Patriot Capital Funding Q4 2007 Earnings Call Transcript

Patriot Capital Funding, Inc. (PCAP)

Q4 2007 Earnings Call.

March 3, 2008 10:30 am ET

Executives

Tim Hassler - Chief Operating Officer

Richard Buckanavage, President - Chief Executive Officer.

Bill Alvarez - Chief Financial Officer

Analysts

Elliot Burke - Ironside Partners

Daniel Furtado - Jefferies & Company

Henry Coffey - Ferris, Baker Watts

Troy Ward – Stifel Nicholas

John Hecht – JMP Securities

Vernon Plack – BB&T Capital Markets

Bob Napoli – Piper Jaffray

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Patriot Capital Funding 2007 fourth quarter results conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded Monday March 3, 2008. I would now like to turn the conference over to Richard Buckanavage, President and Chief Executive Officer. Please go ahead sir.

Richard Buckanavage

Good morning and welcome everyone. Thank you for joining us this morning to discuss our results for the quarter and year ended December 31, 2007. I am joined by Tim Hassler, Chief Operating Officer and Bill Alvarez, our Chief Financial Officer. Bill, would you please provide our Safe Harbor disclosure statement before we get started this morning?

William Alvarez

Today’s conference call is being recorded and webcast live through our website at patcapfunding.com. Today’s webcast will also be available on our website as will an audio replay of the conference call. Replay information is included in our press release today and it is posted on our website. Please note that this call is the property of Patriot Capital Funding, Inc. Any unauthorized rebroadcast of this call in any form is strictly prohibited.

I would like to call your attention to the customary Safe Harbor disclosure in our press release today 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 would cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our related SEC filings please visit our website or call Investor Relations at 212-835-8500.

Lastly, there will be a question-and-answer session following our presentation. With that I will turn it back over to Rich.

Richard Buckanavage

Thank you Bill. Despite turbulence in the credit markets this past year, factors that were particularly acute in the fourth quarter, we are pleased with the operational and financial results achieved in the fourth quarter and the full year.

For the year we closed 17 new transactions as well as completed eight follow-on financings for existing portfolio companies totaling approximately $197 million in gross capital commitments. This compares favorably to new gross capital commitments in 2006 of approximately $169 million.

The portfolio at year end totaled approximately $389 million in 36 companies. The growth we have been able to achieve in the portfolio delivers material benefits to our shareholders in terms of greater diversification across overboard, industry and asset class.

Viewing the full year deployment activities, was a robust fourth quarter which we closed five new transactions in our core lower middle market sector totaling almost $77 million as well as $1.5 million of incremental financings for two existing portfolio companies. Further, the fourth quarter’s deployment of almost $80 million provides us with a material head start toward achievement of our 2008 financial objectives.

During the year we bolstered our balance sheet and liquidity positions. We closed two follow-on equity offerings during 2007; the first in January 2007 in which we raised approximately $34 million of gross proceeds and the second in October 2007 raising an additional $30.5 million.

Also during 2007 we increased the commitment on our securitization revolving credit facility from $140 million to $175 million and extended the term by one year from July 2009 to July 2010. However, due to our robust deployment phase during the year, we must secure additional funding if we are going to continue to grow the portfolio. We are actively evaluating various capital raising alternatives. More discussion of our liquidity position will follow later in the presentation.

We are very pleased not only with this quarter’s deployment level but also the composition of this quarter’s investment activity. We took advantage of the turmoil in the market while other capital providers moved up market, but curtailed their investment activities, Patriot Capital Funding demonstrated continued commitment to the lower end of the middle market solidifying our position as the market leader in this segment. All five transactions were in our core lower middle market segment and represented investments along six private equity groups, two of which were sponsors with whom we have previously closed a transaction. This brings the total number of private equity groups with whom Patriot Capital Funding has closed a transaction to 47.

Our shareholders should also find the composition of this quarter’s deployment activities attractive.

We closed three investments totaling almost $38 million in the healthcare industry, a previously untapped sector for us. This will help further diversify the portfolio from an industry perspective and does show in a sector that we see as defensive which is particularly relevant given trends in the macroeconomic environment. Further, borrowing yields on the fourth quarter investments are expected to exceed those made early in the year at over 100 basis points.

