Garrison Capital's (GARS) CEO on Q4 2015 Earnings - Earnings Call Transcript

| About: Garrison Capital (GARS)

Garrison Capital, Inc. (NASDAQ:GARS)

Q4 2015 Earnings Conference Call

March 03, 2016, 10:00 AM ET

Executives

Joseph Tansey - Chief Executive Officer

Mitch Drucker - Chief Investment Officer

Brian Chase - Chief Financial Officer

Analysts

Mickey Schleien - Ladenburg

Chris York - JMP Securities

Brian Hogan - William Blair

David Chiaverini - Cantor Fitzgerald

Chris Kotowski - Oppenheimer

Bryce Rowe - Robert W. Baird

Operator

Welcome to today's Garrison Capital Inc. Fourth Quarter Ended December 31, 2015 Earnings Call. For the fourth quarter ended December 31, 2015, earnings presentation that we intend to refer to on the earnings call, please visit the Investor Relations link on the homepage of our website, www.garrisoncapitalbdc.com and click on the fourth quarter December 31, 2015 earnings presentation under Upcoming Events. As more fully described in that presentation, words such as “anticipates,” “believes,” “expects,” “intends” and similar expressions identify forward-looking statements. Actual results could differ materially from those implied or expressed in our forward-looking statements for any reason, and future results could differ materially from historical performance. You should not rely solely on the matters discussed in today’s call as the basis of an investment in Garrison Capital. Please review our publicly available disclosure documents for further information on the risks of an investment in our company.

Questions will be taken via the phone during the Q&A session at the end.

It is now my pleasure to turn the webcast over to Mr. Joseph Tansey, CEO. You may begin.

Joseph Tansey

Good morning everybody and thank you for joining the call this morning. I'm joined by Brian Chase, our Chief Financial Officer, and Mitch Drucker, our Chief Investment Officer. On Wednesday evening, we issued our earnings report and press release for the quarter and year ended December 31, 2015. We also posted a supplemental earnings presentation to our website, which is available for reference throughout today's call. Following my broader comments, Mitch will highlight our investment activity during the quarter and discuss the portfolio in greater detail. Brian will then discuss our financial performance before we open up the lines for Q&A.

The fourth quarter was another volatile quarter in the global financial markets. Our experience is that during periods of increased volatility, deal flow often slows down considerably, as buyers and sellers can’t come to terms on asset values. This bid-ask spread frequently leads to decreased M&A volume in the near term. We clearly experienced this in the fourth quarter in our core origination business which showed only modest deal volume. However, we were able to take advantage of some of this volatility by acquiring approximately $25 million in transitory assets. In total, this resulted in modest portfolio expansion for the quarter. In the first quarter of 2016, we have taken advantage of the continued volatility in the markets by purchasing $16 million of additional select syndicated credits that we felt offered compelling risk and return.

Unfortunately, our portfolio suffered significant losses during the fourth quarter from a combination of spread widening due to this volatility and increased expectations of losses on several credits. In total, our net book value declined 94 cents or approximately 6.3% from the previous quarter. Of this loss, 72 cents is related to two credits, that Mitch will discuss in greater detail, which took significant turns for the worse during the quarter. We are extremely disappointed in our performance this quarter and the level of credit losses that we have experienced in total for the year of 2015.

Our team of experienced asset managers is working diligently on resolutions to maximize recoveries in all of our watch list credits that we hope will be in excess of their current market values. We remain confident in the overall credit profile of our portfolio outside of these issues. There will always be an array of credit situations in the portfolio environment that will flare up from time to time, unfortunately, several of them have hit in a short period of time this year.

We take full responsibility for the losses that we have incurred. With the benefit of hindsight, some of these situations were avoidable. As a result, we have augmented our internal underwriting process to attempt to avoid future mistakes. We will continue to focus on strong structures in predominantly first lien deals with tight financial covenants. As always, our underwriting focus will be on downside protection and capital preservation.

The 4th quarter was the first time in 7 quarters were we did not cover our dividend from adjusted NII, however, we did safely cover the dividends for the full year of 2015. This shortfall in the quarter was due to the increase in loans on non-accrual status as well as a decrease in fee income due to lower repayment volume. We expect that balance sheet expansion from the full use of our approved SBIC facility combined with resolution of some of our non-accrual loans will allow us to fully cover the dividend in 2016.

