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Fifth Street Finance Corp. (NASDAQ:FSC)

F1Q12 Earnings Call

February 9, 2012 10:00 AM ET

Executives

Stacey Thorne – IR

Len Tannenbaum – CEO

Bernie Berman – President

Alex Frank – CFO

Analysts

Joel Houck – Wells Fargo

Mickey Schleien – Ladenburg

Robert Dodd – Morgan Keegan

Greg Mason – Stifel, Nicolaus

Casey Alexander – Gilford Securities

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Fifth Street Finance Corp. Earnings Conference Call. My name is Carol and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator Instructions) As a reminder ladies and gentlemen this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Ms. Stacey Thorne, Director of Investor Relations. Ma’am?

Stacey Thorne

Good morning, and welcome everyone. My name is Stacey Thorne and I’m the Head of Investor Relations for Fifth Street Finance Corp. This conference call is to discuss Fifth Street Finance Corp’s first fiscal quarter ended December 31, 2011. I have with me this morning, Leonard Tannenbaum, CEO; Bernard Berman, President; and Alex Frank, Chief Financial Officer.

Before I begin, I would like to point out that this call is being recorded. Replay information is included in our January 4, 2012 press release and is posted on our website www.fifthstreetfinance.com. Please note that this call is the property of Fifth Street Finance Corp. Any unauthorized rebroadcast of this call of any form is strictly prohibited. Before going into our earnings portion of the call, I would like to call your attention to the customary Safe Harbor disclosure in our January 4, 2012 press release regarding forward-looking information.

Today’s conference call includes forward-looking statements and projections. And we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections.

We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website or call Investor Relations at 914-286-6811. The format for today’s call is as follows: Len will provide an overview, Bernie will provide an update on our capital structure, and Alex will summarize the financials, and then we’ll open the line for Q&A.

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

Len Tannenbaum

Thank you, Stacey. Welcome to the 2012 lending environment. Unless Republicans win the Presidency and control both chambers of Congress, we believe the taxes will increase next year. As the odds change on the outcome of the election during the year, we expected to have a substantial effect on M&A activity. As the tax increase that will occur next year from the expiration of the Bush tax cuts coupled with the extra tax from ObamaCare may incentivize owners of businesses to accelerate any sales plans they have in the next few years for 2012.

The supply and demand equations will be further complicated by the exploration of the reinvestment period on many middle market CLOs and the refinancing wall of CLOs that is approaching. We are also seeing the beginnings of BASEL III taking effect as the Big’s U.S. banks begin to reduce lending in cooperation for the adherence to the these standards.

Lastly we believe the massive deleveraging of Europe and the need to raise hundreds of billions of dollars in equity to support the fragile banking system there will also contribute to the reduction in worldwide liquidity. So what is the offset to these amounts, quantitative easing of course. QE is the new fad as we even saw this morning as Europe increased their QE by $50 billion this morning.

And we expect that everyone may participate in the party. How this offsets and drives capital flows however is very hard to predict. What we can do at Fifth Street is to optimize the results for our shareholders is to pay very close attention to what our lending partners are doing, what we’re seeing in the market and like in the years past make sure that we have the capacity and deal flow to quickly adjust to the change in capital flow cycles.

Our latest equity rates of $100.7 million accomplished at a net price above book value allows us the continued flexibility to take advantage what should be a building year for new deals while staying close to our leverage targets for 2012. Despite the volatile market environment we issued stock above book value and unlike many of our peers we did not ask for permission from our shareholders to sell below book value.

We continue to believe that selling stock below book value is rarely justified. Reiterating some of our guidance for 2012, we currently expect the portfolio to remain in a range of 70% to 80% first lien loans with our Sumitomo facility being consolidated. And we expect to be on average leveraged about 0.6 times excluding our 10 year fixed non-recourse SBA debentures. We are exploring ways to de-consolidate the Sumitomo facility in a way that should be accretive to earnings and allow the facility to expand more rapidly.

