stable, et cetera?

Len Tannenbaum

So upfront fees in the middle market where we are the originator are almost – the majority of securities are pretty stable around 2% for us. We have seen the compression, as you can point out. The upper middle market and upper market, the upfront fees have trended to 1% actually. But we’re not in that – FSC, which is this conference call, is not in that market. And so we’re really enjoying the nice 2% spreads and we’re getting about a point in syndications.

Robert Dodd – Raymond James

Okay, appreciate it. One last one if I can. On the – the question of where the dividend is versus where earnings look to be going [indiscernible] by $0.01 this quarter when I – through my numbers, obviously not your opinion necessarily, look to be that next quarter if you maintain the leverage and comparably maintain income yields, not just portfolio yields with more fee income, et cetera, looks like you’re in pretty good spot to significantly of – earn the dividends the next quarter.

So what’s the reasoning necessarily for, A, cutting it in the first place just a couple of months ago if there was – seemed to be some visibility that you were actually going to deliver on your targets and actually catch back up and be declaring it all the way to August if you may well be significantly over earning [ph] as of that timeframe [ph]?

Len Tannenbaum

Well, we appreciate that the shareholders want us to return to the previous dividend level. And obviously last quarter, we earned $0.24?

Unidentified Company Representative

Twenty-four.

Len Tannenbaum

And we paid $0.24. In this quarter, we earned $0.25 – $0.26, sorry, and we’re paying $0.25. So, yes, we’re up by $0.01. Until we can meet or exceed the dividend for a couple of quarters and give that confidence, then we can’t increase it back to a level. We want to make sure that’s sustainable and this multipoint plan is working.

I believe – I hope, right, as I did last year, that – and we see the trends of it working and if we do exceed the dividend in earnings for a couple of quarters, we look forward to increasing it towards that other level that we were at.

Robert Dodd – Raymond James

Okay, thank you.

Operator

Your next question comes from the line of Ron Jewsikow from Wells Fargo Securities. Please proceed.

Ron Jewsikow – Wells Fargo Securities

Good morning and thank you for taking my questions. First off, I appreciate that we’ve not to ask the ability to issue below NAV. With that, you talked about the potential for future syndications or back levering, freeing up liquidity. What do you think the current opportunity for that is on your balance sheet?

Len Tannenbaum

I think there’s the warmest opportunity in the balance sheet. The deals that we’ve done, really our average EBITDA is $25 million. These are more – solidly middle to upper middle market deals. They’re in high demand. They’re almost all sponsor backed. They’re all nice yields.

But we have no shortage of demand for people that would like our assets. We had a conference with BDC CEOs. I was talking with one of the other BDC CEOs and we were really surprised that assets in the market – if we were to buy these assets today from anyone else, they would trade it 1.5 to 2 times book value.

And how our assets traded to discount-to-book value, both of us were saying, we just don’t get it because if we were to be – actually just be purchased, the assets be purchased. They’re worth that much more.

These are very difficult to create assets and it’s very difficult to create portfolio of 100 securities which I would say 90% is sponsored backed. So if it’s really a valuable portfolio, and so anytime we need liquidity, we can get it.

Ron Jewsikow – Wells Fargo Securities

Yes, that’s good color. And then you mentioned pricing pressure and one-stops kind of this quarter. Has that continued in the next – in the current quarter? And what’s driving that pressure? Is it more players or just more aggressive pricing?

Len Tannenbaum

More aggressive senior pricing. What happened about a month or two ago, is that senior pricing got aggressive. And when senior pricing gets aggressive, the lend doesn’t make sense at the right rate for us, and then the market had a little bit of turbulence a few days ago, and more deals came on our pipeline from one-stop.

So it takes market dislocation, and then market dislocation – I called a couple of the banks that I know, and I said, "Did you just drop, you know, your lending from 0.5 to 1 turn because of the dislocation?" And they all – "Oh, yes."

So what happened in these dislocations is, the banks drop back in the debt to EBITDA they’re willing to lend through which makes the blend more one-stop friendly. And so we’re back, you know, right now in this environment, we’re back in business on one-stops, but we certainly were out of it for about a month as yields dropped below our tolerance level.

Ron Jewsikow – Wells Fargo Securities

All right. That’s great. Thanks for taking my questions, guys.

Operator

Your next question comes from the line of Troy Ward from KBW. Please proceed.

Troy Ward – KBW

Thank you. Len, following up a little bit on Ron’s question on the fee side, can you get – maybe you’ve done this in the queue and I haven’t come across it, can you give us a breakout of what was the origination fees versus the syndicated fees in the quarter?

Len Tannenbaum

Did we break that out, guys?

Bernie Berman

No we don’t break that out, no.

Len Tannenbaum

I don’t think we’re going to break it on the call if we don’t break it out in the document.

Troy Ward – KBW

Okay. Len, you mentioned that the kind of an average fee on syndicates, on back levering in 1%, so if we just use the amount of sales, and I assume in the press release, the sales number that you gave, I think of $109 million, are all of those sales related to back levering transactions?

Len Tannenbaum

Actually, none of our sales were – into back levering. Back levering transactions, again, generally, a lot more fees than 1%. Not only – because back levering in basically turning our first lien security into last out first lien. I mean that’s really what back levering is. It’s similar to an SSLP which is the same thing. You turn in your first lien security into a back lever first lien. It’s just the more cumbersome way of doing it because we don’t have an SSLP operating.

And what that does, it really increases the interest rate, right? Because if a bank for example lends – I’m just giving you numbers for illustrative purposes, not necessarily transaction, but if we do a deal at 8% and the half of the deal, the first half gets refinanced at 5%, then the back to RPs [ph], now becomes 11%. And that’s just basic math, right? Because we captured 3 extra points on the front end, we don’t have the P [ph] still, it goes in the backend, so now, we turned an 8% yielder to an 11% yielder. That’s back levering.