The expansion of our balance sheet with our SBIC facility has two important effects. First, it will allow us to pursue some lower yielding deals that wouldn't meet our return objectives without the benefit of the SBIC financing, thereby increasing our potential deal flow. Of course, with a lower return, we would expect those deals will carry less risk, which is important as we continue into later stages of the credit cycle. Second, if that deal flow is additive to our existing deal flow, then the expansion of our balance sheet should allow us to grow our NII per share over time.

Past experience is that after markets stabilize, at a higher or lower level, there is often a considerable increase in deal flow. Some transactions that stalled or didn't get launched, come back to the market and can present compelling investment opportunities. We hope that this pattern will repeat itself in the coming quarters.

The current market landscape for new originations has changed for the better from only a few quarters ago. As transaction volume picks up, there will be less competition to provide the necessary capital. Capital market volatility has resulted in a difficult, if not impossible, capital raising environment for BDCs and many are fully invested leaving them with limited capital to deploy. In addition, the widening in traded credit spreads often stops larger private fund competitors from dipping down into the lower-middle market space. Finally and maybe most significantly, regulatory scrutiny of the portfolios of regional banks has increased considerably in the last few quarters. This has caused them to be more conservative in their underwriting standards, as well as declining to extend credit to certain borrowers that have brought unwanted attention from the regulators. This has forced certain borrowers to seek more expensive non-bank replacement lenders.

I will now turn it over to Mitch, who will provide additional color on the loan market and our activity during the quarter.

Mitch Drucker

Thanks Joe. While capital market volatility has been well documented in today’s environment, I will speak to its effects on our business and the lower middle market in general. We have seen a modest reduction in financing liquidity as banks have become increasingly conservative and a select group of our competitors have become capital constrained. Concurrently, sponsor business in our market has declined. This is consistent with the trends in the broader leveraged finance markets as buyers and sellers appear to be in a period of prolonged price discovery. Demand for capital remains soft in a prolonged economic environment of sluggish growth.

In addition to this decline in liquidity and reduction in deal flow, concerns have been renewed around the overall health of the US economy and its ability to withstand a recession. As I will discuss in greater detail, we are experiencing some level of impact in the portfolio from economic and capital market conditions. While we don’t believe that the US will enter into a recession, we have incorporated this potential into our evaluation of new opportunities. We have declined to participate in a number of deals in volatile and unpredictable industries. This heightened scrutiny and enhanced selectivity, coupled with an overall decrease in financing flow, has led to a decrease in our core volume throughout the period relative to the prior year.

Despite these factors, the attractiveness of the lower middle market remains, because it is fragmented and inefficient compared to larger markets. Through the efforts of our direct origination platform, deals funded in Q4 ‘15 and 1Q ’16 have come with enhanced structures without sacrificing yield. These investments are not only in stable or mature industries, but also include credit enhancements such as lower leverage, larger sponsor equity contributions, or both.

As we continue to grow our franchise, we are well positioned to capitalize on market volatility and opportunistically source quality transactions with attractive yields. Additionally, the approval of our SBIC license permits the enhanced leveraging of our capital base, which will also afford flexibility to pursue higher quality deals at tighter pricing levels.

New originations, club deals, purchases and portfolio add-ons for Q4 ‘15 totaled $54.1 million across 17 new portfolio companies with a weighted average yield of deals closed of 8.9%. $29 million of these investments consisted of core investments with a weighted average yield of 10.5%, with the balance totaling $25.1 million of purchased transitory assets.

Core loan portfolio additions included three sponsor deals and one non-sponsor deal. Our term loans supported acquisitions and re-financings for a variety of companies including a business services provider of consumer market research, an information technology services provider, a supplier of furnishings to off-campus housing owners, and a provider of branded merchandise programs to retailers. Leverage at closing for all deals funded during the quarter is well inside peer averages across the middle market. A brief description of these 4 deals can be found on pages 4 and 5 of the presentation.

We continue to opportunistically source and close transactions with premium yields, without resorting to second lien and mezzanine markets with lower recovery rates. All four core transactions were first lien deals and the percentage of first lien deals now totals 92%. Flow of business from our marketing channels was broad based with two of the deals referred directly from sponsors with the remaining two from our club partners. Originated credits declined slightly to 56% of the portfolio, due to the purchase of transitory assets during the quarter. Transitory assets consists of purchases made in the liquid secondary market with our excess liquidity. As spreads widened due to capital markets dislocation, the relative value of these credits became more attractive. These transitory purchases were spread across 13 companies, with a weighted average yield of 7%.

