BlackRock Kelso Capital's CEO Discusses Q1 2014 Results - Earnings Call Transcript

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BlackRock Kelso Capital Corporation (NASDAQ:BKCC)

Q1 2014 Earnings Conference Call

May 1, 2014 4:30 PM ET


James Maher - Chairman and Chief Executive Officer

Michael Lazar - Chief Operating Officer

Corinne Pankovcin - Chief Financial Officer

Laurence Paredes - Secretary and General Counsel, Advisor


Troy Ward - KBW

Rick Shane – JPMorgan

Jon Bock - Wells Fargo Securities


Good afternoon. My name is Branson, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Kelso Capital Corporation Investor Teleconference.

Our hosts for today’s call will be Chairman and Chief Executive Officer, James R. Maher; Chief Operating Officer, Michael B. Lazar; Chief Financial Officer, Corinne Pankovcin; and Secretary of the Company and General Counsel of the Advisor, Laurence D. Paredes.

All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Maher, you may now begin the conference.

James Maher

Welcome to our first quarter conference call. Before we begin, Larry will review our general conference call information.

Laurence Paredes

Thank you, Jim. Before we begin our remarks today, I would like to point out that certain comments made during the course of this conference call and within corresponding documents contain forward-looking statements subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar expressions. We call to your attention the fact that BlackRock Kelso Capital Corporation’s actual results may differ from these statements.

As you know, BlackRock Kelso Capital Corporation has filed with the SEC reports which list some of the factors which may cause BlackRock Kelso Capital Corporation’s results to differ materially from these statements. BlackRock Kelso Capital Corporation assumes no duty to and does not undertake to update any forward-looking statements.

Additionally, certain information discussed and presented may have been derived from third-party sources and has not been independently verified. Accordingly, BlackRock Kelso Capital Corporation makes no representation or warranty with respect to such information. Please note, that we have posted to our website an investor presentation that complements this call. Shortly, Jim and Mike will highlight some of the information contained in the presentation.

At this time, we would like to invite participants to access the presentation by going to our website at and clicking the May 2014 Investor Presentation link in the Presentations section of the Investor Relations page.

With that, I would like to turn the call back over to Jim.

James Maher

Thanks, Larry. Good afternoon and thank you for joining our call today. First quarter highlights include new investments of $63 million, exits of $188 million and a $34 million realized gain on the sale of existing investments and increases in the valuation of many of our remaining equity positions.

Adjusted net investment income equaled $0.19 per share. When taken together with our portfolio of net realized and unrealized gains, our adjusted NII exceeded our $0.26 dividend and resulted in an increase in our NAV of $0.05 per share to $9.59 per share.

Earlier this year, we entered an agreement to sell our entire debt equity and warrant position in Arclin for an aggregate proceeds of $59.2 million. This transaction generated a realized gain of $37.2 million. Proceeds in the transaction will be approximately $7 million higher than the year end valuation.

Over more than 5.5 years, since the initial investment in Arclin, the investment generated a cash-on-cash internal rate of returns in excess of 20%. We have also entered into a contract to sell our largest equity investment. ECI at a price range of $71.5 million to $72.5 million which is anticipated to produce a realized gain of approximately $49 million.

As anticipated, this would further reduce our portfolio equity composition while generating additional proceeds to redeploy into income producing assets. We expect this transaction to close late in the second quarter.

Utilizing loss carry-forwards to eliminate our capital being distribution requirement will allow us to reinvest the proceeds from these transactions in interest-bearing securities with a meaningful impact on NII. We have now sold or agreed to sell more than half of our equity investments by value.

With respect to the balance of our equity positions, we like the prospects. And although it is our goal to exit that on an orderly basis, we expect to continue holding substantial majority of them over the near to medium term. We expect the rate of return on these investments will be accretive to our overall returns.

Economic conditions generally and the performance of our portfolio companies continued to strengthen into the first quarter of 2014. As we look at new investment opportunities, we continue to balance the stronger economic fundamentals against the weaker rates and the terms available in today’s credit market.