Let me describe this quarter’s investment activity briefly for those of you who have might missed our press releases. The five new transactions closed during the quarter, all in our core lower middle market segment are broken down as follows: because of the $25 million one stop financing comprises of senior and subordinate debts and a $2 million equity co-investment in support of the acquisition of Sports Helmet Inc. DBA cascade Helmets, the leader in lacrosse helmets by North Castle Partners, a second transaction with the team from North Castle. We closed at $15.5 million one stop financing comprised of senior and subordinated debt, a $500,000 equity co-investment and the support of recapitalization of Vincent associates clinical research. A provider of clinical testing services by Solarity Partners and Management. We closed a $13.75 million one stop comprising of senior and subordinated debt and a $250,000 equity co-investment in the support of the acquisition of Aircraft Fasteners International master stocking distributor specialized in hardware components for the aero space, electronics and defense industries. Our investment is alongside Tucker Partners and Cruse Atomic Partners.

We closed in a $11.5 million one stop financing comprising of senior and subordinated debt and another $500,000 equity co-investment and supported a big capitalization of North Western management services. The dental practice management company sponsored by the Beekman Group and company management and lastly we closed a $10.8 million one stop financing comprises of senior and subordinated debt and a $125,000 equity co-investment, backing acquisition of LHC holdings, a provider of home health care services by Florida Capital Partners. This is our second transaction with out good friends of Florida Capital.

Lastly as I mentioned earlier, we also closed two incremental financings for two portfolio companies, a $1 million increase in our single commitment to the Sidump'r Trailer Company and an incremental $500,000 of subordinated debt invested in smart LOC. Because of our intense focus on our core, lower and middle market segment we did not deploy an additional capital in this indicated lower market during the quarter. In fact our exposure to this after class has declined to the repayment or sale of almost $13 million senior secured and junior secured term debt investment. During the fourth quarter we received full repayment of our $1 million junior secured term loan to U.S. Silica Company and subsequent to quarter end we sold $2.9 million our investment in Nice-Pak Products and received full repayment of our $9 million junior secured term loan with Eight O’clock Coffee Company.

Now turning my attention to the portfolio; our decision at late 2006 to de-emphasize investments in companies that operate in cyclical industries and our continued vigilance in our investment evaluation process served us well in 2007. Based on persistent inflationary pressures that began even prior to 2007, we began to adopt a cautious approach to companies that manufacture goods using significant levels of base metals and/or petroleum based raw materials. In addition to the portfolio measures we also focused our investment efforts on one-stop financing opportunities versus stand-alone junior secured term debt and subordinated debt investments.

Investments in the senior most and secured tranche of the capital structure afford us the maximum level of life and remedies should one of our portfolio companies experience meaningful operational or financial weakness. We believe that these initiatives among others have helped contribute to the solid credit metrics achieved throughout the year.

While we did see a modest uptick to watch the credits in the fourth quarter, the metrics at year-end are indicative of a solid portfolio and remained well within our internal targets. Even with the emergence of one four-rated loan, over 80% of our portfolio remains rated one or two, our highest two-rated categories and we have no pass due or non-accrual loans. The last formal remark I would like to make this morning is to reiterate the announcement from last Thursday that our board of directors after completing it’s process of estimating our distributable income for the first quarter of 2008 declared a dividend of $0.33 per share. This represents a 3.1% increase from the first quarter of 2007. The record date is March 14, 2008 with the actual dividend being paid on April 16, 2008.

I would like to now turn over the call to Bill Alvarez, who will discuss our earnings release for the quarter and full year in more depth.

William Alvarez

Thank you. I will begin on the discussion of our December 31, 2007 balance sheet.

We ended the year with a total investment portfolio net amount earning income of $384.2 million, up approximately 18% from $325.4 million at September 30 and up approximately 49% from $257.2 million at the end of 2006.

The weighted average yield on our interest bearing portfolio in 2007 was 12.4% compared to 12.5% for the nine months ended September 30, 2007. Our weighted average balance of our interest bearing portfolio for the quarter ended December 31, 2007 was $342.1 million, up from $302 million during the third quarter of 2007. We ended 2007 the total assets of $397.9 million. Our total debt outstanding was $164.9 million and total stock holders equity was $221.6 million. At the end of the year, our debt to equity ratio was 0.7 to 1. Our NAP per share at December 31, 2007 was $10.73 as compared to $10.67 at September 30 and $10.37 at December 31, 2006.