Additions for the quarter were offset by $29 million of repayments with a weighted average yield of 10%. Approximately $20MM of these repayments came from the sale and refinance of two sponsor owned business, with the balance from normalized amortization and excess cash flow repayments. Repayments outside of normal amortization have been modest. Our flexibility to finance our client’s targeted acquisitions, and provide rate accommodations when justified, have allowed us to maintain borrowers that otherwise might be at risk of a refinance. The overall weighted average yield on the portfolio after repayments and markdowns now stands at 10.8%

While we are pleased with the growth of our franchise and positioning within the market, the level of losses for the quarter was unacceptable. Net realized and unrealized losses of $17.1 million has clearly undermined our performance. While $3.4 million of the losses were mark to market adjustments on our existing loan portfolio, $13.7MM were net unrealized losses related to the negative credit related adjustments of four portfolio investments. These four investments have been highlighted in previous quarters as special situation credits. We have decided to take further markdowns this quarter based on market uncertainties and company specific dynamics. I will briefly review the status of each of these investments. Forest Park Fort Worth and Forest Park San Antonio are members of an affiliated hospital chain, however they are two distinct credits. The hospitals opened in late 2014 backed with financial support from doctors and real estate investors. We entered into a leasing program to provide mission critical equipment to each hospital. Ramp up of both hospitals was hampered by delays in obtaining third party insurance contracts, management issues and liquidity shortages. These issues resulted in the operating companies of both hospitals filing for bankruptcy and the retention of advisors to sell the hospitals. These loans were placed on non-accrual status as we have not been receiving lease payments throughout the restructuring period. The hospitals are up for sale and there appears to be substantial interest from large hospital operators that should require our equipment for their operations once a transaction is completed, but a sale was not announced or completed by quarter end. Based on capital market volatility and uncertainty, we’ve decided to take incremental markdowns to these positions at quarter end.

We took an incremental markdown on an investment in a distributor of nursery products to home improvement retailers. Unanticipated losses in Q2 due to poor seasonal sell through of the products, led to management changes and a material increase in leverage. The sponsor contributed additional equity in support of the business at that time, but in Q4 an inventory write-down lead to a reduction in the borrowing base and additional liquidity shortages. As our loan is supported by current asset collateral including inventory, we took an additional markdown to reflect the updated inventory levels. We have also placed the loan on non-accrual due to the need to preserve liquidity to fund operations. The company has hired a chief restructuring officer and is in the midst of implementing a turnaround plan.

The fourth situation involves an investment in a logistics and ecommerce business, which we placed on non-accrual in Q3. The company had been experiencing losses due to revenue decline and unprofitable contracts it signed with material customers. An investment bank was hired by the company to advise on its strategic alternatives, including a sale of the company. Bids received in Q4 were insufficient to cover our obligations, so we’ve taken additional markdowns in Q4. Discussions with sponsors and stakeholders in all these investments are of a sensitive nature and we are working diligently to maximize our recoveries.

The losses are impactful, and as Joe said, we accept full responsibility for them. However, it’s important to note that we believe the balance of the portfolio is of sound credit quality. Leverage of the portfolio after removing the 4 isolated credits above remains relatively conservative at 3.6x. On the whole, leverage levels for our portfolio remain materially below those in the upper middle market and broadly syndicated market, and most of our competitors in the lower middle market. Our risk rating grades range from 1 for our highest rated companies to 4 for the lowest rated and the weighted average risk rating remained at 2.66 from Q3 to Q4, as downgrades were offset by upgrades. After removing the credits on non-accrual, the overall risk rating declined to 2.51, which is consistent with risk levels on the balance of the portfolio at the end of 2014. Loans we have made to fund the exploration and development of oil & gas in the US comprise approximately 6% of our total portfolio. It should be noted that these investments were made after the major correction in commodity prices. In addition, the combination of the total reserves and company enacted hedging programs provide downside protection and full support for our loans.

