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Medley Capital Corporation (NYSE:MCC)

F2Q 2014 Earnings Conference Call

May 2, 2014 10:00 ET

Executives

Brook Taube - Chief Executive Officer

Rick Allorto - Chief Financial Officer

Analysts

Mickey Schleien - Ladenburg

Andrew Kerai - National Securities Corporation

Troy Ward - KBW

John Hecht - Stephens

Casey Alexander - Gilford Securities

Terry Ma - Barclays Capital

Christopher Nolan - MLV Company

Operator

Good morning, ladies and gentlemen. Welcome to Medley Capital Corporation’s Second Quarter Fiscal 2014 Financial Results Conference Call. Today’s call is being recorded for replay purposes. At this time, all participants are in a listen-only mode. (Operator Instructions)

This conference call may contain statements that to the extent they are not recitations of historical fact, constitute forward-looking statements. Actual outcomes and results could differ materially from those forecast due to the impact of many factors. The company does not undertake to update its forward-looking statements unless required by law. The second quarter 2014 investor presentation is available in the Investor Relations section of the company’s website, www.medleycapitalcorp.com.

I would now turn the call over to the company’s Chief Executive Officer, Mr. Brook Taube. Please proceed sir.

Brook Taube - Chief Executive Officer

Thank you very much, and welcome everybody to the Medley Capital Corporation’s quarterly earnings call. We appreciate you taking the time to join us this morning. As usual a quick agenda, first, we’ll talk about our recently declared $0.37 dividend for the quarter ending March 31. Second, we’ll provide an update on originations in the portfolio including a review of the activity for the quarter and our current outlook. Third, we’ll provide an update on our SBIC activity and discuss liquidity and capital availability for new investments. And finally we’ll review the financial results for the quarter ending in March.

On the dividend on May 1 the Board of Directors declared a dividend of $0.37 per share from the quarter ending 331. The dividend will be payable on June 13, the shareholders of record of May 28. As we’ve stated in the past we expect net investment income will meet or exceed the current dividend as we look forward assuming we’re able to deploy capital as planned. On the origination front this quarter we originated $170 million in eight new investments and six existing investments and we received amortizations repayments of $29.8 million resulting in net portfolio growth of $140.9 million.

We’re pleased with the volume this quarter and I’d like to acknowledge the entire Medley investment team for their efforts. The origination results are the largest quarterly growth and net origination since our IPO. Pricing on non-sponsored investments remain stable and we continue to find attractive risk adjusted returns in the market. Our deal flow remains strong and we expect to deploy the recent equity capital raised in a steady and consistent manner. Our portfolio which consists primarily of senior secured loans remains stable and well diversified. We currently have 69 portfolio companies across 26 industries.

Our expectation is that we’ll continue to diversify as we grow the overall size of the portfolio. And as I’ve mentioned on our prior call we intend to increase the floating rate portion of the portfolio. During the past quarter 72% of our origination volume was floating rate and we expect to increase that as the portfolio grows in the quarters ahead. As of the March 31st break the percentage of the portfolio that was invested in floating and fixed rate assets were 63% and 37% respectively. And overall the credit quality of the portfolio remains stable.

Turning now to the SBIC as of March 31st, the subsidiary had $87 million invested in eight portfolio companies with an average size of $10.9 million and $44 million of SBIC leverage drawn. A large portion of the pipeline qualifies for the SBIC and we continue to draw or expect to continue to draw further SBIC leverage in the quarters ahead. As I’ve communicated on prior calls we may in the future increase our regulatory capital at the SBIC subsidiary to a total of $75 million that’s an increase of $25 million. That would allow us to borrow an incremental $50 million bring total leverage to $150 million for this SBIC subsidiary. As of today our liquidity for new investments including the proceeds from our recent equity offering is approximately $220 million and this includes $56 million of undrawn SBIC leverage.

I’d like to now turn the call over to Rick Allorto, our Chief Financial Officer to review the results for the quarter.

Rick Allorto - Chief Financial Officer

Thank you, Brook. For the three months ended March 31, the company’s net investment income and net income were $16.6 million and $12.4 million or $0.38 per share and $0.28 per share respectively. The net asset value per share was $12.69 at March 31 compared to $12.68 at December 31. For the quarter total investment income was $31.4 million and was comprised of $26 million of interest income and $5.4 million of fee income.