Market conditions for new investments in the upper-end of the middle market for sponsored back M&A transactions remain challenging. Through the first quarter, loan funds continued to benefit from net cash inflows.

Overall, the trend towards lower rates, higher leverage levels, and issuer-friendly structures seen throughout last year continued into the first quarter of 2014.

Our competitive strength is often more visible in more challenging credit market environments. As we tend to be able to draw on solid credit underwriting in our private equity backgrounds to find ways to structure high returning investments in complicated


With the market is over here, as we feel it was in the first quarter, our tendency is to remain disciplined on credit terms which over the long run are more important in rates. It’s not that we are not seeing our fair share of opportunities, except those opportunities we are seeing generally give us pause as credit terms weaken. Given where we stand in the credit cycle, we expect that as we move forward in 2014. We will entertain investment opportunities that are more senior in the capital spec.

Our equity investments have benefited in this environment as we have seen significant equity appreciation. This results in a high-quality problem of creating a high concentration of equity investments in the portfolio which typically do not generate current cash returns although they are accretive to valuation and overall performance.

In light of these factors, our Board of Director has reexamined our dividend policy and has elected to reduce our dividend rate to $0.21 per share. Our Board has determined to set the quarterly dividend to much better match the return profile and composition of the portfolio given the current market environment.

We believe that by setting the dividend at a level that is largely covered by interest and dividend income, rather than capital appreciation, gains and fee income, we are now in a position to grow net asset value.

Finally, our first quarter borrowings decreased as a result of loan repayments. Our goal for leverage over the long-term remains at 0.75 times. At quarter end, giving effect to the Arclin transaction, our leverage stood at 0.56 times. As a result, we still don’t expect to raise additional equity capital in the near-term.

Mike will now discuss our results and portfolio activity in more detail.

Michael Lazar

Thank you, Jim. As Larry mentioned in advance of this conference call, we posted our quarterly investor presentation on the website. An overview of our first quarter results starts on Page 2.

We are pleased with the solid performance of our investment portfolio. Net assets increased to at $714 million and net asset value per share increased by $0.05 during the quarter to $9.59 per share. Total investments were $1.1 billion at quarter end.

With respect to earnings, our portfolio generated investment income of $29.6 million for the first quarter which was a decrease relative to the $3 million in the prior quarter. While interest income was up by almost $1 million in the period, fee income was down substantially in the first quarter. Fee income tends to be relatively consistent for our business over the long run, although it can volatile in any given quarter.

For the quarter, fee income totaled $908,000, this compares to $4.8 million or $0.06 per share for the prior quarter, an average of more than $4 million per quarter over the last two years. Although there were $64.7 million more exits during the current quarter, only one of these exits was accompanied by a prepayment fee.

Total expenses for the three months ended March 31 were down significantly at $18.5 million compared to $28.4 million in the prior quarter. The principal difference between the two periods relates to incentive fees, including those accrued on unrealized gains. Incentive fees relating to income were zero in the quarter and incentive fees accrued based on a hypothetical capital gains calculation were $3.5 million.

On a pro forma basis, incentive management fees for the first quarter were less than $300,000, far less than the $2.5 million attributable to the fourth quarter as adjusted. Of the current period totals, $3.5 million in the quarter compared with $5.5 million in the fourth quarter representing incentive management fees accrued based on a hypothetical capital gains calculations required by GAAP.

As of March 31, the accrual for incentive fees related to capital gains stood at $29.2 million. We believe that our adjusted net investment income which removes the hypothetical fees and adds an adjustment to account for incentive fees that are non-income is a better indicator of our quarterly performance.

A reconciliation of these GAAP and non-GAAP measurements appears on Page 11 of the Investor Presentation. Adjusted net investment income of $14.3 million in the quarter compares with $16.5 million in the fourth quarter and equated to $0.19 per share versus $0.22 in the fourth quarter of 2013.

In the first quarter, our adjusted net investment income of $0.19 when added together with gains realized during the quarter of $0.45 per share, resulted in $0.64 per share of combined net investment income and realized gains. Taken together this income provided dividend coverage of 248% of our previously declared $0.26 dividend.