In 2007, we raised on a gross basis approximately $64 million in new equity capital and increased our debt facility by $35 million to support the growth in our assets. Subsequent to year end, we increased our liquidity position by approximately $19 million as a result of the sale and our repayment of three portfolio investments. Such proceeds were used to reduce our outstanding borrowings. Tim Hassler will further comment on liquidity later in this call.

Now let's move on to discuss our earnings for the fourth quarter and full year.

Interest and dividend income for the quarter ended December 31, 2007 was $10.6 million as compared to $9.6 million in the third quarter of 2007. Fees and other income for the fourth quarter of 2007 was $499,000 as compared to $198,000 in third quarter. That brings total investment income for 2007 to $39 million which was an increase over the $26.5 million of investment income for 2006, an increase of approximately 47%.

Investment income increased in 2007 primarily as a result of the $127 million net growth in our investment portfolio over the course through the year, offset by a slight decrease in our portfolio yield. Included in investment income are fees and other income which totaled $1.8 million, up from $1.1 million in 2006. The increase in 2007 was primarily due to an increase in prepayment, structuring, and environment fees. Fees and other income will fluctuate from quarter-to-quarter depending up on the level of investment activity and changes in our portfolio.

Operating expenses were $4.6 million in the fourth quarter 2007 as compared to $4.3 million in the third quarter. Interest expense was $2.2 million in the fourth quarter of 2007 as compared to $2.1 million in the third quarter. Our weighted average borrowings were $127.9 million for the fourth quarter of 2007 as compared to $115.2 million during the third quarter. Compensation expense was $1.5 million in the fourth quarter 2007 as compared to $1.3 million in the third quarter. Professional fees and general and administrative expenses remained leveled at approximately $900,000 in the fourth quarter of 2007. That brings our total operating expenses for 2007 to $16.2 million as compared to $11.5 million in 2006.

The increase for 2007 related to higher interest expense of $3.1 million as a result of an increase in our weighted average borrowings which were $106 million for 2007 as compared to $55.3 million for 2006 and higher compensation expense of $1.5 million resulting from increased salaries, higher bonus accruals and the addition of new employees during the year. Professional fees and general and administrative expenses were $3.4 million in 2007 as compared to $3.3 million in 2006.

Our net investment income was $6.5 or $0.32 per basic and $0.31 per diluted share for the fourth quarter of 2007, as compared to $5.5 million or $0.30 per basic and diluted share for the third quarter. For the full year of 2007 our net investment income was $22.7 million or $1.22 per basic and $1.21 per diluted share as compared to $15 million or $1.06 per basic and diluted share for 2006.

During the fourth quarter of 2007, we recorded net unrealized appreciation on our investments of $2.6 million which brings our total net unrealized appreciation to $3.6 million for the 2007 year. The unrealized appreciation for 2007 results from an increase in the number of portfolio companies requiring closer monitoring and to a lesser extent from the quoted market prices below par on our syndicated loan portfolio as a result of the disruption in the financial and credit markets. In addition, we recorded $516,000 of unrealized appreciation on our interest rate swap agreements during the fourth quarter of 2007, bringing our total unrealized appreciation at $775,000 for the year. The unrealized appreciation in our interest rate swaps resulted from the decreasing interest rates during the quarter. If interest rates continue to decline, we will experience further unrealized appreciation on our swaps as we had during the past two quarters.

During 2007, we realized $92,000 of capital gains on our investments principally due to the sale of equity warrants.

Finally, our net income was $3.4 million or $0.16 per basic and diluted share for the fourth quarter of 2007 as compared to $4 million or $0.22 per basic and diluted share for the third quarter. For the full year of 2007 our net income was $18.4 million or $0.99 per basic and $0.98 per diluted share as compared to $15.6 million in 2006 or $1.10 per basic and diluted share.