Total operating expenses were $14.8 million and consisted of $8.2 million in base and incentive management fees, $4.6 million in interest and financing expenses, and $2 million in professional fees, administrator expenses and general administrative expenses. For the quarter, the company reported net unrealized depreciation of $4.1 million and a net realized gain from investments of $28,000.

As of March 31, the Company’s total debt outstanding equaled $404 million including $136 million outstanding on the revolving credit facility, $120 million term loan payable, $103.5 million in notes payable and $44 million of SBA debentures. The Company’s debt-to-equity ratio excluding the SBIC debt was 0.6 times. As of today, our liquidity for new investments including the proceeds from our recent equity offering is approximately $220 million and this includes a $56 million of undrawn SBIC leverage.

That concludes my financial review. I’ll now turn the call back over to Brook?

Brook Taube - Chief Executive Officer

Thanks, Rick. Again we’re very pleased with the performance in our second quarter for fiscal 2014. The team remains focused on originating a portfolio of high quality loans at attractive yields that would generate a stable and consistent dividend for our shareholders in the quarters ahead.

I’d like to thank all the shareholders for their continued support and we can now open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Mickey Schleien with Ladenburg. Please proceed.

Mickey Schleien - Ladenburg

Good morning, Brook. I wanted to start with Revstone Aero. I noticed that you lowered the interest rate on that loan and it matured last November. Could you give us an update on the status of that loan?

Brook Taube

Sure. We – the business is stable. We’re supporting the company in an active sale process and we’ll have more to report in the quarters ahead.

Mickey Schleien - Ladenburg

Okay. You had as you mentioned record net portfolio growth driven by very significant originations. Were they relatively even distributed over the quarter?

Brook Taube

Sorry Mickey, I’m not sure I understand the question.

Mickey Schleien - Ladenburg

Were your originations relatively evenly distributed over the quarter?

Brook Taube

In terms of timing and when we were – I actually can’t comment on that.

Mickey Schleien - Ladenburg

Okay.

Brook Taube

I don’t have the information. I’ll get back to you.

Mickey Schleien - Ladenburg

That’s fine. I noticed you have a high weighting now in the oil and gas industry almost a 10% weighting. Can you tell me what the investment thesis is underlying that allocation?

Brook Taube

So that hasn’t changed. We’ve been active in this sector. There’s a lot of activity I would characterize 10% as a target for any given sector. The capital needs are high. We’re seeing solid deal flow and the investment opportunities are attractive.

Mickey Schleien - Ladenburg

Okay. A couple of more questions. Can you tell me what types of rates that Merchant Cash and Capital charges their customers and what levels of loan losses do you assume for their loan portfolio in your investment thesis for that company?

Brook Taube

I can’t comment on their specific. Our loans obviously we’ll make a senior loan to the company. So we’re advanced as an advanced rate structure against their receivables. And the company has had very consistent and stable growth and stable performance on their underlying portfolio.

Mickey Schleien - Ladenburg

Okay. I calculated a weighted average yield on new investments of 11.3% with the portfolio’s total weight, could you talk about the quality of the deal flow in the quarter with respect to the breakdown between refinancing, dividend recap, M&A, growth capital etcetera?

Brook Taube

I don’t have – there was no unique focus here. I’d say the portfolio was consistently across the origination sources, this is direct sponsor as well as user proceeds. I think 11.3% is a coupon that you’ve calculated the effective yield, if you comp that to our kind of 13 and change percent portfolio yield it would be consistent, it’s certainly below. So not significantly below, the stated portfolio yield to maturity, although as your coupon, I think your coupon is above, right. I will point out that 88% of the volume was first lien this quarter and I think we’ve stated publicly that we intend to increase the floating rate and there is a increase in the first lien exposure on the margin.

Mickey Schleien - Ladenburg

Okay, Brook. I understand. And lastly just any update on Calloway and Exide?

Brook Taube

Yes, Calloway we continue to monitor sample volume increases. The team is focused and we remain supportive of the company. Exide as you know is public and I don’t have any particular color although there has been some volatility obviously over the last few years regarding recent developments and the various amounts that in the company has made publicly.

Mickey Schleien - Ladenburg

Thanks for your time this morning.