As we build on our direct origination platform in the lower middle market, we have solidified existing relationships and expanded our network of proprietary referral sources. Our new business focus will continue to be in the sponsor arena, with groups which we have executed repeat business or have strong relationships. As economic conditions remain fragile in the US, we will be selective and pursue only those deals with reasonable leverage levels and solid business prospects. We will utilize our favorable SBIC financing and leverage to pursue quality deal flow that quite often comes with tighter spreads than historical levels. Now, I’d like to pass the discussion to Brian Chase, our CFO.

Brian Chase

Thanks, Mitch. Our adjusted NII this quarter was $0.30 per share, and we've announced a first quarter dividend of $0.35 per share payable to shareholders on March 28, 2016. As a result of an uptick in our non-accruals this is the first quarter in some time that we did not cover our dividend from adjusted NII. However, it is worth noting that when looking at 2015 as a whole we earned $1.48 per share from adjusted NII compared to our dividend of a $1.40 per share. As Joe previously mentioned, it is our expectation that balance sheet expansion through the SBIC should allow us to cover our dividend in the quarters to come, assuming all other factors remain static including assuming non-accruals remain at their elevated levels.

While we are clearly disappointed with our performance the past few quarters we are a lot closer to resolving our few troubled situations that have plagued us over that time and we’d expect a commensurate stabilization in book value in the not too distant future. Book value sits at $13.98 which is $1.02 below our IPO price of $15.00 nearly 3 years ago. When taking into consideration our 35 cent dividend that we have consistently paid since the IPO our total economic return over that period of time was 19% and an annualized return of approximately 7%.

We also think it makes sense to compare our economic performance for the quarter and year-to-date period relative to the credit related indices. This quarter, our total economic return was down approximately 4% compared to declines in the high yield bond and leveraged loan indices of approximately 1.5% and 2.3%, respectively. For the year-to-date period, our total return is negative 1.35% versus a loss of 4.7% for the high yield index, and a 2.8% decline in the leveraged loan 100 Index.

Clearly, our goal is to have both strong absolute and relative performance, and cumulatively, since the time of our IPO, we have been able to achieve both of those goals. However, during 2015 we have not been able to meet those objectives due to higher than expected credit losses.

As disclosed in our 10-K we have been very active repurchasing our shares both last quarter and during this 1st quarter. In the 4th quarter we repurchased 251,185 shares at a weighted average price of $13.19 which represents a roughly 6% discount from our year-end NAV. During this 1st quarter we have repurchased 254,000 shares at a weighted average price of $11.53 which represents roughly a 17.5% discount to our year-end NAV. In total we have utilized approximately $6.2 million of the $10mm repurchase program. We expect to opportunistically utilize the remaining capacity under the program in the coming quarters.

As mentioned during last quarter’s call, we are balancing the share repurchases that we are making with the liquidity needs required to utilize the $70mm of SBIC debentures that are available to us. We believe that fully equitizing the SBIC is our best use of capital as it will increase our return on equity and help ensure that the current dividend remains intact.

As of the end of the 4th quarter we have invested $26.7mm of equity into the SBIC subsidiary and have drawn on $19.3mm of debentures. We have invested some more equity into the SBIC subsidiary this quarter and will continue to do so until we have the $35mm required to draw on all $70mm of debentures. We continue to see many of our originations qualify to fit within the SBIC guidelines and feel confident in our ability to fully invest what is available to us within the SBIC.

At this time I’d like to open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Mickey Schleien of Ladenburg. Your line is open.

Mickey Schleien

Good morning, guys. I want to start with just actually a follow-up to, I think, Brian's last comments regarding capital allocation. I'm trying to understand the thesis behind owning investments like Otter Products at L+475 or US AGM at L+375 as opposed to purchasing more shares. Can you help us -- can you walk us through that logic?

Joseph Tansey

Sure. Some of the capital that would be used to buy that is within the CLO. So, if it were -- and that equity is in the CLO, you can't really take the equity out of the CLO. And so you just want to make sure that the CLO is fully utilized because that equity that’s contributed to the CLO is basically trapped in there. Now, the capital that we use for buybacks is the capital that is not in the CLO or in the SBIC subsidiary.

Mickey Schleien

Understand. Talking about the purchased deals, can you give us an idea of the sort of average EBITDA of the companies in that basket?

