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Executives

David Golub – CEO

Ross Teune – CFO

Analysts

Jonathan Bock – Wells Fargo

Greg Mason – Stifel Nicolaus

David Miyazaki – Confluence Investment Management

J.T. Rogers – Janney Montgomery Scott

Greg Mason – Stifel Nicolaus & Company

Ross Haberman – Haberman Management

Golub Capital BDC, Inc. (GBDC) Q4 2011 Earnings Call February 7, 2012 11:30 AM ET

Operator

Good afternoon, welcome to the Golub Capital BDC Inc. February 7, 2012 quarterly earnings conference call.

Before we begin, I would like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. Statements other than the statements of historical facts made during this call may constitute forward-looking statements and are not guarantee of future performance or results, and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time-to-time in Golub Capital BDC, Inc.’s filings with the Securities and Exchange Commission.

For a slide presentation that we intend to refer to on the earnings conference call, please visit the Events and Presentations link on the homepage of our website, www.golubcapitalbdc.com and then click on the Investor Presentation’s link to find the February 7, 2012 Investor Presentation. Golub Capital BDC’s earnings release is also available on the company’s website in the Investor Relations section.

I would like now to turn the call over to Mr. David Golub, Chief Executive Officer of Golub Capital BDC. Please go ahead sir.

David Golub

Thank you, operator and good morning to everyone, thank you for joining us today. I am joined today by Ross Teune, our Chief Financial Officer. I hope you’ve been able to review our earnings release and investor presentation which we posted on the website. We’ll be referring to this presentation throughout today’s call.

I’d like to start today by providing an overview of the December 31, 2011 quarterly financial results. Ross is then going to come back and take us through the quarterly results in more detail. And then I’m going to return and provide some commentary on our recent stock offering and provide also some summary of some recent regulatory matters.

With that let’s get started. As I highlighted on page one of the investor presentation, net investment income for the quarter ended December 31, 2011 was $6.3 million or $0.29 a share, as compared to $6.5 million or $0.30 a share for the quarter ended September 30. Net investment income including the net spread payments of $700,000 generated from the total return swap was $0.32 a share for the quarter. We’ve included this additional non-GAAP measure which includes the net spread payments from the total return swap as we view the net spread payments from the total return swap is recurring source of private liquidity to pay dividends for investors.

Net increase in net assets resulting from operations for the quarter ended December 31 was $6.2 million or $0.28 a share, as compared to $3 million or $0.14 a share for the quarter ended September 30. If we look at the combination of net realized and unrealized loss on investments on derivatives for the quarter, it was negative $200,000, a loss of $200,000 or $0.01 a share for the quarter. I am going to suggest when we talk about this, that we combine both realized and unrealized and combine the sum of those two into three categories to help explain where we got the negative $200,000 it’s a little bit confusing otherwise.

Let’s first look at the total return swap, net realized and unrealized gains return swap were plus $2.1 million, and that’s comprising two pieces, a $1.5 of unrealized gains that was primarily result of rally in broadly syndicated loan prices of the loans that were referenced in the total return swap. And in addition to the $1.5 million, there was also an increase in net interest accrued on total return swap of $600,000 for the quarter. So total of $2.1 million consisting of two pieces.

Now let’s talk about the second component of net realized and unrealized which is huge investments in loans and equity securities. Here we have a bad guy and that is $1.8 million. Loss of $1.8 million that was comprised of $2.1 million of realized losses on the sale of a non-earning asset in that, $2.5 million on unrealized depreciation because we actually sold that position for more than carrying value. And we also had $2.2 million of unrealized depreciation, principally the result of a write-down on one new non-earning asset.

The final piece of net realized and unrealized relates to our futures hedge. If you recall last quarter, I mentioned that we in connection with drawing down debentures under the SBIC program, we currently have temporary borrowing under that program, it will get fixed in the SBA’s next ruling date is in March. So to eliminate interest rate risk on those temporary securities, we entered into a futures hedge. And the futures hedge with a quarter ended December 31 at a $500,000 mark-to-market loss on it. That was comprised of $400,000 of losses on the settlement of one futures contract and unrealized loss of a $100,000 on a new contract that we rolled into at year-end.