Brook Taube

Thanks, Mickey.

Operator

Our next question comes from Andrew Kerai with National Securities Corporation. Please proceed.

Andrew Kerai - National Securities Corporation

Yes, hi, good morning and thank you for taking my questions. I just wanted to Brook if I could just chat about the SBIC debt, it’s my first question. So you guys were $44 million again sort of quarter-over-quarter. I know that you’ve kind of guided previously utilizing about $25 million or so the SBIC debt kind of on a quarterly basis. Kind of with $56 million left here I mean is it a reasonable expectation that you can probably draw that down within maybe the next two to three quarters as 2014 kind of moves along here?

Brook Taube

Sure. We did make an investment in the quarter for SBIC. We actually just received the pay-down which was a good result.

Andrew Kerai - National Securities Corporation

Sure.

Brook Taube

We continue to invest in the subsidiary this quarter. I think if you look that in average production for us over the calendar year I don’t expect us to be off on a rolling basis, any specific quarter with the pay-down or in the time we have a closed deal I wouldn’t read too much into it. We expect to use the facility and will continue on that pace.

Andrew Kerai - National Securities Corporation

Great. Thank you. That’s certainly helpful. And then if we could just kind of go back to sort of where you’re seeing the relative value in the sponsored versus the direct originations. I certainly appreciate the color that you’ve seen stable yields kind of within the non-sponsored market. As you guys kind of think about growing the book here, are you still kind of thinking two-thirds non-sponsored kind of where you’ve been traditionally or has that changed at all as 2014 sort of moved along so far?

Brook Taube

It’s difficult to predict I think what the future will hold. You should expect us to continue to focus on direct originations. 100% of our volume was direct this period and I would characterize to clarify that we’re not participating in any loans, those are all Medley originated deals. I don’t have a specific sponsor, non-sponsored for the quarter, but sponsors at any given quarter might be more than 50% and sometimes they are less. Interestingly we’ve seen – we still see yield compression in the market, I think we’re seeing that across the board. We’ve been able to produce as I mentioned the portfolio origination was at or near the portfolio average this quarter so not a material change, I think most of that the origination, the lower yield on the margin versus the average was related to the first lien mix this quarter.

Andrew Kerai - National Securities Corporation

Sure.

Brook Taube

So it will be interesting I think to watch here some of the volatility in the market as to whether this is the annual or every 18 month kind of risk-off market where we see yields come back to us. So some of the market vol and the risk-off that we see pretty frequently ends up driving higher yield, I’m not predicting that, but we’re going to watch carefully here. We raised capital and we feel very good about our pipeline that was right in front of us and that’s the reason we raised. So I’d say as we look here today it remains an attractive opportunity to be providing senior secured credit in the market.

Andrew Kerai - National Securities Corporation

Great. Thank you. That certainly makes sense. And then just a couple of loans that you guys wrote down a little bit in the quarter, a couple of your larger positions in United Road Towing with like you took about $2 million or so fair value marks on that one and then the Water Capital as well too about $1 million of fair value write-downs. So just hoping given that those are two of your larger positions, if you could just maybe provide a little bit color on what you saw in the quarter and why you decided to takedown the fair value marks a little bit?

Brook Taube

Sure. Well as you know all of our valuation, enterprise valuations are done by third-parties.

Andrew Kerai - National Securities Corporation

Right.

Brook Taube

So there have been some general overall shifts in yield metrics by the third-party valuation folks. I’d characterize modestly marks has not – has no specific color. With respect to URT there has been a stabilization of the business at lower levels. And we’re working with the sponsor in the company closely and I have no color on Water Capital at this point.

Andrew Kerai - National Securities Corporation

Okay, great enough. Thank you for taking my questions and certainly appreciate the color.

Brook Taube

Thanks, Andrew.

Operator

Our next question comes from Troy Ward with KBW. Please proceed.

Troy Ward - KBW

Great. Thank you. And good morning guys. Hey Brook following up on a little bit on what Mickey was talking about earlier on, origination activities and yields and things like that. Can you just kind of talk about how you’re seeing greater origination volume I think in the calendar year 2012 your average quarterly originations were $90 million and then in 2013 $130 million and now were up to $170 million in just this first quarter and you’ve raised equity. So clearly I think we’re going to continue at a higher origination pace. How do we combine the thought process of what we see is a very competitive market to your originations continue to increase quarter-over-quarter?