In February of 2008, the IRS granted us permission to change our with tax year from July 31 to December 31 effective on December 31, 2007. Accordingly, we will file a five month short period return. Because of the change in our tax year we have re-characterized a portion of the two distributions made in the short period. In total $0.06 per share will be our return of capital relating to those distributions paid.

At December 31, 2007 we did not have loans or debt securities at fair value nor accruing interest and now I will turn the things over to Tim Hassler, our Chief Operating Officer.

Timothy Hassler

Before I discuss market conditions for new investment opportunities, I want to touch on the topic of liquidity both in terms of the overall market conditions and for Patriot specifically.

As you are all aware the debt and equity capital markets have been negatively impacted by significant write-offs in the financial services sector, relating to some prior mortgages and the re-pricing of credit risk in all markets including the syndicated loan market coupled with deterioration in the housing market and weakness in the general economic conditions, it is in terms a reduce to the availability of debt and equity capital for the market as a whole and financial firms in particular. As it relates to Patriot specifically our primary sources of current liquidity are cash on our balance sheet, net cash from operating activities, scheduled amortization and senior subordinate debt from our portfolio companies and the ability into our $175 million on our securitization revolve and credit facility.

We currently have $144 million drawn on our revolver with $31 million available to us. In addition, we expect that net cash generated from our operating activities and scheduled amortization of senior debt in our debt portfolio will continue to be more than sufficient to cover our quarterly dividends. In order to fund new investment opportunities, we are working on a number of capital raising initiatives including an increase to our existing securitization facility. We have received a $50 million commitment from another financial institution to participate in the facility and we are working diligently to close this financing. Until all such time as we are able to raise additional debt or equity capital our ability to grow our investment portfolio will be tampered.

Since the third quarter of 2007 the competitive landscape in the lower middle market continued to evolve rapidly as a number of vendors either exited the market, moved up market or decided to sit on the sidelines. With fewer participants actively pursuing transactions in our market, we have seen improvements on several fronts including a meaningful increase in both senior and sub debt pricing, lower leverage, increased deal flow and a higher hit rate as you saw in the fourth quarter when we closed five new transactions totaling over $78 million in commitments.

Despite the favorable shift in the competitive landscape we continue to be very cautious on the economic outlook and highly selective in the opportunities that we pursue. Four of the five transactions that we closed in the fourth quarter were in defensive industries that we felt would not be meaningfully impacted by an economic downturn and the fifth transaction was levered very modestly to account for the Company’s end market cyclicality.

In the first two months of 2008, the number of deals that we have reviewed is up 25% year-over-year. We are starting to see a trend of sponsorship in this transaction much earlier in the process well before they had companies under LLI which is quite a bit different from the first half of 2007 when the competitive landscape was more intense. However, despite the significant increase in deal flow year-to-date, the quality of companies that we’ve been seeing recently has been underwhelming. The number of active opportunities that we are pursuing in our current pipeline is below average relative to the number of yields that we have reviewed, but we are encouraged by what we have seen just in the past couple of weeks.

The proposal that we’ve issued in the first two months of this year recording senior pricing at about a 100 to 200 basis points higher than mid 2007 and recording all the measuring pricing at 200 to 400 basis points higher. We expect risk adjusted return profile of those deals that we do in this year to be extremely attractive and overall the policies impact on our overall portfolio yield going forward. And then as mentioned before with our cautious stands on the economy, we continue to be keenly focused on credit quality as we review new transaction opportunities and manage our existing portfolio.

We have no direct exposure to the residential or commercial real estate markets and we have only moderate exposure to discretionary consumer products. In addition we have a conservative asset mix of great than 65% senior secured debt follow the in disuniversification and no past, new or not accrued loans. We believe we have built a solid portfolio base for future growth and we are cautiously optimistic that the trends we have seen over the past several months with continue to allow us to find opportunities to deploy capital at very attractive risk adjusted returns.

Now I am going to just turn it back over to Rich.

Richard Buckanavage

That concludes our prepared remarks this morning. Operator can I please ask you to open the lines for questions at this time.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) and our first question comes from the line of Bob Napoli from Piper Jaffray. Please proceed with your question.