Joseph Tansey

Yeah. They're quite a bit bigger than the regular originated credits that we would have. I would say that on average they are -- we ran this the other day, it was about $30 million with the average EBITDA.

Mitch Drucker

When you add the transitory average overall it's about $30 million. When you take the transitory out, our average is in the $15 million range.

Joseph Tansey

That means the transitories are probably more like $50mm.

Mitch Drucker

Yes.

Mickey Schleien

I'm sorry, you said 50 for the transitory?

Joseph Tansey

Roughly.

Mickey Schleien

Okay. So those are fair -- I don't know, because those are broadly syndicated, but they're pretty liquid?

Joseph Tansey

Yeah, they're pretty liquid.

Mickey Schleien

Okay. And I noticed an investment in metal services. Is that an indication you believe the commodity cycle has turned or was that idiosyncratic?

Joseph Tansey

No, that's idiosyncratic. It's a business that services -- that provides long-term contract services to different metal fabrication facilities. So, it's not actually volume-dependent, it's more maintenance-dependent.

Mickey Schleien

And, Joe, that's a new investment but it was marked at 91% of cost. Did it deteriorate since you bought it, or what happened?

Joseph Tansey

It seems to be as of today market price is 90, so it's down a little bit.

Mickey Schleien

Okay, so there is a bit out there, okay. I don't want to take too much time here. Oil and gas investments were marked at 96. Given what we've seen elsewhere, that seems pretty aggressive. Were those valued by third parties and why wasn't there more of a decline in their valuation?

Brian Chase

They were valued by third parties. I mean, I can have Joe obviously chime in about --

Joseph Tansey

Those are 2015 vintage originations and that were done sort of, maybe not today's commodity price environment, but in a low commodity price environment. And luckily, when those deals were done, there was substantial hedging that was put in place to protect from the downdraft. And so the markdown there is largely because spreads are wider today for any kind of energy related investment than it was when those investments were made a few quarters ago. But, again, they weren't made in -- they're not 2014 vintage, $100 oil vintage investments.

Mickey Schleien

Okay, my last question and I'll get back in the queue. You indicated you're taking a more conservative stance toward your outlook on the economy, but I'm trying to reconcile that with the fact that at least as of December, a quarter of the portfolio was in manufacturing and retail. Now, I know that those definitions are somewhat loose, but you would normally consider those to be pretty cyclical, so can you help me understand that?

Joseph Tansey

I think you can still lend conservatively at low leverage points into manufacturing businesses even if you see a weakening manufacturing environment. And so I think that it's not a sector that we think is going to go away and so that you need to avoid it at all costs. I think it's a sector that we need to be cautious in and looking at the amount of leverage in any underlying credit investment that you would make.

Mickey Schleien

Okay. I understand. Thanks for your time.

Operator

Your next question comes from the line of Chris York from JMP Securities. Your line is open.

Chris York

Good morning, guys. Thanks for taking my questions. So, Joe, you commented in your prepared remarks that some of the credit issues were avoidable and in hindsight, which we all know is 20/20, but could you elaborate on this a little bit? And then the changes you are making internally on underwriting?

Joseph Tansey

Sure. I think when you look at the business risk and you have to look at them one-by-one, but I think that they are -- and you can look at the hospitals, there was a startup nature to the individual hospitals that we financed there, as they were part of a broader chain. But those individual hospitals were new hospitals, and the delays in getting approved by the insurance counterparties caused a working capital strain that we didn't anticipate. That they had gotten the insurance approvals at other hospitals in their chain and we assumed that those would be -- it would be a faster process because of that. But basically, they didn't have enough working capital to make it through to the other side, and there were some issues with operations that resulted due to that. Luckily, in those circumstances I think their recoveries should be in reasonable short order where our real sales process is going on with real interested parties and that will clear itself up. I think when you look at something like Speed, that was a financing of an acquisition and they didn't integrate that acquisition. We finance lots of acquisitions and often those acquisitions, though to be honest they’re more in our sponsor business than they are in a small public company, where the sponsor has a lot of additional resources to bring, and most of those acquisitions go very smoothly. This was a small public company and they didn't have that backstop, I guess to say, and the integration didn't go well. And that in hindsight, in each of these cases, is something that was avoidable.