Brook Taube

Sure. Well thanks for the question, Troy. If we wind to the IPO over three years ago, I think the message we delivered we are right on our plan every quarter. So if you march on the expected ramp this is a size we said and I’ve said in prior quarters we expect to double from here. So in terms of our plan target size origination volume is exactly on the plan that we weighed out and what we’re executing. I’m going to reiterate a point I believe I’ve made which is we have a private fund that was investing that’s come through the end of it’s investment period so as that fund which we do co-invest with wind down more volume became available to be invested at BDC.

So obviously ramping a portfolio you could front the issue of smaller deal sizes early for diversification, but we would have put a pin in 69 positions in this quarter, so it’s very consistent. If you look at the average portfolio growth and you graft it I think the only word you would see is consistency although I do agree it has grown. We expect to continue on this steady and measured path. The market color I have is if you look at you stratify the market today by EBITDA what you’re witnessing and we’re seeing is that the larger players, these are people that are bigger than us, I’ve gotten bigger than us faster. So in many ways they’re growing faster than we’re growing and they’re growing to off a bigger pace. So I think the migration up the market is leaving in the wake opportunities that we continue to find attractive. So we offer that we’re going to raise capital when we’re fully levered and we’re going to raise capital when we see an opportunity in the market and we met all of those measures over the last three years.

Troy Ward - KBW

At what point does the competitive nature of the market though impact your anticipated growth trajectory, right. I mean when you started the IPO did you expect the yield to continue to come in and at what point does that as a lender do you say gosh given where the market is and where yields are, I’m not going to grow as fast because this isn’t maybe the best time, I’m actually going to slow my growth in this environment and maybe re-ramp it later on?

Brook Taube

Yes. I think that’s a good question. What if and when we feel that’s the time I will communicate that to you. As we sit here today with mid single digit revenue and mid single digit EBITDA growth and high quality uses of capital, our observation in this market is that it’s an attractive time to be deploying capital in earning returns.

Troy Ward - KBW

Okay. And then one other one, you commented that you expect to increase the mix of floating rate assets and I think you said the current mix was 63% to 37% fixed to floating. Can you kind of give us where you expect that kind of mix that end up and then secondarily what channel do you typically source flowing rate assets and then of course I think it comes back all back to yield again. Do you think floating it right rate assets typically would have a lower overall yield than the fixed rate assets?

Brook Taube

Yes. I think on the balance we’ve seen – we will see slightly lower floating than fixed. We’re seeing attractive opportunities today. I think we’re going to increase it. It would be hard for us to get the whole book at this point to off floating but that’s a steady march. And if I remember correctly we’re kind of adding three, four points a quarter, so we’ll keep that march up obviously the percentage growth at a constant or a fixed origination volume, it gets harder to increase the percentage on the portfolio. But I think you’d put and paying in over 70% as a target and there is no particular difference in the sourcing for fixed or floating meaning a sector or a specific type of deal. It’s very idiosyncratic today in the market in terms of where the fixed rate requests are coming from.

Troy Ward - KBW

Okay. And then one final one. Given the last capital raise kind of cost of the equity which of course is the dividend yield, where do you think kind of the breakeven point is to be able to have to invest that capital with leverage in order to be accretive for shareholders?

Brook Taube

I don’t have the number for you, I mean our view with our SBIC availability as well as our broadening of expanding credit capacity that will need to access which we would expect although can’t comment and see we would expect a lower cost. But this capital is going to be positive for shareholders both from a growth of the portfolio, diversification of the portfolio and then ability to continue to grow the business and remain relevant in the market.

Troy Ward - KBW

Great. Thanks guys.

Brook Taube

Thanks.

Operator

Our next question comes from John Hecht with Stephens. Please proceed.

John Hecht - Stephens

Good morning guys. Thanks for taking my questions. First one, apologize I think you did give some of this information in the prepared notes, but I wasn’t able to ride fast enough. For the fee income can you breakdown origination versus prepayment fees or what the balance was?

Rick Allorto

Sure, John. This is – the total fee was 5.3, the breakdown is detailed out in the footnotes in the Q.