Our origination efforts remained focused on higher quality investments and special situations where we have an investment edge or a benefit that results from experience, information or relationships. We look at opportunities with a long-term view and focus on maintaining and growing our NAV over time.

Our investment strategy does not favor portfolio growth at the expense of lower credit underwriting standards that we believe do not benefit our shareholders over the long run. Generally, current market conditions have led us to focus on higher quality loans, often with some significant credit support from asset coverage.

Since quarter end, the market has backed off somewhat as what had been a 95 consecutive week streak of net positive cash inflows into loan funds, finally ended in late April.

Exits including the $59 million received in the sale of Arclin, exceeded the amount of new investment in the first quarter. Some of the other significant transactions in the quarter included Trimark, Crimson and the repayments or sales of attach made – learning and road infrastructure.

During the quarter as part of the refinance transaction, we exited our existing Trimark senior secured second lien term notes of just over $50 million. We invested $15 million in a new term loan to the company. Trimark is one of the country’s largest full-service providers of design services equipment and supplies to the food service industry.

We also provided a $30 million second lien term loan to Crimson Energy Partners. Crimson is a Texas-based E&P operator with 29 producing wells. The second lien term loan was utilized to pay down Crimson’s existing revolving credit balance, providing liquidity for the company to execute on its drilling program.

The second lien term loan had a cash coupon of 10 and three quarter’s percent and was issued with a two point few to yield 11.28%. The security also requires mandatory amortization and reflecting the mandatory amortization the IRR on this loan is anticipated to be 11.65% to maturity.

In general, our portfolio companies continue to perform quite well. We had no investments on non-accrual at quarter end, and no changes in the ratings of our portfolio companies since year-end.

We continue to look to make commitments in the capital structures of businesses in which our investments are well supported by future free cash flow generation, current enterprise value and identifiable assets.

We view this as a defensive posture, we expect to continue seeking these more conservative investment structures. Ours is a business we are paying attention to the details is a paramount importance. The performance and prospects of the companies that we invest in, the strength and character of the managers of those businesses, the transaction-specific covenants and the details of the assets that support our positions all enter into our analysis of potential transactions.

Over time, this has been somewhat difficult to convey as much focus on analyzing our investment portfolio by the general category or tight of each investment, viewed through the lens of current market conditions for larger more liquid credit investments. Our investment made in the second lien loan of Crimson is a perfect example. On the one hand, crimson I second lien loan whose security, interest and the assets of the underlying company are subordinated to the company’s commercial banking revolving credit agreement. Importantly, it is the lien that is subordinated not the loan itself. Some people might view the credit as being particularly risky as the credit statistics surrounding the typical broadly syndicated second lien loan in the first quarter, generally had pretty loose credit terms such as lacking financial covenant protection and having high debt attachment points approaching four times EBITDA or even higher. Often leverage loans in the liquid credit markets have been extended will beyond the value of the tangible assets of the company and the line nearly exclusively on free cash flow is credit support. We made our investment in Crimson more than six months after initially meeting with the company. We negotiated the terms over an extended period of time and benefited from watching the company’s performance.

Our loan, while second lien is supported by the liquidation value of the company’s assets. Our loan contains performance covenants focused on the value of those assets. At closing, the attachment of BKCC’s second lien loan was at a half or turn of EBITDA and total leverage through our security was approximately two times EBITDA.

Furthermore, asset coverage was more than six times representing a loan to value ratio of LTV of less than 20%. Liquid asset coverage was at an LTV of less than 70% at the closing of this investment.

In short, this is not a typical syndicated second lien loan. In essence this is what we do. When we speak about our conservative approach, we are referring to the details rather than just the headlines. These opportunities are difficult to source and difficult to underwrite but well worthy effort in our view while we can participate in more traditional sponsor led buyout from time-to-time more in liquid market opportunities. This is the fundamental blocking and tackling that drives our business.