And so we've changed how we structure the underwriting group here at Garrison a little bit, in that one of our senior long-term members of the staff has sort of become the head of underwriting and has really been given a bit of an elevated role in that process, to be a bit of a naysayer as opposed to allowing some of the originators who -- we had a process more -- had kind of checked each other but weren't necessarily on the deal team. Now, Allison or one of the people in that group are always on the deal team itself, and early results of that are good and we -- you know, they're idiosyncratic issues in each of these credits that went wrong that we feel that we could have done better. And that's not a good feeling for us and it's going to take us a few quarters to, I think, rebuild the market's trust and understand that we've kind of got our act tightened up and we'll hopefully be able to do that.

Chris York

Great. Thanks for that color. That's really helpful. Switching gears to the new non-accruals. So, we calculated, I think it's about 600,000 in foregone contractual interest income from additions in the quarter. Did any of these investments service their debt in any month during the quarter, or were they all sole non-accruals?

Brian Chase

I believe there was an interest payment made in January in one of those credits, but for the most part there was no debt service.

Chris York

Okay. And then, Brian, for modeling purposes, should we expect any pickup in professional or other expenses associated with the management of these troubled investments?

Brian Chase

No, I don't think there will be anything significant there. Normally, those sorts of expenses are picked up at the company level, not at the GARS level. In other words, the borrower would end up picking that up.

Chris York

Okay. And then the last question is on leverage. So, you mentioned that you have repurchased shares in the current quarter, which, when combined with the further spread widening since year-end, should increase your leverage beyond the 0.91 times. So, it would appear that the cushion for asset coverage is getting small, so how are you guys thinking about leverage currently and should we expect deleveraging going forward?

Brian Chase

Yeah, I mean, we're keeping a very close eye on that. You know, looking at all those numbers and running sensitivities. As Mickey was talking about before, we have a lot of transitory assets, and optimally we wouldn't want to be forced to sell them, but for some reason we were, we could, and there is plenty there to do that. So, we feel like we're adequately positioned from a leverage perspective. And, frankly, a couple of the troubled credits that we're talking about here have been written down so severely that there is not as much to go even if it got a lot worse, right, to put you in a bad position from a leverage perspective. So, we're watching that very closely and we're looking at that in coordination with the buybacks that we're doing.

Chris York

Got it. That's it for me. Thanks, guys.

Joseph Tansey

Thanks, Chris.

Operator

Your next question comes from the line of Brian Hogan from William Blair. Your line is open.

Brian Hogan

Good morning. A question on the credit quality. You mentioned the average risk rating was 2.51 excluding the nonaccruals, but you also invested in the transitory assets, which are obviously, I would say, probably pretty safe, a better risk rating. So, I guess, what is the trend in the average risk rating excluding the transitory assets?

Brian Chase

I mean, we don't have -- we did not run the numbers without the transitory assets, but I think it's fair to say it's relatively flat. I mean, the math, even if all those transitory assets were a 2, I don't think it would be enough to move it downward significantly. But that is something that we can get back to you on.

Brian Hogan

Yeah, I would appreciate that. Just trying to get comfortable with that.

Brian Chase

Yeah, I think it's about flat. That's our sense.

Brian Hogan

All right. And then, so, what is the outlook on the timing of the resolution of the nonaccruals? You kind of briefly alluded to, like the sale of the Forest Park facilities, but any other things throughout the year? I mean, you did mention that the resolution of nonaccruals allow you to cover the dividend in 2016, in addition to the expansion of the SBIC.

Joseph Tansey

Sure. I think the nearest term event is likely to be the Forest Park in San Antonio where there’s ongoing discussions around potential buyers, and that will play itself out. You know, hard to say in any kind of process. As we all know, if you can get a few good weeks or months in market, M&A seems to happen a lot better, and when they go bad, things get stretched out quite a bit. And then I would think potentially Fort Worth thereafter. Those would be the ones that are engaged in processes that will lead to resolutions in the short term, upcoming quarters. And beyond that I wouldn't want to speculate.

Brian Chase

Just be clear on the dividend. We spent a lot of time on this with the board, and we -- although obviously the cleanup with the nonaccruals to re-perform again would be a very big factor in sort of earnings accretion and growth, we had run it assuming that wasn't cleaned up. And despite those nonaccruals still remaining in place, we still think we can cover the dividend as a result of just a little bit of balance sheet expansion in the SBIC, and that's really all it would take.