John Hecht - Stephens

Okay.

Rick Allorto

10-Q.

John Hecht - Stephens

I’ll refer to that then. Second question is and I know these are volatile, prepayments slowed this quarter from the last two quarters. Brook, I’m wondering if you can characterize kind of your perspective of what’s going on with respect to prepayment trend, if there is any change or if you just expect it to be volatile and uncertain? And the second is can you tell us what your scheduled amortization is in your portfolio?

Brook Taube

Okay. I’ll go in a reverse order. As I said on the last call prepayments are difficult to predict. I don’t think you can – it’s not interest rate sensitive and it doesn’t typically trade with kind of overall levered loan volumes. Our business is direct to borrowers that tend to be smaller obviously than the broadly syndicated. So they are not as geared up to go back in the market to save 25 basis points. So I’d say volatile is probably the right word but not a negative characterization. We put a opinion somewhere between 10% and 15% of kind of expected early prepayments on a portfolio basis. If you looked at kind of a static over the life pool obviously it can be more and sometimes it’s less, but it’s not a big concern of ours although at any given quarter we can get capital back. In terms of the scheduled prepayments you mean for what window of time are you working on, John.

John Hecht - Stephens

I guess it’s just given the portfolio term what would be the average amount of amortization in a quarter?

Brook Taube

Yes, I mean if you kind of look at our scheduled amortization you’re correct, $25 million to $30 million, so call it a 100 and in a portfolio of $1 billion that kind of 10%. It’s unusually a little bit more. So it kind of hops around, that’s I would say on an average. I don’t want to get too specific because it will just be a little bit volatile, but we do look carefully on a forward basis that we don’t have any specific quarters or even rolling period that have amortizations that are stacked up significantly.

John Hecht - Stephens

Okay. I appreciate that. And final question I fully understand the focus on adding floating rate instruments in the portfolio given the interest rate cycle here. But within SBIC it gives you a little bit more flexibility in immediate to long-term fixed rate debt you can put second lien and mezzanine in there. I’m just wondering if you could comment on – it create some flexibility and your pipeline right now is off floating, right. I’m just wondering if you could comment on how you – if you intend to take advantage of that flexibility if you are more just interested in balancing and floating a fixed rate mix and you don’t gets into SBIC is giving you that ability to change your pattern?

Brook Taube

Sure. It’s a good question. We don’t look at the SBIC as a financing subsidiary. It’s a specific vehicle. There’s a criteria that we need to meet for the SBA. And we take that specific vehicle seriously, we expect to continue to work with the SBA and grow that relationship. In terms of fixed rate liabilities does it make sense to have them? I think our answer is yes. And you would expect over time to perhaps see us make obviously use some of the fixed rate SBIC and consider alternatives on the fixed rate liability side.

John Hecht - Stephens

Okay. I appreciate that.

Operator

Our next question comes from Casey Alexander with Gilford Securities. Please proceed.

Casey Alexander - Gilford Securities

Yes, hi, good morning. Thanks for taking my questions. I think you just touched just barely on one of my questions which you’ve taken a real measured approach to the SBIC. And as you say there are certain requirements for deals to go in there and yet your pipeline is really strong. Given your recent capital raise would you be thinking about taking advantage of securitizing more debt capital on the sort of other side of the balance sheet? And if so is there a point in time where potentially acquiring an investment grade rating is important to Medley?

Brook Taube

Sure. Well I think I answered the – would we look at more fixed rate debt? The answer is yes. There is no specific guidance but obviously that’s – that market is available and it’s sensible to consider. In terms of our SBIC we have a pipeline that’s active and I don’t have any other color to say other than a lot of our significant portion of our pipeline does typically qualify. And what was your other question, Casey?

Casey Alexander - Gilford Securities

Well is at some point in time acquiring an investment grade rating for the debt capital that Medley issues an important consideration for management?

Brook Taube

Sure. It’s a good question. Our observation is you needed to have three plus years of operating history under your belt, we’ve completed that. So we’re kind of in a good position now to pursue that. I would expect that is important, we’re going to consider it. And I will make one observation that I don’t believe that our fixed rate liabilities are significantly wise to where we would expect in the price where we need to have an investment grade rating it would be some amount but not dramatic. But the short answer is yes, that is going to be important to us.