Bob Napoli – Piper Jaffray

Thank you, good morning. The one write down that you had I guess with the unrealized depreciation assuming that’s combined, that’s within the four rated asset. I wondered if you could give some additional color on like what sector and risks that remain in that investment?

Richard Buckanavage

Sector is legal document management Bob and all I like can say is that it is mostly attributable to Company’s specific issues, so there is really not a lot of take aways with regards to the economy as a whole from that situation.

Bob Napoli – Piper Jaffray

It sounds like it’s a company that’s been in your portfolio for several years.

Richard Buckanavage

It has, it’s been in the portfolio for four years.

Bob Napoli – Piper Jaffray

Okay and what is the remaining balance on that investment?

Richard Buckanavage

It’s about $14 million Bob.

Bob Napoli – Piper Jaffray

Okay. From a capital perspective that are you guys considering a right offering given your stock being right around your net asset value. Is that or I mean where are you -- when you stand with the SBIC are you guys looking at that one option as well.

Richard Buckanavage

We have looked at that Bob sometime ago but we are not pursuing SBIT option and currently we are not planning a rights offering as well. First and foremost we are focused on raising additional debt capital, bring us up to the one to one statuary limitation, really Bob it’s most advantageous to our share holders. Once we get closer to the leverage limitation we’ll look at, in fact we are evaluating a number of equity alternatives and other capital raising alternative as well, but right now we are not planning a write off.

Bob Napoli – Piper Jaffray

Okay, alright that’s it from me right now. Thank you.

Operator

Our next question comes from the line of Vernon Plack from BB&T Capital Markets. Please precede with your question.

Vernon Plack – BB&T Capital Markets

Thank you and Rich the investment that went from three to four is that the same investment in the third quarter that went from two to three, just trying to…

Richard Buckanavage

No it’s not Vernon. That was about three years prior to the previous work.

Vernon Plack – BB&T Capital Markets

Okay and just so that I understand, I know you ended the quarter with about a $165 million as debt outstanding and did Tim say that your facility right now is at about a $144 million.

Richard Buckanavage

Yeah, we -- since quarter end we have sold a couple of investments and received a repayment on once indicated transaction generating some additional liquidity and we are down to $144 million drawn with $31 billion available to us.

Vernon Plack – BB&T Capital Markets

Okay thanks.

Operator

Our next question comes from the line of John Hecht from JMP Securities. Please proceed with your question.

John Hecht – JMP Securities

Good morning guys, thanks for taking my questions. I wonder if you can give us a sense where you would expect margins to go on. In one level we have things like liable or commercial paper cropping rapidly, but taking that in the context of sowing originations and widening spreads where do you guys see your margins going on the near term?

Richard Buckanavage

For investments we are making John?

John Hecht – JMP Securities

The new investments as well as your steeled or old book.

Richard Buckanavage

We -- Tim noted too in his remarks, we have been quoting senior debt depending on the deal between 100 and 200 basis points higher then it previously had then, certainly within the most of 2007 and the junior capital subordinated debt is being quoted today two to 400 basis points above where it was for most of 2007. Now of course those investments takes that we are able to win transactions in 2008. We will take time to have an influence on the real portfolio yield, but being consistent with quarters of yield in 2006 and 2005 when you saw it kind of rub up 13 into the mid 13’s, we would certainly expect the portfolio eventually over the year to migrate towards those levels versus where they are today.

John Hecht – JMP Securities

And can you just remind us how many of your loan portfolio -- is it all adjustable rate and are there any flows in place giving where short term rates are going.

Richard Buckanavage

I’ll answer the second part of that and I’ll let Tim answer the first part. The second part about flows; why our flows on floating rate transactions are something that kind of comes and goes with the competitive landscape. They emerge several years ago primarily in the below syndicated deal that is now back again from what we understand -- started again in the syndicated market. However we are hearing about large work force actually making their way down into the traditional mini market and even into our market and it is certainly a mechanism that we are evaluating and could certainly expect to use in our transactions going forward that provides us with a very nice hedge against further declines and interest rates which we will expect. Yeah and the floating rate piece of our portfolio is about 60%.

John Hecht – JMP Securities

Okay and the last question Rich if you could may be give us an update with the private equity relationships you have what’s differing from them are the sellers kind of psychological well in prices, we see researchers of activity in the middle of the year. How do you take character in that channel right now?