We knew this is pretty dramatic with interest rate risk and in an ideal work, this would roll into the origination cost of the SBA debentures, the loss reflects the fact that interest rates have actually gone down, so we get the benefit when we hit the ruling date of over rate debentures, but we’re paying the price for that this quarter in the form of $500,000 loss on the derivatives.

Turning to page three of the investor presentation as we communicated in our press release back in early January, originations for the quarter ended December 31 were very strong, totaling a $164 million. After-tax bringing repayments, the net increase in investments of $102 million. I’m pleased to add that the mix of these new investments was consistent with our global shifting the overall mix of the portfolio to have a higher percentage of unit costs and sub debt investments. So that the asset mix of the new originations were 38% unitranche, 29% sub debt and second lien and 30% senior secured investments and 3% equity. Unitranche investments now comprise over 40% of our total investments and sub debt and second lien investments of 20% of total investments.

Deal flow remains strong but as we said in the press release, we do expect originations to slow down for the quarter ended March 31 following the very robust quarter ended December 31.

Ross is going to go through the financials more in detail now and I am going to come back after he is done with some more information on our recent stock offerings and an update on some recent regulatory matters. Ross, over to you?

Ross Teune

All right, thanks, David. I’m starting on page four of the investor presentation. As David already mentioned, we closed our new investment commitments totaling $164 million for the quarter. Exits from repayments and sales totaled $42.9 million for the quarter, so our overall net funds growth was $102.2 million for the quarter.

As shown in the asset mix table, and as David also mentioned, we continue to make progress on shifting the asset mix from senior secured investments to a more unitranche and subordinated debt and second lien investments. On a year-over-year basis, the percentage of senior secured assets declined from 59% of total investments to around 37% total investments for the quarter ended December 31. We still have some more work to decrease the percentage of senior secured assets in the portfolio, but we are getting close to our targeted asset mix.

Looking to the next page, balance sheet, total assets were $634.0 million, which includes total investments of $562.1 million at fair value and total cash and restricted cash of $39.9 million. The liabilities, borrowings were at $311.9 million, which includes $174 million in floating rate debt issued through our securitization vehicle. It also includes a $100 million of fixed rate SBA debentures and $37.9 million on our revolving credit facility. At December 31, 2011 net assets were $316.2 million and our net asset value per share was $14.53.

Flipping to page 6, the income statement. Total investment income for the quarter was $12.5 million, an increase of 15.2% quarter-over-quarter. The increase was attributable to an increase in the average investments outstanding, as well as an increase in the average total yield on investments, at approximately 30 basis points.

On the expense side, total expenses of $6.1 million, increased by $1.8 million during the quarter, primarily due to an increase in incentive fee expense as we exceeded the quarterly hurdle rate of 2% or 8% annualized on the income component of the incentive fee calculation. We also experienced an increase in base management fees as average investments increased. And last, interest expense increased due to an increase in the average debt outstanding as well as an increase in the average rate on our floating rate debt due to an increase in the LIBOR rate.

The net loss on investments and derivatives for the quarter was $151,000 for which David provided a breakdown of those components in his opening remarks.

Turning to page 7, these charts graphically summarize the breakdown of our new originations and end of period investments. As shown on the chart on the left, 38% of our new originations during the quarter were unitranche investments, 30% were senior secured investments with the remaining 32% in junior debt and equity investments. The chart on the right provides a breakdown of our total investments that we ended the period.

Turning to page 8, I’ll walk you through the spread analysis focusing first kind of on the red line, which represents the interest income yield. The interest income yield represents all income earned on the investments, excluding the amortization of discounts and origination fees. Our interest income yield continues to increase reflecting our progress in the shifting asset mix. For the quarter ended December 31, the interest income yield increased 20 basis points from the prior quarter to 9.3%. On a year-to-date basis, we have increased the interest income yield by 120 basis points from 8.1% for the quarter ended December 31, 2010 to 9.3% for the quarter ended December 31, 2011.