We’re hoping to complete, believe it or not, our first back levered piece [ph] this quarter which has taken a long time. And there’s no certainty that we’ll even be able to do that, but we think – we’re optimistic anyway.

As for the syndications that you’re talking about, that syndication is the third parties, it could be, and often is other BDCs, smaller BDCs, or private funds. And that typically is a skin [ph] of 1%. Sometimes, we’re able to also get an interest rate increase there too, if we sold the APs and keep the BPs because the amortizing piece is often more attractive to other parties. So maybe that answered your question longer than expected.

Troy Ward – KBW

No, I appreciate that color. Just to clarify then. The $109 million that you decided – in the press release of sales, what is that piece?

Len Tannenbaum

It was a combination of cap market sales, and the syndication of our – actually at the time, I think it was one of our largest deal. Wasn’t it Steve?

Unidentified Company Representative

It was – right at the top.

Len Tannenbaum

One of the larger hold sizes for us for a greater diversity. Our target hold size really is 5% at maximum. We sold down a piece of one of our large deals. I think we got a 1% fee for that.

Troy Ward – KBW

Okay. And then you also talked, Len, about you know, potentially adding some – you’re looking at adding additional unsecured term debt? I think I heard that in your prepared remarks. Can you talk of the current market availability for that and the current pricing?

Len Tannenbaum

Well, I mean unsecured term debt can come in many forms. We’re looking at the market in general. Again, I don’t want to front run anything that we’re going to do, but we are looking at that area. Obviously Ares completed some excellent unsecured term debt transactions, and every BDC has watched those transactions occur.

So we’re very encouraged that Ares was able to get what I would consider, especially on the reoffer, a terrific pricing. So maybe you could use that as an idea range of where we could, this year.

Troy Ward – KBW

Right. That’s helpful. And then one last one on the venture lending. Just curious, when you – in your venture transaction, I think there’s kind of two schools of lending thoughts as a VC lender. Some lenders like to go and – the only debt, there’s not even a revolver in front of them in which case you have to kind of carve out a piece of your balance sheet for undrawn revolvers at all time, and other ones team up with other revolving – revolver providers, you know, like Silicon Valley Bank.

When you do your venture debt lending, kind of what – what passage does your typical transaction follow?

Len Tannenbaum

As you mentioned, Silicon Valley Bank is the 800-pound gorilla of venture lending. They are well received, they have a great reputation, they have a lot of clients. It is very difficult to win anything over Silicon Valley Bank.

Having said that, you know, they’re also good partner once you get an agreement with them. They can take the senior, we can fall behind them. They actually – when you really think about our venture capital transaction, as I’ve got in the space – I’ve give you another illustrative example.

It could be $100 million of equity invested in the company, they’re trying to really bridge – the way to think of venture capital lending is bridging to the next round. It may take only $15 million on top of the structure. And it could be a $5 million revolver from Silicon Valley Bank, and it could be a $10 million term note from Fifth Street.

So – you’re very, very senior in the structure and you have lots of equity support. In fact, one of the more interesting things, even more interesting things I found about venture is, a number of the venture companies that we lend to actually have positive EBITDA.

So they crossover into the lower middle market, I guess from EBITDA standpoint. Don’t relate to the lower middle market because the massive amounts of money that the venture capital firms have invested in the security.

Troy Ward – KBW

Great. Thanks.

Operator

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

Casey Alexander – Gilford Securities

Good morning. Your unfunded, you know, I realize your originations were roughly high for the quarter, your unfunded has gone up 60% which is, you know, as he just said, is sort of a lien on your balance sheet. Is there anything in this quarter that some of that is going to get peeled off, that was just delayed as deals close and tranches or anything like that?

Len Tannenbaum

Unfunded went up to $239 million from – is that the year-ago, Steve?

Unidentified Company Representative

That’s the last quarter.

Len Tannenbaum

The last quarter was $149 million. And that were – with revolvers and other things, it’s still less than – when I listed the unfunded liability benchmark for us, I want to keep it at about 10% of assets as my general benchmark.

So yes, we sort of started – 10% of assets. We take very good care of trying to predict how we’re using the unfunded than being drawn [ph]. And I could show it – I mean I can’t show you, but our models, predicted models are excellent at determining, you know, where we think in each quarter, how much draw is going to be, and where they’re going to draw. But yes –

Alex Frank

We have to test those models too assuming that – significant outlier event.

Len Tannenbaum

That’s a good point, Alex. So we feel really comfortable with the level that we’re at.

Casey Alexander – Gilford Securities

Okay. Secondly, is it possible to share with us in terms of your senior secured what percentage is first lien, and what percentage is second lien?

Len Tannenbaum

I don’t think we break that down anymore. But you have to understand, one of the reasons that we lump them together besides the fact that a number of other BDCs lump them together, is I think, the senior secured – the second liens and we’re going over this with the rating agencies, but the second liens are not all created equal. Lower middle market, second lien, has payment blockage. And the upper middle market second lien, doesn’t have payment blockage.

Often, the second liens, every middle market are better than the first liens of the lower market.

So just because it’s first or second lien, it’s not a big a thing. I will say, I know the majority of our loans are first lien. But I don’t think we break it down anymore.

Alex Frank

Except that the SOI [ph] which has all the individual –

Len Tannenbaum

Okay, you can break it down if you – if you go limb by limb, you can find whatever you want. We just have to break it down limb by limb.

Operator

Okay. I would now like to turn the call over to Dean Choksi for closing remarks.

Dean Choksi

Thank you for joining us on today’s call. Have a good day.

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