With that, I’d now like to turn the call to Corinne to review some additional financial information for the quarter.

Corinne Pankovcin

Thanks, Mike and hello everyone. I will now take a few moments to review some of the other details of our 2014 first quarter financial information. Portfolio composition was relatively stable in the first quarter. The percentage of our portfolio invested in senior secured loans and unsecured or subordinated debt securities each increased 1% to a respective 44% and 17% while our concentration in senior secured notes declined 3% to 15% as compared to the prior quarter. Although our sale of Arclin during the quarter removed a significant amount of fair value from our equity investment, this was offset by continued appreciation in our existing investment. In addition, when the $96.3 million decrease in overall portfolio size, it’s taken into account equity investments comprised 21% of the portfolio at quarter end. This represents a 5% increase in our non-income producing securities from 16% at this time last year driving the 40 basis point decrease in our total portfolio yield between the two periods.

The weighted average yield of the debt and income producing equity securities in our portfolio at their current cost basis remains stable at 12% at March 31. The weighted average yield on our secured loans and other debt securities at their current cost basis were essentially flat at 11.4% and 12.9% respectively.

Net unrealized appreciation decreased $22 million during the current quarter. While this number represents less unrealized depreciation in the portfolio in the aggregate, and at the end of the prior quarter, this is largely due to reversal of unrealized appreciation of $28.6 million because these investments were in fact exited and these unrealized gains became realized.

By moving the reversal, the current portfolio appreciated $6.6 million in value during the quarter taken in conjunction with the $33.8 million of realized gains during the period, our net realized and unrealized gains of $11.8 million help to drive our net asset value per share up another five cents for the quarter to $9.59 per share. This was a further increase over our $9.47 net asset value per share at this time last year.

As part of our strategic tax planning from time-to-time we are able to reduce our investment company taxable income by losses taken on ordinary assets thus minimizing the amount of taxable income to be reported by our shareholders. Relative to our $1.1 billion portfolio at fair value, we continue to have sufficient debt capacity to deploy an attractive investment opportunity. At March 31, we were in compliance with regulatory coverage requirements with an asset coverage ratio of 255% and were in compliance with all financial covenants under our debt agreement.

At March 31, we had approximately $34.1 million in cash and cash equivalents, $459 million in debt outstanding and subject to leverage and borrowing based restrictions, $250 million available for use under our amended and restated senior secured revolving credit facility which now matures in March 2019.

As compared to last year, our weighted average cost of debt decreased 59 basis points to 4.91% due to securing more favorable pricing with the amendment of our credit facility during the quarter. Average debt outstanding increased from $359.5 million last year to $482.4 million this year resulting in a $3.7 million increase in total borrowing cost during this quarter.

With that, I would like to turn the call back to Jim.

James Maher

Thanks, Corrine. We are pleased with our accomplishments year-to-date particularly the successful exit of one of our two largest equity positions and the signing of a final purchase and sale agreement to the other. As we have said before, even after we have exited those investments, we still will hold equity positions that comprise a higher percentage of our overall portfolio and it’s our long-term goal.

Redeployment of those proceeds of these and future transactions will only further contribute to our ability to grow our net investment income per share. As we think about dividends for 2014, and into 2015 and beyond, we set the dividend at a level that we believe takes into account the rates available for more conservative types of investments that we are comfortable with in today’s environment.

Furthermore, this dividend level requires no capital gains or fee income to sustain. We believe that the retention of any excess earnings is a prudent and cost-effective way to grow available capital and therefore total assets. Any future retention of excess capital would be available to help protect and sustain our dividend over the long-term.

On behalf of Mike, Corrine, Larry and myself, I’d like to take this opportunity to once again thank our investment team for all of their efforts to thank you for your time and attention today. Brett, would you now open the call for questions?

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Troy Ward from KBW. Please go ahead with your question.

Troy Ward - KBW

Okay, thank you and good afternoon. First, I’d just like to say congratulations on the great sale on Arclin and the upcoming sale of ECI, two very strong results for shareholders? Mike, can you walk through quickly just on the Arclin by your mass looking at the cost basis at December 31 and the exit price given, it seems like there was been an additional $14 million over where you had it marked and you mentioned a $7 million increase, was there some additional capital put forth?