Including the amortization of fees and discounts, the total yield on investments, the dark blue line up on top, the total yield was 10.2%. As we previously noted, our total yield on investments will fluctuate on a quarterly basis depending on the level of runoff in the portfolio, as when our loan prepays we accelerate remaining unamortized fees. Looking at the green line, the cost of our borrowings increased slightly from 3.3% for the quarter ended September 30, 2011 to 3.5% for the quarter ended December 31 as the three month LIBOR rate increased by comparable amount.

Turning to page 9, for new investments, the weighted average rate on new investments was 9.7%. The weighted average rate on new investments is based on the contractual interest rate at the time of funding. For variable rate loans, the contractual rate is calculated using current LIBOR, the spread over LIBOR and the impact of any LIBOR floor. For fixed rate loans, it’s obviously the stated fixed rate.

The 9.7% for the quarter compares favorably to the weighted average rate of 7.5% for investments that were sold or paid off in full during the quarter. As shown on the middle of the page, the investment portfolio remains predominantly invested in floating rate loans. In regards to credit quality and non-earning assets, I’ll turn to slide 10 and 11. The portfolio risk ratings on the top of page 10 tells familiar story that overall fundamental credit quality remains strong with over 90% of the investments in our portfolio rated a four or a five, however non-earning loans did pick up during the quarter 1% as we added one new account which has a current fair value of $3.4 million.

In regards to the TRS, we had unrealized depreciation of $1.5 million during the quarter, primarily due to improved market pricing which represents $1.1 million of the depreciation with the remaining $400,000 due to earned spread income on the referenced loans. As a reminder, independent valuation firms valued approximately 25% of our investments as of December 31, 2011.

Turning to page 12, our Board declared a distribution of $0.32 a share payable on March 29, 2012 to shareholders of record as of March 16, 2012.

Turning to slide 13; looking at liquidity and investment capacity, unrestricted cash totaled $25.4 million as of December 31, while restricted cash totaled $14.5 million. Restricted cash is cashed on securitization vehicle and our SBIC entity and is available for new investment that qualify for acquisition by these entities. Subject to leverage and borrowing base restrictions, we had approximately $37.1 million available for additional borrowings on our $75 million revolving credit facility.

As noted on the bottom of the slide, we recently received approval from the SBA to issue an additional $30 million in new SBIC debentures that are subject to customary SBA approval and procedures.

I’ll now turn it back to David who will talk and provide more detail about our public offering that is summarized on the middle of page 13. He will also provide some update on recent regulatory matters and provide some closing remarks. David?

David Golub

Thanks, Ross. So we summarized in our press release last week on February 3, as we closed on our public offering of 3.5 million shares of our common stock at a price of $15.35. We raised $53.7 million in gross proceeds through that offering. We also granted the underwriters typical reissued purchase an additional 525,000 shares to cover over-allotments if any. If the underwriters exercise the cover over-allotments the company will receive an additional $8.1 million in gross proceeds.

In the offering, Golub Capital trust purchased $3.1 million worth of the stock at the public offering price. This is something we’ve done before. This is a trust that will then go on and distribute the shares to our key investment professionals as part of incentive compensation. So I think this is a really important way for us to continue to stay aligned as a management team with our shareholders.

As I’ve said before, we’re going to – we have and we will continue to look to raise capital when we feel it’s a good time, for both existing shareholders and new shareholders offer. So we consider it [ph] very careful about winning, earning solution from equity offerings that are too large or too frequent, you’ll know this is relatively small offering. In terms of that size, we feel it was the right amount given our current capacity. We’ve got additional borrowing suite and take advantage of our revolving credit facility. We have $30 million of additional debentures as far as the SBIC program that we recently received approval for. So we think we’ve got sufficient fire power to grow our balance sheet and investment income for a while.