Richard Buckanavage

I think consistent with previous market corrections, I think we are in that period where buyers and sellers expectations are mutually exclusive and I think that is resulting in some curtailment of M&A activity. I think as we work through 2008, sellers expectations will more closely align to that of buyers and will see a pick up in activity, but right now we are hearing from sponsors that there is very little adjustment to the sellers expectations and obviously there has been a profound contraction in the level of debt that sponsors can obtain for their transactions which is why I think we are saying not only broadly but certainly in our own pipeline some transactions that -- well there is a lot of transactions -- our guess is a lot of these transactions actually aren’t making it to the finish line.

John Hecht – JMP Securities

Okay thanks very much.

Operator

Our next question comes from line of Troy Ward from Stifel Nicholas. Please proceed with your question.

Troy Ward – Stifel Nicholas

Thank you good morning gentleman. I know it’s listed but can you tell me what the unfunded commitments at the end of quarter are?

Richard Buckanavage

For our portfolio it’s about $29 million Troy.

Troy Ward – Stifel Nicholas

And Tim, in your commentary you talked about being able to under whelm that the correct credit quality and your having a below average right in the pipeline I think you said. Can you talk about kind of where -- is the pipeline below where you expected it to be or is it just, it is still okay, but just a lower hit right.

Timothy Hassler

I guess it depend on how you look at pipeline. A number of transactions reviewed is actually up quiet a bit. As I said 25% year-over-year, but the active pipeline of deals that we saw that we sort of -- deal was being potential, real opportunities. It was down, it’s on that lower than average, primarily because of that quality issue, there is a lot of stuff in the pipe that we can review that we just -- we didn’t want to take a load of that and so we just in the last week or two, have seen an up take in the number of -- several transactions that have seen. Actually earlier in the process as I mentioned before from sponsors and senior, a little up take in quality. So our pipeline moves around a lot and it can move quickly both in the number and in quality. So I don’t think we want to have that two months is the trend here and given the fact that it’s turning back the other way, we are optimistic that that’s moving in the right direction.

Troy Ward – Stifel Nicholas

Okay, and then on the one investment that –- what am I thinking is it one investment that went to level four?

Timothy Hassler

Yes, it is.

Troy Ward – Stifel Nicholas

Okay that’s that and then I believe that that investment previously has cost around $17 million is referred to them -- is that to make the assumption that maybe a piece of debt in that investment as the market gains through at this point?

Timothy Hassler

Yeah, that’s correct.

Troy Ward – Stifel Nicholas

And nothing up on non-accrual?

Timothy Hassler

That is correct.

Troy Ward – Stifel Nicholas

Okay, great. Thanks guys.

Operator

(Operator Instructions) and our next question comes from the line of Henry Coffey from Ferris, Baker Watts. Please proceed with your question.

Henry Coffey – Ferris, Maker Watts

Good morning guys. A very clean quarter; can you give me some insight just as a part of the track your commercial paper relate and that was running about 20 basis points, 30 basis points below LIBOR, I mean of course in the third quarter it was kind of chaotic and now you’ve been set up back again. Did this strength to what your average borrowing base looks like during the quarter and what takes you on your borrowing cost right now?

Timothy Hassler

I’ll answer the average outstanding debt I think for the quarter, but the commercial paper rates as you mentioned Henry have been down quite a bit, they continue to be pretty volatile. Right now they run maybe just slightly above LIBOR. They have gone from below to LIBOR to up to 75 basis points above LIBOR in the last six months. So it’s moved around quite a bit and just in the last -- I would say in the last month or two, we were borrowing -- again commercial papers running it seems to me between 5 and 15 basis points above the month LIBOR rate.

Richard Buckanavage

Our weighted average borrowings during the fourth quarter was a $127.9 million, up from about $115 million in the third quarter.

Henry Coffey – Ferris, Maker Watts

What is the cost on that?

Timothy Hassler

We have to -- it’s breakable by interest components?

Richard Buckanavage

No.