Our fiscal year earnings guidance remains at about $1.15 per share which fully covers our dividend with net investment income. As the portfolio continues to mature, we believe that we will experience more repayments, which will drive earnings due to the acceleration of our upfront fees in addition to the recognition of exit fees, payment penalties and occasionally equity realizations.

As for origination volume, we expect to have $100 million to $300 million per quarter on average through the year of gross originations with each quarter being successively higher. We anticipate that the fourth calendar quarter could be a record setting quarter with the tax changes mentioned before. This quarter ending March 31 has started off surprisingly slow and we’ve only just recently seen signs of a pickup in activity.

Our first fiscal quarter net income, of $0.29 per share, was in the mid-point of our previously issued guidance. Going forward we expect our earnings power to be better realized as we have increased velocity in the portfolio are starting to realize some of our equity investments, collect pre-payment penalties and exit fees on occasions and have a much more efficient capital structure.

In 2012 we will also benefit from an expanding capital markets platform that may generate over $1 million in fee income. We anticipate that part of this additional earnings will come from better matching our targeted leverage, increased utilization of our credit lines and continued reallocation of the assets in the portfolio. We also have equity stakes that should start to be realized as the companies mature. These gains will continue to offset our capital loss carry forward and generate some growth in net asset value. Earning or dividend will also assist in growing NAV over time.

We continue to finance larger companies which we believe are inherently safer with the typical borrower having EBITDA in the $10 million to $30 million range. We believe that our high first lien exposure coupled with investing in larger and more stable portfolio companies and our robust diligence and portfolio management processes will result in a greater portfolio stability should the economy pull back again.

At the same time we feel comfortable that our weighted average yield of 12.27% at 12/31 will remain stable, now that we’ve reached our targeted portfolio amounts. We believe interest rate spreads currently are above average and are finding value both in the lower middle market and upper middle market due to continuing scarcity of capital available to these markets from traditional lenders.

We expected however the supply demand equation will shift more positively from lenders as the year progresses and anticipate the pricing will tighten with that shift. We’ve seen continued positive momentum in the credit quality of our assets. Categories three, four and five rated securities continue to account for less than 2% of the portfolio at Fair Value, as of December 31, 2011.

This is a positive trend that positions us well for the next down cycle potentially allows us to increase our return on equity. Following our approach to be one of the most transparent companies in the BDC industry, we will continue to release the debt-to-EBITDA of our rating tranches, as well as update our investors on a regular basis.

We are excited to announce that we are growing our Chicago presence. We have signed a new lease commencing in April for expanded space and expect to hire a Chicago based field team in 2012 to better service our private equity sponsor client base there.

Our expectation is to continue to add many strong experienced institutional credit and operating members through the balance of the year and I am so far pleased with the response and caliber of individuals attracted to our organization. To service our clients Fifth Street continues to build a broad institutional platform both in terms of technology and team members.

We believe that our strong brand and relationship allows us to capture premium pricing over the market. The market is also differentiating lenders based on balance sheet capacity namely whole size and the ability to grow with client’s platform companies. We have led and agented an increased number of deals this year and we are recognized as a top ten lender in the middle market by PitchBook for the second year in a row.

We have also expanded our capital markets presence with the development of strong syndicate relationships. Our investment grade rating coupled with large credit capacity gives our clients comfort that we will make expansion capital available to them when needed.

Fifth Street’s replication in the middle market as a leader as well as its market share should continue to grow as we add to our institutional platform and continue to provide a high level of service to our private equity sponsors. We are very excited about the opportunities in the middle market and we expect M&A activity to increase this year.

I will now hand the call over to our President, Bernie Berman.

Bernie Berman

Thanks Len. With respect to our lending facilities, we have not made any changes since our November 30, 2011 earnings call. And I can report that we are working on the amendment and extension of our $230 million ING-led credit facility and we expect to have a definitive announcement on this in the next few weeks.