James Maher

That's an easy question, we had excess – I’ll answer that, but we had excess – some warrants that were expiring in January. So we had to exercise those and that was an additional $7 million.

Troy Ward - KBW

Okay, good that will make it, so then, great and then back on the fee income, like you talked about you had strong exits in the quarter, but the fee income generation just wasn’t there as we’ve seen in the past, is that a function of investments that have been added to the portfolio over the last couple years, is there just a lower embedded amount of exit income in there because of the competitive nature that we’ve seen over the last couple of years?

James Maher

There is no single answer to that question. I think the single biggest contributing factor to the unusually low amount of fee income in the quarter was that so many of the exits while it was the large number on dollar terms were equity exits and those don’t tend to have any type of fee offsetting them.

With respect to the debt exits, yes, some of those – it was a combination of exited investments of a few slightly more recent transactions that had lower types of prepayment penalties, 102, 101 par type of structures, because they burning rate loans. Others of the exits Trimark for example, our investments that had been on our balance sheet for many years and had just been paying their rate and had made it through any non-call period or prepayment penalty period and that’s just sort of the timing of when these particular loan is repaid or expired. So it’s a bit of a mix bag there.

Troy Ward - KBW

Right and that's helpful and then one final one Mike, on the pipeline of what you are seeing today, you didn’t note that the streak of inflows finally ended, how does that – are you seeing that translate into your business and do you feel like there is a little bit more opportunity and then separately what is the current mix of opportunities you are seeing out there, new opportunities versus refinancing?

Michael Lazar

Sure, I think when we think of what we were doing so far this quarter, first of all, as you said – and as we said in the prepared remarks we were very pleased to see the 95 week streak end of inflows. Obviously, that doesn’t have a single direct effect on our marketplace.

But we did see the liquid credit markets trade off just a little bit in light of that change as people started selling some of these recently completed loan assets and things started to trading back down from premiums to parts being down 50 to 75 basis points depending.

That has a small effect on what we are working on at any given time, but what it does do is it’s good for our forward calendar because that marginal second lien or first lien syndicated loan that was just going to get done in the marketplace on the smaller side, on the more difficult to underwrite side, that's the deal that’s going to not get done now in the liquid credit markets and its going to move back into our marketplace and give us an opportunity going forward.

That’s really kind of this month’s and next month’s business we hope as we look forward there should be some opportunities from that. We have been looking to a transaction similar to the one I described in some detail Crimson, where we are looking for some off the run deals and we found a couple that we are currently working and we are hopeful about for this quarter that are sort of away from that broad marketplace environment.

Troy Ward - KBW

Great, that’s great color Mike. Thanks, I’ll get back into queue


Your next question comes from the line of (Inaudible). Please go ahead with your question.

Unidentified Analyst

Thank you. Just – the equity that you have come back to you, the pretty large amount $72 million from ECI and $59 million from Arclin, it seems to me that you would be with a – if you can reinvest those in – not too quickly but that will be pretty meaningful from NII perceptions. So I guess my question would be, with lower dividend level how low of a yield are you willing to go to it’s kind of a lower bogie now that would be particularly accretive to NII once you rotate those – that proceeds into your new loan book?

James Maher

Well, and that’s something we talk about any yield would be accretive because obviously w are at the margin, we were borrowing to carry those investments and paying management fees on those investments. And so, I will pick a number it’s over. We eliminate cost of over 5% just by selling those opportunities. So – it’s at a different lag. If we would have to put even 1% yield on our books, it would be incremental. I’ll let Mike now, because it’s a harder question which is, what’s the target.