Timothy Hassler

Then, it’s okay. We can get…

Henry Coffey – Ferris, Maker Watts

For ’08 you were going to keep turning over the existing portfolio and you have what, I think you said that earlier on the call. You too have that number in terms of what your existing borrowing capacity was, maybe you give us a sense on how much net growth you can realize – today and what you think it will look like once you get other financing operations put together?

Timothy Hassler

Henry we have currently $31 million available on the revolver, working on a $50 million increase to net revolver as I mentioned before. That will take us up to $225 million which is above the level of our equity which would bring us up to the statutory limit of 1 to 1. We also continue to look in the portfolio, on the senior debt side to opportunistically sell down the senior secured debt what we think it makes sense because the portfolio yield obviously and also it generates some liquidity to invest in higher yielding assets. So based on -- probably we wouldn’t push it all the way to 1 to 1 leverage but with $31 million available plus the additional 50 if we can get that to the close, that’s obviously would be about $81 million to take it up to our 1 to 1 leverage limitation with some ability to -- as you can see pointed out before, some repayments as well as some opportunistic sales in the portfolio while I was to invest some additional dollars as well.

Richard Buckanavage

Henry, just to sort of clarify, the 81 is the maximum. Of that debt that availability would be impacted by we have to reserve some portion of that against the unfunded revolver segments in the portfolio as well.

Henry Coffey – Ferris, Maker Watts

The cost on the incremental 50 that’s pretty hard and you think it will come in, in line with the terms of the existing facility?

Timothy Hassler

We are actually finalizing the pricing and it’s not finalized yet. We are very close to it. It’s fair to say that it will be consistent with the increase that you would see across the market and all investment grade and non-investment grade debt securities and so we will see an increase in pricing.

Henry Coffey - Ferris, Baker Watts

And that increasing is going to be borne on your job facility or just the incremental increase?

Tim

It will be on the entire facility Henry.

Henry Coffey - Ferris, Baker Watts

Great, thank you very much.

Richard Buckanavage

Hey Henry, just before you finish up on the borrowings, our weighted average interest cost was 6.9%.

Henry Coffey - Ferris, Baker Watts

Thank you.

Operator

Our next question comes from the line of Daniel Furtado from Jefferies & Company. Please proceed with your question.

Daniel Furtado - Jefferies & Company

Good morning. Assuming it’s a $50 million of revolver that’s done where do they come from that they can leverage too.

Richard Buckanavage

Well, we have an internal target of trying to keep leverage in the 0.8 to 0.85 range that is running through our mind. That was just the kind of flexibility that we feel we need and again I think it’s somewhat forced upon with some of the revolver commitments that we got in the portfolio. So you never going to see us get much beyond that, we do have to reserve some capital against potential borrowings there. Well, that being said, we do see very little activity relative to the total dollar amount of those commitments. We don’t have -- our revolvers are not used as the more working capital, day to day borrowings. We see these as more precautionary liquidity lines for most of our borrowers, so it’s only about $7 million to $8 million quarter-to-quarter kind of volatility there, but we certainly need to reserve some capital against those contractual commitments.

Daniel Furtado - Jefferies & Company

Understood; I guess what I’m trying to figure out here is -- thank you for that answer -- is do you see the current status and I fully appreciate that you guys are still trading above that AB, but I assume that if you trade below that, do you see the opportunity out there attractive enough to raise the needed capital at this point or do you prefer to kind of get into a steady state and just run it at current capital levels while you continue to assess the market?

Timothy Hassler

Again and like I always said before first and foremost focused on the debt because we do have from on a capacity if we can get that $60 million increase approved, obviously non-dilutive for shareholders. So that’s the first priority. If we are able to invest those -- that additional capital and find ourselves closer to our leverage limitation, again, we will evaluate all capital raising alternatives including in the rights offering. It really depends frankly on what where we are trading, what the price is, how dilutive a transaction might be relative to the increased spreads and risk adjusted returns that we can get in the market and it’s a dynamic analysis that will -- it will be real volume based on kind of where we are trading.

Richard Buckanavage

And Dan I would also add that the size of the traditional debt and equity financing we are also exploring some off-balance sheet opportunities, we have not given up on establishing some sort of side cart fund outside of the balance sheet of the public company. As we have said time and time again throughout 2007, before the CLO market collapsed, there is a very strong strategic advantage for us to raise that type of capital, it still augments our core business very nicely and we are still holding numerous conversations to try and raise that type of capital albeit it’s going to look a little different than we originally planned given the state of the CLO market.