We also hope to extend and increase our $100 million Wells Fargo credit facility during the first half of this year and we have had preliminary discussions with Wells Fargo on that topic. We expect to provide more detail by our next earnings call.

We are excited to have begun ramping the $200 million credit facility we closed with Sumitomo Mitsui Banking Corporation last year. As Len mentioned, we are exploring options to move our subsidiary which is Sumitomo’s borrower off of our balance sheet. If we are able to do that, we believe that it will be accretive to shareholders while gaining additional flexibility under the 200% asset coverage test.

This is a project which is in the early stages, but we are working diligently to evaluate our auctions and we will keep you posted on our progress over the course of the year. We have no update on our application for a second SBIC license except to report that we remain optimistic we will receive a second license in the near future.

I’m now going to turn it over to our CFO, Alex Frank.

Alex Frank

Thanks, Bernie. We ended the 2011 calendar year in a strong financial position with total assets of $1.2 billion, an increase of $420 million or 53% over the previous calendar year end, reflecting robust growth in net new originations and the strength of our business platform.

Investments were $1.1 billion at fair value and we had available cash on hand of $70 million. We also completed a follow-on equity offering in late January 2012 which raised over a $100 million of new equity and further increased our financial strength and flexibility. At a net price of $10.07 per share representing a net discount of 4.6%, we achieved the tightest spread for the offering of any of our previous equity issuances.

We thank our lead underwriters in the transaction Credit Suisse and RBC for the great job they did in helping us to achieve a very positive outcome for our shareholders. The issuance was done at a premium to NAV and was immediately accretive to book value per share.

The proceeds of the offering have been used to reduce current debt outstanding and provide additional capacity to fund growth in our portfolio. Turning back to the three months ended December 31, 2011 total investment income was $39.5 million including $33.5 million of interest income and $6 million of fee income.

Payment-in-kind interest remained a low percentage of total income at $3.4 million for the quarter declining to 9% of total investment income as compared to 12% for the year ago period. Net investment income per share increased 11% to $0.29 for the quarter as compared to $0.26 in the same quarter of this previous year.

The net realized and unrealized loss on our portfolio investments for the three months ended December 31, 2011 was $10.8 million. This represents a change of less than 1% in the overall value of our investments. In contrast to the previous quarter market risk premiums in the high yield and middle market loan space were little changed for the quarter as compared to the volatility experienced in mid 2011.

The weighted average yield on our debt investments remains stable at December 31, 2011 at 12.3% versus 12.4% in the prior quarter, while the cash component of the yield was also stable at 11.2%. The average size of the portfolio investment was $19.6 million. We originated $95.3 million of investments in the quarter across seven new and one existing portfolio company bringing the total companies in our portfolio to 67 at December 31, 2011.

We also received $52.4 million in connection with the exits of three of our portfolio companies, all of which were exited at par or better. We continue to experience an increase in the velocity of our portfolio enabling us to earn additional fee income, redeploy capital, and provide additional financial flexibility.

Approximately 98% of the portfolio by fair value consisted of debt investments, 75% of the total was in first lien loans, and 69% of the debt portfolio was at floating interest rates. The investment portfolio continues to be well diversified by industry, sponsor, and individual company. Our largest single exposure is the healthcare. We expect that successful exits of a number of investments in this sector during the next few months will bring our healthcare industry exposure to approximately 25%.

Another metric indicative of the diversity of our investment portfolio is that our largest single individual company exposure is only 4.35% of the overall portfolio. The investment portfolio is of high credit quality and the credit profile was stable versus the prior quarter.

We rate our debt investments on a one-to-five rating scale and the highest performing one and two rated securities were 98.1% of our portfolio versus 98.5% as of September 30, 2011 and 94.5% a year ago. During the quarter ended December 31, 2011 we had four investments in the portfolio on which we had stopped accruing income versus three investments at the same time the previous year.