Before I sum up, I want to provide you with some details on a couple of regulatory matters. First on December 30, 2011 and we’ve submitted filings on this two of the founding shareholders Golub Capital BDC, two of our private firms, GCC V and GCC VI sold a portion of their shares GBDC to a pension fund that’s managed by our long time Golub Capital investor. The Form 4 reportings are a little confusing. It looks to sum actual [ph] shares. This is not the case, the shares were sold by the private funds. And these private funds are using the proceeds to invest in middle market loans and equity investments in many cases, right alongside GBDC.

Second for purposes of compliance with the asset coverage ratio tests, we agreed with the Staff of the SEC to treat the outstanding notional amount of the total return swap, less the amount of cash collateral on deposit with the custodian as a senior security for the life of the instrument. We don’t agree with this treatment, as it its thoughtful matter but we’ve agreed to this treatment at least for so long as the SEC is continuing its review of treatment of derivatives and treatment of similar instruments. And we are hopeful that the SEC kind of with different guidance as we think this approach is really not appropriate.

And finally based on discussions with the SEC, we also were told that it was an important for us to include the interest spread income from the total return swap as part of the income component of our incentive fee as against the capital gains component of the incentive fee. We had previously planned on including everything related to the total return swap and the capital gains component of the incentive fee, that’s where our approach is consistent with the GAAP treatment of the interest spread payments, but the SEC is informed us that it’s their (inaudible) that just has to be in the net interest income incentive fee.

So we agreed to treat it as the SEC provides us guidance when we reviewed the incentive calculation with the interest spread payments included in the income component of the incentive fee, we found that the result would be that the manager would be paid $647,000 more in the quarter. And we thought that was not appropriate. So we decided to and have wait irrevocably waive that incremental portion of the incentive fee that’s attributable to the change in treatment to the TRS interest spread payments. Again here we are acknowledging the SEC’s guidance but respectfully disagreeing and deciding to handle that those agreements through in irrevocable waiver turning down those fees.

Finally I want to – I’ll talk briefly about 2012. We continue to look forward. We have confidence for strong year in 2012, the first fiscal quarter, it’s off to a strong start with very good originations and funds grew and particularly good movement toward our goals from our mix perspective. In addition, we feel that we discussed that we had some investment capacity now to continue to make attractive investments to grow our balance sheet and grow net investment income. And finally, we think we’re well positioned to benefit from what we anticipate will continue to be a slowly improving economy. As we said before, we don’t need robust economic growth to have a good year and we’re not counting on it.

The Golub Capital platform had a strong over recently ranked the number one traditional middle market bookrunner for 2011 by Thomson Reuters for senior secured loans of up to $100 million for leveraged buyouts. And that’s the fourth consecutive year that we’ve been ranked the top three players.

I thank you for your time and support today as always. And with that operator, I’d like to open up the line for questions.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions) One moment for our first question. And our first question comes from the line of Jonathan Bock from Wells Fargo. Please go ahead.

Jonathan Bock – Wells Fargo

Good afternoon guys. Just a few quick questions.

David Golub

Hi Jon.

Jonathan Bock – Wells Fargo

Yes, a just a few quick questions. We’ll start with the market first, but the recent rise in high yield bond prices and particularly bond for loan takeouts, could you give us a sense of the competitive dynamics that really sit in the middle market now maybe looking out six months and particularly for those second lien and mezzanine securities that you’re migrating toward?

David Golub

So Jonathan, as you alluded to, there has been a very significant rebound in public trading prices for both broadly syndicated bank loans and ideal, since the darker days of August and September, vis-à-vis the middle market I would say the impact of that is modulated by the fact that when broadly syndicated loans and high yield declined in August September, I don’t think that decline was fully reflected in middle market pricing, nor do I think it’s rebound it’s going to result in entire changes in middle market pricing.

