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Solar Capital (NASDAQ:SLRC)

Q2 2012 Earnings Call

August 01, 2012 10:00 am ET

Executives

Michael S. Gross - Chairman, Chief Executive Officer, and President

Richard L. Peteka - Chief Financial Officer

Bruce Spohler - Chief Operating Officer and Director

Analysts

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Arren Cyganovich - Evercore Partners Inc., Research Division

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Greg Mason - Stifel, Nicolaus & Co., Inc., Research Division

Casey J. Alexander - Gilford Securities Inc., Research Division

Justin Baker

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Solar Capital Ltd. Earnings Conference Call. My name is Chantilly, and I'll be your facilitator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Mr. Michael Gross, Chairman and CEO. Please proceed, sir.

Michael S. Gross

Thank you, and good morning. Welcome to Solar Capital Ltd's earnings call for the second quarter ended June 30, 2012. I'm joined here today by Bruce Spohler, our Chief Operating Officer; and Richard Peteka, reporting on his first quarter as our Chief Financial Officer.

Prior to joining our team, Rich served as Apollo Investment Corp.'s CFO for nearly 8 years through February 2012. I have personally hired him back in June 2004 when I was a CEO of Apollo. Rich, I'd like reiterate how pleased we are to have you on the Solar Capital team, and before we begin, would you please start off by covering the webcast and forward-looking statements?

Richard L. Peteka

Of course. Thanks, Michael. I'd like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Solar Capital Ltd., and that any unauthorized broadcasts in any form are strictly prohibited. This conference call is being webcast on our website at www.solarcapltd.com. Audio replay of this call will be made available later today as disclosed in our earnings press release.

I'd also like to call your attention to the customary disclosures in our press release regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements, which relate to future events or our future performance or financial condition. These statements are not guarantees of our future performance, financial condition or results and involve a number of risks and uncertainties. Actual results may differ materially as a result of a number of factors, including those described from time to time in our filings with the SEC. Solar Capital Ltd. undertakes no duty to update any forward-looking statements, unless required to do so by law. To obtain copies of our latest SEC filings, please visit our website or call us at (212) 993-1670.

At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Michael Gross.

Michael S. Gross

Thank you, Rich. Although the broader capital markets have experienced quite a bit of recent volatility, our second quarter was a highly productive and accomplished one. We made several strategic advancements in positioning Solar Capital for continued long-term success. We originated a record volume of high-quality new investments in addition to expanding our investment portfolio by over $185 million or 18%. We significantly enhanced our liability structure by increasing our debt capacity, extending the average maturity and reducing our average borrowing cost.

Expenses related to this initiative lowered our NAV modestly to 22.51 at June 30 from our first quarter end book value.

Sovereign debt crisis in Europe dominated headlines and caused broad market volatility but only had a muted effect on the middle market in United States.

Overall, the fundamentals of our portfolio of companies remain strong. The fair value weighted average market of our portfolio excluding common equity was approximately 96.4% at June 30.

We continue to believe that there is excess realizable value as we monetize our existing portfolio.

During the second quarter, we originated over $190 million of investments in 5 new portfolio companies and in 1 existing portfolio company. We sourced the mix of financings for private equity sponsors, new acquisitions and for follow-on financings as either an incumbent investor or private investor. Year-to-date, during June 30, we've underwritten over $250 million of new investments. Our redemptions for the quarter were less than $6 million, all of which contractual amortization repayments. Net origination for the quarter totaled over $185 million, both on a gross and net basis. This quarter marked a record origination effort for Solar Capital.

It is worth noting that a large portion of our second quarter investments funded late in the quarter and subsequent to quarter end. Therefore, the full benefit of our strong origination quarter was not reflected in the second quarter's net investment income. Based upon our current visibility, we expect third quarter recurring net investment income on the larger average investment portfolio to cover our third quarter dividend.

During the quarter, we made significant progress in optimizing our capital structure through 2 strategic transactions. First, we entered into a new 4 year, $485 million credit facility and issued $75 million of 5-year private replacement notes which increased our total borrowing capacity from $540 million to $660 million. These issuances extended our average debt maturity beyond the expected duration of our average investment, thus, improving our asset liability match. In addition, we meaningfully reduced the borrowing cost of revolving debt and improved our terms in the facility overall.

With the addition of 5 new high-quality institutional investors in the private placement notes, we further diversified our lender base. We will continue to take advantage of windows of opportunity on the liability side of the business.

At June 30, our leverage equaled 0.28x debt to equity. We continue to manage the cost of our capital, and as we further invest our available credit, our average borrowing cost will decline. At the end of the second quarter, our uninvested capital exceeds $300 million, which gives us substantial dry powder to further drive growth in our net investment income.