Our Board of Directors has declared monthly dividends for April, May, and June 2012 of $9.58 per share reflecting a continuing annual rate of $1.15 per share. The dividend rate continues to be set at a level commensurate with our earnings capacity and we remain confident that our dividends going forward will be covered by net investment income.

Now I’ll turn it back to Stacey.

Stacey Thorne

Thank you, Alex. Before we open the lines for Q&A I would like to remind everyone that for the month that Fifth Street doesn’t report quarterly earnings, we generally release a newsletter. If you want to be added to our mailing list and receive them directly please either call me at 914-286-6811 or send a request e-mail to ir@fifthstreetfinance.com. Thank you for participating on the call today. Carol, can you open the line for Q & A?

Question-and-Answer Session

Operator

Thank you, Stacey. (Operator Instructions) Your first question comes from the line of Joel Houck of Wells Fargo. Sir.

Joel Houck – Wells Fargo

Good morning, Stacey, Alex and Len. I guess the first question on the recent equity rates again we appreciate you guys in that recent below NAV I think investors like that. I am wondering you raised above NAV that you had quite a bit of cash in the balance sheet as well meaningful to debt capacity. Can you talk about that the tradeoff between further leveraging the balance sheet versus raising more equity early this year and de-levering? Are you is that a function of the volatility and wanting to have more dry powder. Is it how much of that is driven by your expectations M&A activity will pick up this year. Just interested in your thoughts around that?

Len Tannenbaum

Yes, the $70 million that we had on our balance sheet was just due to a timing issue at the end of the year. At the time of the equity raise we didn’t have any cash in our balance very little cash on our balance sheet if anything we were very well drawn on our credit lines which of course our credit providers like great deal.

Even today after the $100 million paid down it was almost all used to pay down our lines. We are still substantially drawn on both our Wells Fargo line and our ING line. And we appreciate that for the first time that’s, this is the first time that was able to be happen, able to happen and our new financial flexibility given our size allowed us to much more accretively do these equity offerings than in the past.

Joel Houck – Wells Fargo

Okay. The switching gears on the Sumitomo facility there has been a, I don’t know if you’d call it an SEC crackdown but the SEC has taken...

Len Tannenbaum

Very hard stance.

Joel Houck – Wells Fargo

Yeah hard stance. What’s your view kind of I know you can’t talk specifically about the discussions of the SEC but what gives you the comfort level that you would be able to continue this kind of de-consolidate that facility?

Len Tannenbaum

No. We don’t have right now it is consolidated, it’s not de-consolidated. We’re exploring ways to do that in conjunction with the SEC’s five point test that they have outlined. And we are very carefully going through with them, what makes de-consolidated entity and probably will err on the side of conservatism if anything.

You shouldn’t expect us to do something like a total return swap to try to make something off balance sheet. We were very careful with previewing with the SEC all of our intentions. However I think as Bernie indicated in his remarks this is not a near-term event. This is a event that may take all year, but it is something that works fine.

Joel Houck – Wells Fargo

Okay. So I guess we’ll get more updates as the year goes on. Lastly, on the lowering of your management fee hurdle rate, can you talk to what you’re going to justify from shareholders to approve that measure as it seems to benefit the manager, where is the benefit for the BDC shareholder?

Len Tannenbaum

Alex?

Alex Frank

I’ll take that. Sure. So, yeah we’ve asked our shareholders to approve an amendment to our investment agreement that would lower the hurdle rate for purposes of determining whether our investment advisor is entitled to any income incentive fee. And although the change from 8% to 7% would not have had any impact historically on the amount of income incentive fee earned by our investment advisor.

And in fact we don’t expect it will have any impact in the foreseeable future. We do believe the change is appropriate. Where market conditions warrant, the change will continue to incent our advisor to invest in senior assets with lower absolute but potentially higher risk-adjusted returns. That’s a strategy that’s been very successful for us over the past few years. In addition, because many of our BDC competitors pay incentive fees based on a 7% hurdle rate, the change ensures that our advisor will continue to compete successfully in the industry.