Michael Lazar

Right, so Jim of course took the part that I would have taken first. And I think with respect to what our new target investment yield is, without giving too many specific hints to people who might seek to borrow from us, I would suggest that, overall, what this allows us to do is it allows us to focus on slightly more senior, slightly more secure, slightly less risk profile, higher up the capital stack as Jim said in the remarks. It allows us to focus on some of those opportunities that perhaps had less future volatility and less risk to them and takes some of those on to our balance sheet as we look forward. So it’s not so much independently the return it’s the risk-adjusted return and it allows us to broaden the portfolio into some more senior positions.

Unidentified Analyst

Okay, I mean I guess the problem with that - it’s not a problem that will be positive once you reinvest those, but from a senior loan perspective you can have senior loans from small companies at high yields or large companies at pretty low yields. So I guess, can you give any kind of range where you going sub-70%, sub 8% any kind of idea will be helpful.

Michael Lazar

Sure, I think we don’t intend to migrate our fundamental strategy which is to serve lower middle market companies, companies that are away from broadly serviced capital markets where there is an attractive premium available for those assets, so again, it’s a liquid credit market. We do something at 5 or 6 that’s the kind of loan we might make it 7 or 8 or 9. Those loans were really not available to us to put on our balance sheet before and now we maybe opportunistically capable of making some of those investments as we round out the portfolio.

Unidentified Analyst

Thanks, that's helpful and then, did you provide any quarterly date to investment activity other than the $72 million that you are selling or are there any other loans coming back to you that you know of and what’s the deal pipeline I guess, looking like?

Michael Lazar

We elected not to do that in a formal way on this call at this time. There is a couple of things that we are working on presently that could go one way or the other that would make a significant enough difference to that number that sort wasn’t fair to give one at this point. There are few investments that we have in portfolio companies where there – portfolio have or may market new deals, those will obviously become publicly available. Some of those you will pick up on but on the other side of the coin, there is a bunch of things that we are currently working that we are not quite ready to share any details on. I am sorry about that it’s just the timing at this point.

Unidentified Analyst

Fair enough. Thanks for that.


Your next question comes from the line of Rick Shane with JPMorgan Please go ahead with your question.

Rick Shane – JPMorgan

Hey guys, thanks for taking my questions I guess, this afternoon. Look, we followed you guys for just over three years now and I think what’s come through is that there is a sincerity and genuineness about how conservative you guys are. I don’t question that.

I guess the question we do need to ask though is, has there been an opportunity cost associated with that when you guys looked out over the last three years do you think that this is brought you to missing investment and then when you think about that opportunity cost one of the other things that you point out is, that you are being conservative about raising capital which is true.

But one of the things that we at least theorize about BDC is that when you get to that $1.5 billion to sort of $2.5 billion in assets, there is some operating leverage and some opportunities to develop and is that something that you need to consider in terms of the opportunity cost related to conservatism?

James Maher

I think it’s fair to say that we have always have been quite open about our desire and believe that the appropriate size or a very good size for us would be in the range of $2.5 billion to $3 billion.

So you will get no argument here. It is still our goal to be at that size and obviously if one looks back over the last 12 to 18 months and with the sort of steady erosion of rates during that period of time one could easily come to the conclusion that one should have been more aggressive during that period. Particularly given the lack of credit problems.

I mean that is the likelihood that there is not going to be much credit problems given the economy for the next – certainly for the next 12 or 18 months. So the answer is, yes, we probably have been a little bit overly conservative.

Michael Lazar

I would add to Jim’s comments, Rick by saying that, with a large portion of the portfolio dedicated to equity investments over the past couple of years. It has affected us in terms of our willingness to be more aggressive on some of the more marginal debt securities. Because we think about the whole portfolio’s performance, should there be some turn in the economic environment.

So there is a double benefit in many ways to the sale of these two large equity investments at this point. One is obviously to redeploy the cash into some sort of a returning investment something with positive current return, but also it changes the overall portfolio risk and it allows us I think to be able to go out and think about new debt investments and growth differently. Lastly, with the dividend set where it is there ought to be an opportunity to grow NAV and thereby grow our portfolio that way as well.

Rick Shane – JPMorgan

Got it, okay, that's helpful and I – again realize it bear you the CDMIC to tell you guys how to run your business especially with hindsight and that’s not fair, I think it’s a very clear answer. Thank you guys.