We do see some pressure on spreads in middle market senior at one stuff right, not a lot but we’re seeing some or we were seeing spread widening in August, September, October. On the mezzanine front, I would say we’re seeing a renewal which kind of just is a way for a little dip, but we’re seeing a renewal amount of some pretty aggressive mezzanine proposals from smaller boutique private mezzanine shops that are eager to put money to work during the fall, where I think where you can see the context of recalibration of the public high yield market. So I think it’s going to be – for us, it’s going to be a very good market over the course of the coming months in one stop. And we’re cautious about the environments on this subject [ph].

Jonathan Bock – Wells Fargo

Okay. Now following along with that, can you maybe give us a sense of repayment expectations for 2012?

David Golub

Yes, I’ve had this question, yes again, (inaudible) with respect to repayment activity. We think that as a general rule of thumb that in an year we will see approximately a three year weighted average life to our investments. Right now we’ve got an unusually young portfolio, because a large chunk of it has been originated within the last 14 to 15 months. So I think looking at the portfolio and anticipating our full 33% turnover of the January 1 probably is probably too high. But my expectation would be that it’s going to be – again in the year we’ll see how repayment rates gets like 20% to 25% range for the portfolio. I will tell you though, I think yes.

Jonathan Bock – Wells Fargo

Okay.

David Golub

This is the single largest thing to work out.

Jonathan Bock – Wells Fargo

I appreciate the color. Just a few modeling items. So certainly you have about $59 million of unfunded commitments outstanding. Could you give us maybe a general idea as to what amounts cash or debt capacity you want to keep on hand to fund that amount overtime, how do you look at those?

David Golub

Most of those are going to terms of cash I am sorry, funded investments, because there is a late draw [ph] facilities or the revolvers again, anticipating drawn. We have an unusually large amount of unfunded commitments right now, but we want to make sure that we maintain fire power to be able to manage those unfunded commitments. I think that’s one of the ways that we can look to do that is with unused capacity on debt lines. So we don’t necessarily need to keep cash available to manage those unfunded commitments.

Jonathan Bock – Wells Fargo

Okay. And then with the fed talk of keeping rates low, would you expect to alter your fixed floating mix given the rates might stay where they are for quite sometime?

David Golub

I like our fixed floating mix right now, I think the nature of the SBIC debentures, the degree to which they are highly flexible and low spreads makes them particularly attractive. So we have the opportunity to continue to grow our SBIC debt. I think we will look to do so. Our non-SBIC debt, I think will continue to focus on (inaudible) debt.

Jonathan Bock – Wells Fargo

All right, guys, thanks a lot.

Operator

And our next question comes from the line of Greg Mason from Stifel Nicolaus. Please proceed.

Greg Mason – Stifel Nicolaus

All right, great. Thank you gentlemen. David, on the unfortunate ruling by the SEC, I think on slide five you show a 208% regulatory asset coverage ratio. If I am doing my math right, I think that’s a regulatory debt-to-equity number of call it 0.92 debt-to-equity. First, is my math right on that or we that close from a regulatory debt to equity standpoint? And second, what kind of regulatory leverage are you comfortable running this with, given the ruling by the SEC on the TRS?

David Golub

Well Greg, I don’t want to spend time right now on the math, it’s not time to with math after this call, but let me address the non-mathematical part. First, no question we were disappointed with the SEC’s decision that this non-GAAP treatments for regulatory purposes was appropriate. And we got with that to a level of closeness on the asset covers to us where we were also knew that it was appropriate for us to do one of two things, either to complete a secondary which we did or to unwind the total return swap, which we may do at some point in the future given the negative regulatory treatments of it.

I think that answered your question, I don’t have a specific percentage in mind that we do as a bright line. One thing I think its favorable about the total return swap is that it can be unwind at anytime. So if you’re now winding that we can – we should very dramatically impact this ratio. We’re effectively being accurate now with $80 million of debt that the company doesn’t have. So unwinding the total return swap has the effect of eliminating that $80 million of regulatory debt.