Joel Houck – Wells Fargo

So just to be clear the argument for shareholders is it allows you to do more safer senior secured loans in that with the lower hurdle rate, is that correct?

Len Tannenbaum

I don’t know that allows, we are currently able to do, it allows us a maximum of shift from one side to the other side which is I think we’ve done very well for our shareholders over time. And if you look at almost every peer their hurdle rate is seven and/or an ARIES recent shareholder approval is also seven. We want to make sure that we are matching at least on a competitive basis with our peers.

Joel Houck – Wells Fargo

Okay. So part of the argument is that you’d be at a competitive disadvantage which would hurt your ability to hire and retain key people?

Len Tannenbaum

I don’t know that we said that. I think we are finding some good people and we are retaining key people. It just allows us the flexibility of asset classes which all of our competitors have and we want to make sure we have the same flexibility that they have.

Joel Houck – Wells Fargo

Okay, great. Thank you very much.

Operator

Thank you sir. Gentlemen, your next question comes from Mickey Schleien of Ladenburg. Please proceed.

Mickey Schleien – Ladenburg

Yes, good morning. I wanted to understand a little bit of what drove the almost $17 million realized loss I see on the cash flow statement a sale of almost $12 million of investments, I haven’t had a chance to go through the schedule of investments, so I don’t know which companies you sold and what’s driving that, if you could provide some color I’d appreciate it?

Len Tannenbaum

Absolutely. I am personally and the team is very disappointed in a legal outcome where our Premier Trailer was a deal that we did in 2007 I thought, right at the end of 2007 Bernie?

Bernie Berman

2007.

Len Tannenbaum

Yes, it’s another one of these 2007 deals and the company had turned around its operations substantially and the bankruptcy judge rules contrary to what our lawyers thought and contrary to anybody in our team thought that we got zero as a recovery. And unfortunately it was a very bad outcome for our shareholders. They already had the deal marked down to $4 million or $3 million. So it wasn’t...

Bernie Berman

Zero. A 930, actually it’s unrealized to zero.

Len Tannenbaum

At 930 we marked it to zero but even given, so it wasn’t an NAV hit but it certainly was a realized loss once the bankruptcy judge decided that we got zero for our investment. So it’s a huge disappointment and the team is not very happy about it.

Mickey Schleien – Ladenburg

Fair enough. And my other question is there was a, at least in percentage basis a pretty large increase in administrator expense from the previous quarter. Can you tell us what was going on there it went from $559,000 to $860,000?

Alex Frank

Yeah. I mean we increased the size of our platform. So it was really just associated with the compensation associated with adding new people for our expanded platform.

Mickey Schleien – Ladenburg

So this sort of $800,000 level is reasonable on a go-forward basis?

Alex Frank

I think we’re pretty right sized for where we are today but with opportunities going forward it’s probably something of a step function that we talked about in the past where we’ve got the old teams and a great platform in place. And we’re pretty comfortable with our current ability to underwrite for the capacity that we have.

Len Tannenbaum

I expect the G&A build that we just saw will be steady and we’ll be able to leverage the G&A over the next year. We don’t anticipate that many new hires in the administrator.

Mickey Schleien – Ladenburg

Right.

Alex Frank

That’s reimbursement to BDC.

Mickey Schleien – Ladenburg

Lastly, Len can you give us an idea on a pro forma basis what NAV at least in a ballpark might have looked like at the end of January given the rebound in the markets and your equity offering?

Len Tannenbaum

As you well know there is no way I’m going to give a ballpark, but I will give a direction, there is no – we did see a tightening, we will see if it holds up by the way by March 31.

Mickey Schleien – Ladenburg

Sure.

Len Tannenbaum

So, definitely there has been a tightening. We expect the market yield approach at least that part of the valuation process to be a positive effect on NAV in this quarter should the market tightening hold to the level that is right now.