Casey Alexander - Gilford Securities

Okay. And lastly you had one portfolio company that had a maturity just a few days ago DreamFinder. Did that extend or did it just payoff, what was the ultimate result of that certain position?

Brook Taube

Yes. They paid off that maturity.

Casey Alexander - Gilford Securities

Okay. Alright, great. Thank you for taking my questions.

Brook Taube

Thanks, Casey.

Operator

Our next question comes from (Greg Nelson) with Wells Fargo. Please proceed.

Unidentified Analyst

Hey guys. Thanks so much for taking my questions. Just looking at some of the origination during the quarter, you put some good looking deals on the books in first lien loans at attractive rates. I just want to follow on how you guys are able to do this? Is it a function of direct originations to smaller borrowers or you’re selling any positions ahead with higher priority and maybe run us through an example of the ones you’re making?

Brook Taube

Sure. There is not a material difference and how we do it. Our origination channels I think are not proprietary. We do focus on sponsors and there are certain situations where we could add value and even be in the first lien for the sponsor. The second is intermediaries, these are pieces on the market who are either sector-focused or smaller, they would be called the investment banks if they were much larger. But they’re sourcing interesting opportunities, those are typically not related to a private equity sponsor. So a high quality borrower that’s looking for growth capital that has decided that they don’t necessarily want to sell a piece of their business to an equity sponsor. And then the third is repeat and referral, these are either relationships we have prior borrowers or referrals from prior borrowers.

There has been no shift in our approach. I don’t have the breakdown by those three channels, but we touch the mall every quarter from a volume perspective. The broader wider yield and we’ve said consistently that going direct meaning doing the work on a direct loan as opposed to being in an auction with a sponsor deal generally provides at least a couple of 100 basis points of incremental yield. And our view remains that it’s partially for the hard work, partially for the fact that there is no sponsor, partially for the fact that there is a perceived lack of less liquidity if you will in that business. And that hard work you need to have a big team, our team is now 63 people and growing. So there is a premium for doing the work from start to finish on the direct loan side.

Unidentified Analyst

Yes. That’s great. And then just on the fee this quarter, obviously I think fees were pretty nearly concentrated towards originations. And then a little bit of amendment fees obviously the origination fees are enabled by being able to use liquidity and access to capital markets with equity like you guys did in the quarter and earlier this quarter. Could you run this a scenario where you guys aren’t able to access capital in the equity markets and what that means for NOI and the dividend?

Brook Taube

I am not sure I understand the question. What does the future look like if what happens..

Unidentified Analyst

What I was kind of getting at is that the originations during the quarter drove higher origination fees, while prepayment fees subsided. If you guys weren’t – aren’t able to access the markets trade below NAV and you aren’t able to issue equity to drive those origination fees. Could you like run us through a scenario what would happen with NOI and the dividend?

Brook Taube

Yes. I mean I am not in a position to comment on what the board policies in the future will be with respect to dividends. What I’ve stated publicly is that our strategy with our plan is to set a dividend policy that we expect to be able to meet or exceed with our NII. To the extent that there is origination volumes come down and or we are out of the market it would have an effect on NII. If you look over the prior average quarters obviously our NII exceeds our dividends. So our approach to the business which is not necessarily a science, it’s more of a strategy of looking forward is to say we recommend to the board a dividend policy that we expect to be able to meet based upon the average production in the future.

There are a couple of things that if the markets didn’t give us access to capital that we still have the opportunity to do. One is obviously use capital from the SBIC, that’s going to be valuable, as well as a portion of our portfolio that we said that is in I would say more liquid positions and we’re constantly looking at whether those can be rolled into on balance higher yielding direct originations. So we’re looking at it carefully. The future holds to that there is going to be continued – we’re looking at our credit and our liability side. So if you look that cost structure, access to capital and then the existing portfolio combined with a natural role of the portfolio that I’ve described there is some amortization and prepay. Our expectation is that we’re going to be able to deliver on our target returns.

Unidentified Analyst

Great. Thanks very much for taking my questions.

Brook Taube

Thank you.

Operator

Our next question comes from the line of Terry Ma with Barclays. Please proceed.