Brian Hogan

Great. Can you quantify the lost income from the nonaccrual for each of the four?

Brian Chase

I don't have those numbers at hand, but I think it's simply going to the schedule of investments, looking at the face amount of each of those loans and multiplying them by the interest rate, dividing by four.

Brian Hogan

Sure. Where are you seeing opportunities, which industries? And then which ones are you headed to invest in today?

Mitch Drucker

Yeah, as far as new business philosophy right now, we are taking a late cycle minded approach. We still see some more distress out there here in the sixth year of a bull market in credit, so any deal we do we have to expect flat growth and be ready for a recession. So, we're looking mainly for recession-resilient companies, stable companies with decent free cash flow. Maybe some recurring revenue, probably more focus on business services.

As you know, sponsor business is down. It's down this year; it was down last year, so the volume is light. I think what we could say is we're going to be very patient and selective. That being said, there are definitely opportunities out there. We do have an energy team. We're seeing reserve-based lending with premium yields that we feel good about. We're starting to see some loan and portfolio sales that we're looking at. I think you may see us get into some -- a few larger deals with clubs, with club partners taking the place of maybe a high yield bond offering. So, there are opportunities out there, but we're being careful, patient and selective.

Joseph Tansey

I think the biggest trend, and I mentioned briefly in my remarks, we're seeing the regional banks get more conservative given that they have some trouble in their portfolios with increased regulatory scrutiny. So, hopefully those opportunities that present themselves from the pullback of banks are particularly good risks and return.

Brian Hogan

All right. And then one last question. Obviously with the leverage that was kind of discussed previously at 0.91 excluding the SBIC debt, can you -- what is your liquidity today? You obviously have a transitory portfolio. How big is that, maybe cash. Basically, how much can you invest today and put into the SBIC and grow that?

Brian Chase

So, we have about $50 million of transitory assets, and that's a little bit of, sort of, as of today, not a year-end number. Our SBIC is pretty much completely equitized at this point, so we have $35 million -- $40 million of debentures that we can draw in the SBIC. I would say that's most of the liquidity.

Brian Hogan

All right. Thanks for your time.

Operator

Your next question comes from the line of David Chiaverini from Cantor Fitzgerald. Your line is open.

David Chiaverini

Thanks, good morning. I have a couple follow-ups and then a separate question. The first one, a follow-up on the oil and gas exposure, and you mentioned about having substantial hedging in place. How far out do those hedges go? Is it typically a couple years?

Joseph Tansey

Yeah. It depends a little bit on the circumstances, but two to three years would be the starting point, yes.

David Chiaverini

Okay, so it's two to three years to call it, on average, two and a half years on your oil and gas exposure from -- and on average was it mid-2015 that most of these assets went on the books?

Joseph Tansey

Yeah.

David Chiaverini

Okay, okay. So, towards the end of 2017 is when they'll start rolling off, okay. And then a follow-up on the credit quality issue. I was just curious, you mentioned about how the rest of the portfolio besides the nonaccruals are of sound credit quality. Can you -- do you have any figures or data on revenue and EBITDA trends on the portfolio, either year-over-year or sequentially?

Mitch Drucker

Revenue for the companies that we finance is essentially flat. I can tell you that leverage, when you take out the nonaccruals has been relatively constant, so we feel very good about the cushions we have in the remaining companies. We do have some industry diversity. Albeit there is manufacturing in the mix, but there could be a manufacturer of consumer products in that number. We have a company called CR Brands, which makes basic consumer products selling into retailers, so we do have 80% of the business is sponsor-related, so we do feel good about that. The energy deal, there were three deals, as Joe mentioned; two of them are hedged. One of them is a services company, but it's essentially cash collateralized at this point. It's a $20 million loan ahead of over $150 million of bonds, and the cash amounts basically cover that loan. So, we feel very comfortable about the rest of the portfolio.

David Chiaverini

Okay, great. And then my last question is just -- and I'm not sure if you have information on this, but I'm just curious about comparing the merits of lower middle market lending versus upper middle market lending. I was curious if you had any historical figures as to how lower middle market loans have performed over a cycle versus upper middle market loans? And my instinct is to think that the loans would be more volatile, but perhaps over a full cycle may generate higher risk adjusted returns, but I'm curious as to what your thoughts are there.