I think where this pushes us is towards an approach where we use the total return swap when the company is rich on equity and we move away from using the total return swap when we’re not. And I think that directionally is where we’re going to be headed.

Greg Mason – Stifel Nicolaus

Okay, great. And then I applaud you on voluntarily waving the incentive fee on that. How should we think about that going forward, is that going to be continuing to be waived or we should we expect that incentive fee to be paid at some amount of the TRS income coming through?

David Golub

Good question. We are discussing that with our Board. We don’t have exclusive guidance I can give you on it, what I can tell you is that we were pretty surprised when the SEC took the decision that they took on.

Greg Mason – Stifel Nicolaus

Okay, great.

David Golub

And this has more [ph], I don’t think many people have been told by the SEC.

Greg Mason – Stifel Nicolaus

Well I applaud you on waiving it. We appreciate it. Can you, Ross, you said you’re getting close to your target asset mix. Could you remind us what that is for senior versus unitranche versus sub?

Ross Teune

Yes, let me go back to page four of the presentation, what we’ve said that we want to work down the senior secured which sort of 59% we have already, if you’re going to down to 37%. So I think below 30% is our ultimate target there. And to the degree we continue to have that senior secured loans component before, that increment will be spread in the other categories.

Greg Mason – Stifel Nicolaus

All right, great. And then you had some dividend income this quarter, is that one-time or should we now start expecting a little bit of dividend income since you’ve got about 2% of your portfolio in equities?

Ross Teune

Yes, that was one of our portfolio companies went through a dividend recap so that is more of a – I think a one-time payment from that particular investment. Obviously we’ll be hoping to see more of this in the future, but I can’t say that we would have that same amount next quarter.

Greg Mason – Stifel Nicolaus

All right, and then one last thing, David, could you talk a little bit about who were processing your new non-accrual and kind of what your expectations are for working that investment out?

David Golub

Sure. The loan processing is a company that’s I think a foreclosure processing space. And we have two loans to it, within the BDC we have a first step loan and the second step loan. And you’ll notice in the schedule of investments that we have very shortly different values for the first and the last step. We marked down the last steps very, very significantly. This is a company that entered into a significant difficulties way last year as a consequence of this discussed for the (inaudible) generating an enormous of bad listing for itself around a Halloween party that you guys (inaudible).

And that’s even the amount offered is actually in the process of closing down and that’s in turn having still over impact on filler. The company is being managed through what is a very significant workout right now. I think there is still uncertainty about how this process is going to play out. We think our valuation is quite reasonable here, but like all workout if you have to have a manager admit that there is more volatility and value around the company that’s in work outflow then there is around the normal loan.

Greg Mason – Stifel Nicolaus

Great.

David Golub

And it’s largely play out over the course of the next three or four months.

Greg Mason – Stifel Nicolaus

Okay, great. Thank you David.

Operator

And our next question (Operator Instructions) so as I said, the next question comes from the line of David Miyazaki from Confluence Investment Management. Please proceed.

David Miyazaki – Confluence Investment Management

Good afternoon, just a question here, in the fourth quarter I think you were in the BDC industry cost of equity came down quite a bit obviously with the valuations moving up. And with the issuance that you had as well as some of the other peers in the industry, it looks like your issuance costs for issuance equity has come down quite a bit. I was wondering if you could provide a little bit of color on do you think that’s more of an ongoing trend. And then also at the same time, it doesn’t look like your investment opportunities are really shrinking a whole lot with regard to what you may be able to earn. And it seems a little unusual that your own cost of capital would come down when your investments has not. And then that dynamic seems a little unusual for the industry particularly against the backdrop of the fact that many of your peers have suggested that their hurdle rates ought to be reduced and it seems like in this environment that should not really be the case. So do you have any comments on those issues, I’d appreciate it?

David Golub

Thanks David, couple of questions in there and if I don’t get to all of them please, come back and remind me. So two elements to cost of capital obviously, one is the way that the underlying stock is trading, the way I tend to look at it as a percentage of NAV [ph] I agree with you that over the course of Q4 we saw, calendar Q4 we saw the sector move up in terms of percentage of NAV that most of the sectors trading at, although relatively few companies in those sector are trading as premiums to book, we are one of those and the premiums have been relatively modest.