Mickey Schleien – Ladenburg

Appreciate your time this morning. Thank you.

Operator

Thank you, sir. Gentlemen, your next question comes from the line of Dixon Braden of Morgan Keegan. Sir?

Robert Dodd – Morgan Keegan

Hi guys, actually it’s Robert Dodd. Just a question on your floating rate exposure in the floors I mean it looks to me like the relative amount of low floor loan that you have like below 2 seems to have stabilized a little bit over 50%. Are you happy right now with obviously your floating rate proportion I think happy with that in terms of the structure of where your floors are in that portfolio? Can we expect the average floor to go down, be stable, is going to rise, any color you can give us there would be helpful.

Len Tannenbaum

I’ve got to say I met for dinner with Jeremy Siegel a couple of days ago. And he actually thinks that the Fed won’t keep down until the end of 2014. I’ve been thinking that the Fed, there is a lot of liquidity sloshing around in the system and I can’t believe that interest rates are going to stay that low for that long.

So we are very cognizant of making sure that when interest rates rise we’re at worst neutrally affected and at best we will make a little bit more money. So, I think floors are staying right around the 1.5 when it could be one and three quarters level and that’s pretty stable in the industry standard right now at about 1.5%.

Robert Dodd – Morgan Keegan

Okay. Thank you and just looking into and I know it’s very early days to be talking about this increase in M&A activity but I mean how do you, how do you expect the quality of those opportunities to shake out or you’re going to see a large pool coming into the market the deals that you might not be chomping at the bit to do or do you expect this increase to really be high quality opportunities?

Len Tannenbaum

Well I think the increase towards the end of the year we’ll have all sorts of opportunity. High quality, low quality, middle quality. The advantage of our size right now and this is not an advantage we’ve enjoyed for a very long time only for the past year or so is that we can go up market or down market depending on where we see the best risk adjusted returns. And I am still seeing the best risk, I’m seeing the best risk adjusted returns right now in the upper middle market where I think a number of players are, have exited in the market and/or the seniors are very hard to fill while the mezzanines are very oversubscribed.

And in order to get the mezzanine you have to have a facility like Sumitomo to be able to put the senior at a cost effective a good cost adjusted basis where you’re getting the right leverage level for that type of risk, a very low risk. And we closed the deal yesterday that’s very that basically is along the lines of what I just told you where we took a senior piece and we got a very oversubscribed mezz piece. That had really good yields in the upper middle market. So we are definitely seeing deals high quality deals large companies come to market.

Robert Dodd – Morgan Keegan

Okay, great. Thank you.

Operator

Thank you sir. Gentlemen your next question comes from the line of Greg Mason of Stifel, Nicolaus.

Greg Mason – Stifel, Nicolaus

Great. Thank you. Len you’ve had the opportunity the last couple of quarters to buyback a little bit of your converts at discounts and that’s added about $0.02 each quarter. What is – is there still any opportunity there in generating some income earnings from that?

Len Tannenbaum

I think our convertible bonds traded up probably since I announced I started buying them back. And in addition obviously we’re continuing to execute on our plan. And I don’t think that there is that much opportunity at today’s pricing which I think is around $92, $93. If it should drop we are happy to take advantage of any time, we could take advantage of buying back our debt at a significant discount creating risk free return to our shareholders we should be doing that.

Greg Mason – Stifel, Nicolaus

Okay. And then you mentioned something about an expanded platform that could generate $1 million of fee income, is that the syndication desk or what were you referencing there in that comment?

Len Tannenbaum

That’s right. That’s a syndication desk and as you know we started that effort early last year. And this thing does not happen overnight, it takes time to build the reputation with the strong syndicate partners such as Jefferies and Credit Suisse and others that take these deals and syndicate them down to the middle market.

And you have to build that relationship with their capital markets desk you have to build that relationship with the agents and often we are a agent, an agent in many of these transactions and we are one of actually the most prolific agents out there in the middle market.