Terry Ma - Barclays Capital

Hey thanks for taking my questions. Can you just give us a sense of that spread different between your sponsored and non-sponsored expense and how that’s evolved over the last year and maybe what expect in this environment going forward?

Brook Taube

Sure. I would say on balance that remains the spread. Different times it’s going to be wider. It’s been we tracked it pretty closely so at times it can be as wide as 250 basis points to 300 basis points, now this is again an average not any specific deal. On balance it’s tightened a little bit, some of that obviously is going to relate to a shift in our mix on the – to the floating rate. So some of the yields give up that we’re talking about is a risk reduction on balance because of the increase in the first lien. I would be – it would be a surprise to me if there was compression dramatically below a couple of 100 basis points. So we’ve always seen a wider spread and that’s a – that’s what we’re looking to capture in terms of the direct channel.

The other point that I think fairs commenting on is that our observation and again it’s a portfolio observation not necessarily a deal specific one is that if you go direct and you control the documentation process. What’s not seen in the thing called yield or even the name called first lien is the actual structure of a document, covenants, legal structure etcetera. And our view is that you get on balance better documents and better structure as well on top of that wider spread.

So the combination of having control of the process, control of the document, control of the situation when something gets complex combined with the wider spread is the same story and the same significant opportunity that remains. And the final comment I’ll make is typically in environments where overall yields are lower that excess return in many ways is more valuable which is maybe a market we’re in right now, the extra return even if it’s slightly lower than it was three years ago maybe more valuable when the broadly syndicated or regular way deals are actually significantly tighter or even tighter relatively when they were three years ago as well. Does that answer the question, Terry?

Terry Ma - Barclays Capital

Yes, that’s great color. And my second question is just looking on your first lien investments they were close to 70% and it’s increased I guess on the margin over the last year. Is this indicative of some sort of steady state mix or how should we think about that going forward?

Brook Taube

Yes, I don’t think we’re talking about a dramatic shift. We’ve concentrated on it and we’ve said it. So I think you continue to see first and second, I don’t think a dramatic shift although I wouldn’t see it going lower.

Terry Ma - Barclays Capital

Okay. Got it. And then I may have missed this earlier, but just given the recent equity raise, how fast can we expect you to deploy the remaining SBA debt that you have?

Brook Taube

Well what we’ve said this quarter the net increase in the debt was we didn’t because we had a repayment and a deal. And we continue to invest capital now this quarter in the SBIC. What we’ve offered is the idea that we put out $25 million a quarter in the SBIC on average and I think if you look over the course of the year I would not expect to deviate if you look backwards in that zip-code.

Terry Ma - Barclays Capital

Okay, great. Thanks a lot. That’s it from me.

Brook Taube

Okay. Thanks Terry.

Operator

Our next question comes from Christopher Nolan with MLV Company. Please proceed.

Christopher Nolan - MLV Company

Hi, thanks for taking my questions. Two questions on Calloway Laboratories. First because of the all pick nature of the coupons. Does the interest in the pick capitalized back on to the cost basis of the investments?

Brook Taube

Yes.

Christopher Nolan - MLV Company

And since the cost basis hasn’t really changed from between this quarter and the prior quarter, shouldn’t have changed is reflecting the pick income?

Brook Taube

Yes. I think that’s fair. There was a modest adjustment to the mark value, so I think they’re more on modestly and that probably compensated for some of the portion in the pick that would have accrued to the balance.

Christopher Nolan - MLV Company

Great. My follow-up question also on Calloway Labs as the credit matures in September 2014 that’s six months from now. What’s the plan with or do you plan just the lab mature or refinance or any comments on that please?

Brook Taube

We have a team that’s been focused on this position. The sponsor is active. We remain supportive of the company and we’re obviously aware of the maturity and we’re looking at what the right solution is for the company and we’re active with it and supportive.

Christopher Nolan - MLV Company

Okay. Thanks for taking my questions.

Brook Taube

Thanks, Chris.

Operator

We have no further questions. I would now turn the call back over to management for closing remarks. Please proceed.

Brook Taube - Chief Executive Officer

Great. Thank you all, again, for the time. We’re pleased to report continued steady and measured growth and another successful quarter for Medley Capital. We appreciate the time. We look forward to speaking with you on the next call. Thanks again.

Operator

This concludes today’s conference. You may now disconnect. Have a great day.

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