So I am not sure, I didn’t see really big change there. I think there is a subset of BDCs who are viewing positively, who’ve been able to access additional capital because they are trading at a premium to book, and then there is large number of BDC that are not well reverted by the market and are trading at meaningful discount to book. And at least they have not done dilutive offerings putting more shareholders more.

One phenomena that occurred in connection with the first duplicate is the ones that are trading above NAV and have the opportunity to raise capital is that the investment banks and firms as wells as underwriters became more flexible about how much they were looking to generate from secondary offerings. So you’ll note in our case there was 4.5% roughly 4.5% all in difference between GBDC’s share price before the offering was announced and the net proceeds received by the company. That’s something we managed very carefully because every nickel that goes to the investment bankers doesn’t go to shareholders.

So we were pleased with being able to be efficient in our new equity offering. I am hopeful that ours and others capacity to do that sustains itself. We’ll see it. It’s not entirely something that is in our control. I agree with the next thing you said which is I think it is unusual to be in a situation where the cost of capital is decreasing and the opportunities that is given to offer very attractive returns and not really decreasing in context. And I think that is where we are right now. And I think that we’re going to see a sustained period where we’re able to generate attractive investments for GBDC, attractive both in spread terms and in absolute yield terms. And I don’t anticipate that we’re going to be going to shareholders anytime soon asking for a reduction in hurdle rate. I don’t think that would be appropriated at this time.

We have watched with interests and others who were moving in that direction, and I guess we’re just going to stay shareholder friendly out-wire.

David Miyazaki – Confluence Investment Management

Okay, great. That’s very helpful feedback and I applaud that decision. The other question or just a bit of a follow-up to Greg’s question was given where – we’ll talk getting involve the math, is there a change in where you feel comfortable managing your leverage ratio given the way that TRS is classified right now?

David Golub

Yes, I mean I think for regulatory purposes calculating the asset coverage does for regulatory purposes, we are comfortable going closer to the task than we were before knowing that we have a virtually and maybe a stability to impact that ratio dramatically by making the decision at anytime to unwind the total return swap. If we were managing the BDC without the total return swap, we would want to be more conservative in our asset coverage test level.

David Miyazaki – Confluence Investment Management

Okay, thank you very much.

Operator

And our next question comes from the line of J.T. Rogers from Janney Montgomery. Please go ahead.

J.T. Rogers – Janney Montgomery Scott

Good afternoon, thanks for taking my call. David, I was wondering if you could talk a little bit more about the competitive environment, are you seeing any competition coming in from banks. And then there has been some talk about CLO reinvestment periods ending towards the back half of this year, I was wondering if you see any opportunity there?

David Golub

Let me take that in reverse order. I think there is a very interesting dynamic that is playing out in the broadly syndicated loan market. It’s been reported in some sectors to probably underreport it relevant to its importance. And that dynamic is that a very large dollar amount of CLOs that constitute a pretty big chunk of the BSL market are going to shift from being into reinvestment periods and out of reinvestment period, month by month over the course of the next 18 months.

And in order for the broadly syndicated loan market to stay at its current size, you will need to see meaningful dollars of new CLOs or new fund flows into primary mutual funds or new institutional investors in broadly syndicated loans, one, two or three or all of the above in order to sustain a healthy broadly syndicated loan market. My own sense is that the (inaudible) that that’ll happen, that we’ll see some continued pressure on broadly syndicated loan spreads, we’ve seen significant pressure in the month of January but that will flatten out. We’ll see some stability in spreads. It will be stability at a level that we’ll make a new investment by CLO investors attractive and it will put a bit of a floor for us in the middle market, it’ll put a bit of floor on our pricing.