So that all takes time and I think for the first time I’ve ever put a number out there of over $1 million I feel confident that the capital markets desk through our syndication revenue through us taking down large deals and syndicating it down to team members, will generate over $1 million. And in the next couple of days we’ll announce the small deal that is representative of the power of our capital markets desk.

Greg Mason – Stifel, Nicolaus

Okay, great. And then you mentioned I think Rail acquisition went on to PIK non-accrual this quarter as I look at it, it looks to me like that’s valued at call it $0.25 on the dollar. What’s the risk that we see that go on full non-accrual and what’s the story with that investment?

Len Tannenbaum

So the Rail acquisition I think was split this quarter, right?

Bernie Berman

Correct.

Alex Frank

Correct.

Len Tannenbaum

So if there is two securities that were split on the balance sheet let’s just go through them so a diligent analyst like you can follow through on the small details as you always have. Both Rail and Traffic control have two different securities. For example the one Rail security is an asset backed bankruptcy it’s an SPB isn’t it?

Bernie Berman

Asset-backed revolver.

Len Tannenbaum

It’s an asset-backed revolver, secured against receivables and inventory and receivables the main brand firms and at a discount of course to the value of the receivables in the inventory. And that’s carefully monitored and drawn each day that is not going to be impaired in our current expectation. In fact we believe we can liquidate that and recover at or more than the value of that of that of what we’ve loaned. The other security is, has been impaired too dramatically for us not to put it on PIK non-accrual. And certainly could go further on non-accrual how much cash is in that? Net zero right.

Alex Frank

All the cash is deferred so we treat it as PIK and we have not accrued all that.

Len Tannenbaum

So even though you see that on PIK non-accrual it’s fully on non-accrual?

Alex Frank

Correct.

Len Tannenbaum

So I’m glad you asked that question.

Greg Mason – Stifel, Nicolaus

Okay.

Len Tannenbaum

And so that we are currently not receiving any income from that second security and we think that’s the best treatment both because we don’t want to charge an incentive fee, if we don’t believe we can collect the money in the future and we want to make sure our earnings quality could remain as high.

Traffic control though I’ll point out also is a split between the asset-backed first lien, which we fully feel that we could liquidate in the first lien and receive 100 cents on the $1 and the second lien which we believe is impaired and we’ve significantly impaired it this quarter I think the $0.55 to $1.

Alex Frank

$0.55.

Len Tannenbaum

We also expect traffic control to go through a restructuring and at least that’s what we’re hearing. And we believe the restructuring will be a positive for the company as it was for Nicos when that went through restructuring and we merged it with Coll Materials and we are pleased with our progress there.

Greg Mason – Stifel, Nicolaus

Okay, great, great color. Thank you. One last question, you talked in response to Joel’s question, it sounds like you have actually closed a lot of deals post quarter end at least commentary on your cash levels and leverage. Can you give us any color around what you’ve closed so far in January and early February?

Len Tannenbaum

No, actually I said in my comments I thought that was a pretty slow start to the quarter.

Greg Mason – Stifel, Nicolaus

Okay.

Len Tannenbaum

I mean we did close some deals, we expect gross originations to be between $100 million, $300 million at least that’s our current view for the quarter, but we expect recycles to pick up substantially. And that should allow us to generate reasonable income in the quarter to continue to meet our target of at least $1.15, or our expectation of at least $1.15 in NII which covers our dividend.

Greg Mason – Stifel, Nicolaus

Great. Thank you.

Operator

Thank you sir. Gentlemen, your next question comes from the line of Casey Alexander of Gilford Securities. Sir.

Casey Alexander – Gilford Securities

Yep. My questions were answered. Thank you.

Operator

Thank you sir. Ladies and gentlemen this concludes your presentation for today. Thank you very much for your participation and you may now disconnect your lines. Have a great day.

Len Tannenbaum

Thank you.

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