Joseph Tansey

There is not really any good data on that. Experientially what we see is you have a lower leverage attachment point and a generally higher interest rate that you're able to achieve, and that offsets, then, what could be more volatility over time. But there isn't any equivalent to LCD or S&P that publishes that kind of bifurcated data like that that would be reliable.

David Chiaverini

Okay, thanks for that. That's all for me. Thank you.

Joseph Tansey

Thanks.

Operator

Your next question comes from the line of Chris Kotowski from Oppenheimer. Your line is open.

Chris Kotowski

Yes. I guess I was struck by the magnitude of the mark on BFN, and I'm just curious, do you have any kind of security or collateral there, or what is it secured by?

Joseph Tansey

Yeah, it is an asset-based loan. As Mitch mentioned, it was an inventory write-down, and so the inventory, there’s receivables, it is a nursery company, so the inventory is plants, shrubs, bushes, trees, the whole thing. So, we wrote the loan down based on the inventory write-down.

Chris Kotowski

Okay. And the Forest Park Medical Centers, is the collateral there the kind of equipment that is on site and it can't be used anywhere else, or --

Joseph Tansey

Well, no. If you have something like an MRI machine, you could put it in a different hospital, but it would only be used in a hospital.

Chris Kotowski

Okay. So, you're not completely dependent on whoever the buyer of the new -- the new owner of the hospitals are?

Joseph Tansey

That's correct.

Chris Kotowski

Okay, all right. That's it for me. Thank you.

Joseph Tansey

Okay, thank you.

Operator

Your next question comes from the line of Bryce Rowe from Baird. Your line is open.

Bryce Rowe

Great, thanks. Brian, I just wanted to follow-up to some of the comments you made earlier on the call. You mentioned that you got $40 million of availability through your SBA debentures. I would take that to mean you've already drawn an additional $11 million here in the first quarter?

Brian Chase

That's right. We funded more equity and we've drawn on some debentures, that's exactly right.

Bryce Rowe

Okay. And then I guess another follow-up. You talked about balance sheet expansion in some of the prepared remarks and then in some of the question answering you talked about discussions with the board and the ability to reach dividend coverage in 2016. I'm curious what kind of SBA draw is required to get to that level of dividend coverage? And do you assume that there will be some transitory asset sales along the path of getting back to dividend coverage?

Brian Chase

No. No on the second part. The transitory sales are sort of segmented off from the SBIC, and so there is no sort of internal rotation, if you will, within the CLO from transitory to originated to get there. And then on the SBIC, it's a fairly modest expansion to get there but I think the first quarter will be close. It's possible we can miss by a little bit, it’s on an adjusted NII basis, not on a GAAP basis, because our incentive -- there is not going to be any incentive fee in the first quarter, more than likely. And so on a run rate basis, I think it's pretty comfortable, especially because the hospital deals should get cleaned up one way or the other. I would imagine certainly by the back half of the year. So, could we miss by a penny or two on adjusted NII basis? It's possible, but we will cover from a GAAP perspective, or certainly should, and certainly when you look at it over the course of the whole year, we feel pretty good about it. So, certainly comfortable enough to keep it where it is.

Bryce Rowe

Okay. That's all for me. Thanks.

Operator

Again, if you would like to ask a question, press star then 1 on your telephone keypad. Your next question comes from the line of Mickey Schleien from Ladenburg. Your line is open.

Mickey Schleien

Yeah, I just wanted to follow up. Maybe Mitch talked about it, but you repriced Speed Commerce but it still remains on nonaccrual. Can you walk us through that deal, please?

Joseph Tansey

So, we don't like to make too many detailed comments on ongoing restructuring situations, but the repricing probably happened earlier than we put it on nonaccrual. If I remember the sequence of events there, sort of an ongoing sales process, some repricing events that happened during the quarter, and then I think towards the -- as the sales process didn't play out the way that it was expected, then we placed the loan on nonaccrual. But when you're -- the rate is not that relevant at this point of the -- you know, you're on nonaccrual.

Mickey Schleien

I understand. Thank you.

End of Q&A

Operator

There are no further questions at this time. I turn the call back over to the presenters.

Joseph Tansey

Thanks very much, everybody, for dialing in and for all the thoughtful questions. This will conclude the call.

Operator

This concludes today's conference call. You may now disconnect.

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