Daniel Furtado - Jefferies & Company

Understood; thank you for the color.

Operator

Our next question comes from the line of Elliot Burke from Ironside Partners. Please proceed with your question.

Elliot Burke - Ironside Partners

Alright, thanks. I do have one question on the credit facility. My understanding on that is that you could drive that down until July 2010 and my question now is, is there any ability for the bank to -- any renewal position or any ability for the bank to kind of pull that before July 2010?

Richard Buckanavage

Yes, there is a liquidity, 364 day liquidity facility that is part of the financing and that currently expires July of this year, July 2008. We are looking to -- in tandem with the increase, $50 million increase we are looking to extend the maturity of the liquidity facility as well.

Elliot Burke - Ironside Partners

Okay.

Richard Buckanavage

Just further up on that the -- well that might mature even if it wasn’t extended the facility does not get called, the facility that just sort of liquidates over the course of the remaining term, obviously that would protrude further draws but there is call on the debt that’s already outstanding.

Elliot Burke - Ironside Partners

It winds down over a two year period according to my reason.

Timothy Hassler

No that’s the termination date for available financing. It actually would wind down really commensurate with our portfolio amortizations and any repayments. There is no fixed deed of termination or like final maturity if you will.

Elliot Burke - Ironside Partners

Okay and also on the facility asset back commercial paper has been kind of one of those nasty buzz words in the financial sector and just your comments about a lot of facility about the possibility that will go past FY2008 and just kind of what’s the status of that facility in your mind?

Timothy Hassler

Well, a couple of things. One is we are actually working on that $50 million increase being LIBOR based rather than commercial paper based which gives us some diversification on funding source. I can’t speak to surely to what’s really working with both vendors to try to extend that liquidity facility. We have a great relationship historically with Beekman and we are looking for to getting that facility wrapped up and again hoping to get the liquidity facility extended as well. Rich mentioned the other financing alternatives; we are also looking at other on balance sheet and off balance sheet non-commercial paper type facilities to further diversify our funding sources going forward.

Elliot Burke - Ironside Partners

Okay thank you.

Operator

Our next question is the follow up question from the Bob Napoli from Piper Jaffray. Please proceed with your question.

Bob Napoli – Piper Jaffray

Just to want to make sure that I understand your funding cost properly. The -- while your securitization facility is CP plus 100 and 100% of that exploding. Is that all, is that correct? You haven’t hedged any of that floating in the text or have you.

Timothy Hassler

Yes, we have Bob, we have about and this is the initial mention about $30 million in the current level of swap expeditors probably in the high 20’s though.

Richard Buckanavage

It’s a $28 million.

Bob Napoli – Piper Jaffray

28 million okay

Richard Buckanavage

Almost to $29 million.

Bob Napoli – Piper Jaffray

So, what is your incremental in the commercial paper, right now I guess your yield about 3.2%. You are buying at about -- what is and the 60% of your assets floating, 40% are fixed. So your yield at the end of the year was 12.4 on the portfolio.

Richard Buckanavage

Correct

Bob Napoli – Piper Jaffray

So, is your net incremental margin today with the aggressive said rate cuts slightly higher than it was at year end, given the effect of obviously the acquisition?

Richard Buckanavage

Yes it is Bob, because there is a fair amount of up to three months lock encourage at the portfolio company level and so our costs adjust more quickly than our portfolio, so yes the first quarter we will see slight uptick in our net interest margin.

Bob Napoli – Piper Jaffray

Okay now and then I thank you guys kind you said this. You feel like you can maintain the dividend at the current level from everything that you see today, even if you are not able to raise additional capital in the near term over the next, I don’t know what -- in 2008.

Richard Buckanavage

That’s correct Bob, absolutely.

Bob Napoli – Piper Jaffray

Alright thank you.

Operator

Mr. Buckanavage’s there doesn’t seem to be any questions at this time. I will now turn the conference back for you.

Richard Buckanavage

Thank you very much everyone for your time this morning. We look forward to speaking with you in early May to discuss our first quarter 2008 results.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!