(Operator Instructions) Your next question comes from the line of John Bock with Wells Fargo Securities. Please go ahead with your question.

Jon Bock - Wells Fargo Securities

Good afternoon and thank you for taking my questions. Mike, maybe jumping to the comment as it relates to subordinate, and secondly, I appreciate that definitely as you provide details there.

So maybe turning to the other second lien investment that I think you originated this quarter, could you walk us through the leverage stats as well as the rate you are receiving in Trimark USA to the same degree as you did with Crimson? That would be helpful.

Michael Lazar

So, Trimark is a – we came across slightly differently obviously it was an existing portfolio company for us. We have been in that investment since – I believe 2006 earning a 13% or better current return. We didn’t view the new refinancing security as being as good risk-adjusted return as the original security but we do have some pretty good insights into where we expect the business to be.

So, with that in mind, the structure of that transaction is a first lien, second lien we are in the second lien, an important element of the analysis and being part of that particular second lien, is that that second lien loan relative in size to the first lien loan that its behind.

They are almost identical in size which gives the second lien lenders an opportunity should something go wrong to really fix the situation and be active rather than be a participant in the small tail that get wagged by the dog in a restructuring. The run rate return on that, it’s a LIBOR based loan it’s floating rate but it starts off at 10%. And the attachment point I also say it’s sort of below 3.5% and it goes to the – as the loan extends through just slightly over five times.

Jon Bock - Wells Fargo Securities

Over five times, okay. So, I guess, the question is, and while we appreciate the discussion that looking at Crimson at 0.5 to two times EBITDA with low loan to value it’s attractive, there has to be some amount of segmentation because not all of these are going to be created equal and it’s probably best for investors to focus on the lowest common denominator rather than assume everything just pristine as Crimson, would you agree with that?

Michael Lazar

No, I am not sure, I’d agree with that Jonathan, I think that what investors really should do is look at the particular assets and how they are underwritten and who is doing the underwriting. It doesn’t make one group right or wrong, but I think this is a pretty small number of investments in any particular BDC portfolio certainly in ours and we are happy as always to talk about the specifics around the transactions that we enter into and I would say when you look at our loan book, there is a lot more episodic individual unique structured investments than there would be sort of participations in the ordinary run of the mill liquid credit market deal.

Jon Bock - Wells Fargo Securities

I appreciate that, I mean, we always understand that everybody underwrites differently. So, I appreciate with the honest answer. So now maybe trying to the capital deployment picture as we walk through the timing, right, timing here is key in light of the dividend reduction capital deployment is something that we will drive the NOI no matter what you invest in and so the idea is that you say you are going to be conservative and prudent, yet any loan that you put on the books today is effectively accretive if I remember. So, the question is, what’s best for you to go ahead and start to grow earnings immediately or to be just be a little bit more or let’s say careful in terms of what you are deploying and choose to grow earning slowly?

James Maher

I think what’s best for us is to continue to look at each investment opportunity as a separate opportunity to evaluate that and to go forward and not to make a generalization about putting the money to work more quickly or less quickly.

I think, that's the way we intend to do it, I think as Mike said earlier, the sale of the equity is consistent opportunity towards less risky credits but it doesn’t really impact the timing. As we see things, we will evaluate them and make that decision.

One of the factors entering into the dividend was the redeployment of money. How long it would necessarily take, I mean, if you can – as you can appreciate it, if we took that money and redeploy it immediately and put a few other assets on our books, we’d be covering the dividend the old dividend with no problem the conservative approach is to, say, it’s going to take some period of time to put that money back to work.

We are not going to get the money in the case of CI until the end of this quarter and Arclin will be during this quarter.

Jon Bock - Wells Fargo Securities

I appreciate that, and again no one would ever quibble with reducing the dividend substantially in light of economic reality, we definitely appreciate people aligning dividends with pure cash flow. And then just maybe one comment as it relates to overall risk, particularly in the – as it relates to fixed charge and coverage. You spoke about Crimson and the opportunity secondly, and then Mike appreciate that. So it sounded great, walk us through how that loan can go wrong? And more importantly also how it was originated and whether or not you participated with anybody else on that transaction?