So I think that’s a positive. I don’t expect a real dislocation in the broadly syndicated loan markets. There are some pundits who are predicting, that’s not my view. But I do think that the large dollar amount of loan of CLO money that’s going to be flowing out of reinvestment grid will modulate without NYC [ph] pretty significant pricing pressure in broadly syndicated loans. In terms of the competitive dynamics in our margin, look, there is a global search on the part of banks and other investors right now for yields. And we happen to be in a very interesting asset class for a lot of investors, because we’re able to generate attractive yields, attractive spreads, LIBOR floors in securities that are largely senior secured.

And that is an interesting replacement product for traditional fixed income investors frustrated with the relatively low rates of return on traditional fixed income, that’s available in the market right now. So I think that we would be bullish not to anticipate that we’re going to see continued pressure in our edge from some new entrants and from banks. As a factual matter right now, it’s not an major faction [ph]. We’re seeing isolated in some instances of banks being a little bit more aggressive on some asset backed facilities and some yields with a lot of asset coverage, but banks are not a major player or major competitor of ours.

We’re seeing a little bit of increased activity on the part of couple of relatively recent entrants into our world, but I would say there is much more continuity to change. And what we’re seeing in the marketplace leaves us to be quite optimistic about our ability over the course of the coming months continues to deploy capital into one stop in particular on very attractive terms.

J.T. Rogers – Janney Montgomery Scott

Okay, great. Thanks a lot. And then I’d just like to echo Greg and applaud you guys for waiving the incentive fee, you guys are consistently among those shareholder friendly as the BDC management teams out there.

David Golub

Thank you.

Operator

And our next question comes from the line of Greg Mason from Stifel Nicolaus. Please proceed.

Greg Mason – Stifel Nicolaus & Company

All right, great. One follow-up question, on this TRS, you said you can unwind it to give yourself flexibility on the debt-to-equity. Do you have to unwind the entire thing or is it, you would have flexibility to say unwind half of it, and then if you actually had capacity you could reiterate it again. What’s the flexibility with that TRS facility?

David Golub

At the least so long as we can change the stated total amount of the facility that for regulatory purposes whatever that do stated size would be the relevant variable. So to answer your question, I think there is a way for us to accord in as to our needs. And it’s a very question you asked Greg, that’s something we’d actually been working on like we’ve a completely repetitive answer yet, on whether we can practically make that happen.

Greg Mason – Stifel Nicolaus & Company

Great, thank you David. I appreciate it.

Operator

And our next question comes from the line of Ross Haberman from Haberman Management Corp. Please proceed.

Ross Haberman – Haberman Management

Good morning gentlemen, how are you? David, just a quick question, any other non-credits which are sort of monitoring, which are of concern and could you share that and then I had a follow-up question for Ross?

David Golub

There are always some credits (inaudible) we’re lenders, we get nervous [ph] very easily. I think the best route to looking at the portfolio and determining where we – where we are concerned is to look at the marks. And where you see marks that are meaningfully lower than far that’s where we’re nervous [ph].

Ross Haberman – Haberman Management

Okay. And just…

David Golub

(Inaudible)

Ross Haberman – Haberman Management

And whilst to the extent that you paid out your dividends more than your net earnings per share, is that considered return of capital?

Ross Teune

Correct. Yes, to the extent we exceeded our taxable earnings exceeded what we paid in dividends, it would be a return of capital.

Ross Haberman – Haberman Management

And for this year, what you expect that to be? In 2011, sorry?

Ross Teune

Yes, for 2011 as we – for our fiscal year ended, I guess if the 10.99 divs went out I think we paid out 98% of our dividends. So there was no return on capital for calendar year ended 2011.

Ross Haberman – Haberman Management

Okay, thank you guys. Thanks a lot.

Operator

(Operator Instructions) And I am showing no other questions on the phone line. Mr. Golub, I’ll turn the call back to you.

David Golub

Thank you all for your time this morning. And as always if you have any further questions, feel free to give either Ross or me a call. Bye-bye.

Operator

So ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Thank you very much.

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