Michael Lazar

So much like that, I’ll take those questions in reverse if that’s okay with you.

That’d be fine. It’s where we are at in that loan. We originated it through relationships in the industry through our relationship with the manager that runs the company. And through having looked at a potential transaction that looks like a more liquid or market-oriented transaction, that did not come to task.

Gosh, it’s coming on almost a year ago now. And so, by staying with the business, by following it, by meeting the needs the capital needs of the company, we are able to stick around it, watch the company develop and get involved in a transaction being in the right place at the right time of building those relationships and thinking about the company and providing with them with some that they needed.

In terms of what could go wrong, it’s a loan, there is risk to it. It’s related – the company fundamentally is an E&P company. They drill oil. They extract it from the ground. There is a risk that they drill poorly that oil prices change dramatically that there is some sort of a government change in – or government led change in how these minerals and how these energy resources are extracted.

We believe we are very, very well covered in all of those cases because of our low loan to values but those are the types of things that go wrong. Now having covenants and monitoring the company, means that you have an opportunity when things begin to go wrong to try to find the way out of the loan while there is still plenty of asset coverage.

There it doesn’t mean it’s going to happen again, these are loans, sometimes they go wrong. You show me a loan book that’s never had a loss, and I’ll show you who has never made a loan.

Jon Bock - Wells Fargo Securities

That makes sense. Well, guys, thank you so much for answering my questions.


Your next question is a follow-up from the line of (Inaudible) with Evercore. Please go ahead with your question.

Unidentified Analyst

Thanks guys, I wanted to ask you quickly about the credit quality of the portfolio, were there any loans on non-accrual at the end of the quarter and it looks like those are really small amount that went into category three loan in your internal rating system just overall what are you seeing in terms of credit ratings of your portfolio?

Michael Lazar

There were no changes in terms of credit ratings during the quarter.

Corinne Pankovcin

It’s just the valuation that took, it’s not a change in category.

Unidentified Analyst

That created a slight change in the aggregate or the average rating but there were no downward or upward revisions in terms of credit ratings?

Corinne Pankovcin

No, no.

Michael Lazar

And there is no non-accruals.

Unidentified Analyst

Okay, thank you.


Your next question is a follow-up from the line of Troy Ward with KBW. Please go ahead with your question.

Troy Ward - KBW

Yes, just one quick one, lot of questions about on the pace redeployment of the equity capital coming back – in the quarter, it looked like there was three investments that were actually made in the fourth quarter and then exited in the first quarter. On the tracks and Renaissance it looks like, what’s the opportunity to continue to find things like not necessarily exit – originate one quarter and exit the next but those are probably I am assuming much more liquid opportunities. Are those types of opportunities available to you today to put some of this capital to work more quickly?

James Maher

So, I think the general answer to that is, yes. We’ve been reluctant to put capital to work in too many liquid opportunities at one time. As we talked about on our last conference call, we have put an application to the SEC for some exempted relief around starting an asset management company whose focus will be on senior loans and with liquid credits, talked about that some last time. And as part of watching that market and being involved in that marketplace, we have from time-to-time been able very opportunistically and very effectively generate some quick returns on companies that we’ve seen and known who are participating in that liquid credit market, but again that is not our focus. So it would be unlikely that we would turn around and very quickly put this large amount of money equivalent to more than 10% of our overall portfolio to work in that marketplace sort of overnight, that’s an unlikely outcome but we will continue to be opportunistic as we have and as you have seen these smaller investments will on and off as they may be carried over at quarter end.

Troy Ward - KBW

Okay great, thanks, Mike.


So we have no further questions in the queue at this time.

James Maher

Well, I thank you all for participating. And as always, if you have any further questions feel free to give us a call. Thank you.


Thank you. This concludes today’s conference call. You may now disconnect.

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