Finally, our Board of Directors declared a quarterly dividend of $0.60 per share which is fully covered by our taxable earnings. The third quarter 2012 dividend will be paid on October 2, 2012 to holders of record as of September 20, 2012.

At this time, I'll turn the call over to Rich to take you through the financial highlights.

Richard L. Peteka

Thanks, Michael. Solar Capital's net asset value at the end of the second quarter was $825 million or $22.51 per share, a decrease of less than 1% from $830.1 million or $22.68 per share at March 31. The decline was primarily due to expenses related to our enhanced liability structure that Michael referenced earlier.

Our investment portfolio had a fair value of approximately $1.2 billion at June 30. The 18% increase in portfolio value from the prior quarter was primarily due to strong net portfolio growth.

During the quarter, we closed on the new $485 million credit facility, as well as the $75 million issuance of private notes that Michael mentioned. The credit facility is comprised of $450 million of multicurrency revolving credit and a $35 million term loan. With the applicable margin for both of 250 basis points over LIBOR. Consistent with prior facilities, the new facility has no LIBOR floor. In addition, the facility can be expanded to $800 million. The private 5-year notes carry a fixed interest rate of 5 and 7/8. As of June 30, the company's total investable capital was approximately $1.5 billion with more than $300 million still available for investment.

Please note that for both of these new long-term liabilities, we have elected to use the fair value option of accounting. Accordingly, the credit facility in private notes will be mark-to-market with changes in fair value, if any, recognizing quarterly earnings as realized gains and losses. With our portfolio assets accounted for at fair value, this selection will better align the measurement methodologies of both our assets and our liabilities to mitigate volatility of earnings in NAV in the future. As a result of this selection, GAAP required expenses related to the establishment of both the credit facility and the private notes to be expensed during the period. In addition, any unamortized expenses that were being amortized under the previous revolving credit facility and term loan have been accelerated and recognized in this quarter as well.

Back to the results. For Q2, gross investment income totaled $34.8 million compared to $36.3 million in Q1. The decline from the prior quarter was primarily due to prepayment income recognized during Q1, as well as from the typical lags between investment exits and reinvestment, as well as the lag between commitment and funding dates.

Net investment income for the quarter totaled $14.4 million or $0.39 per share, excluding those expenses related to the company's new liability structure and other nonrecurring expenses. Net investment income would have been $20.5 million or $0.56 a share.

Net realized and unrealized gains totaled $1.7 million for Q2. This was driven by a net increase in the fair value of our portfolio during the period.

During the quarter, we placed 1 new asset on non-accrual status, Granite Global Solutions Corp., with a fair value of $15.2 million. DirectBuy, our other non-accrual asset, had a fair value of $5.9 million. Accordingly, 98.2% of our portfolio is performing on a fair value basis.

At this time, I'd like to turn the call back to our -- over to our Chief Operating Officer, Bruce Spohler.

Bruce Spohler

Thank you, Rich. Let me start by giving you an overview of our current portfolio.

At the end of the second quarter, the fair market value of our investment portfolio was approximately $1.2 billion. The fair value weighted average yield on our income-producing investments was just under 14%.

As of June 30, 43% of the fair value of our investment portfolio was in secured assets. We had investments in 41 portfolio companies operating across 22 industries. The weighted average investment risk rating of our total portfolio remained at 2, measured at fair market value at the end of the first quarter. This is based on our 1 to 4 risk rating scale, with 1 representing the least amount of risk.

Let me now take you through a couple of updates on our existing portfolio companies. Early in the second quarter, we finalized the recapitalization of our investment in DS Waters. We, and our fellow noteholders, exchanged the full value of our PIK mezzanine notes into a senior preferred 15% unit with similar economics to our prior security. We also received a participating preferred unit that was structured to capture common equity upside. Our resulting attachment point remains at just over 3x leverage. And importantly, we and the other note holders, received a majority of the company's common equity, control of the Board and we'll have control over all significant corporate actions, including refinancing and monetization events.

Our third party independent valuation firm, valued this asset at 86% at June 30. Publicly quoted securities in the company's capital structure, including the second lien which we're invested in, are quoted at roughly par, reflecting the market's view of DS Waters debt securities.

Since our last update, the company's continue to outperform its budget. Customer growth in Q1 was better than the company have seen in several years. In addition, DS Waters closed on a sizable acquisition of a coffee business and they are currently well along to integrating those operations.

As Rich mentioned, we placed Granite Global on non-accrual this quarter. The companies a leading provider of outsourced services such as claims adjusting for property, casualty and auto lines, predominantly the Canadian based insurance companies. We are currently in active dialogue with both sponsor and the company's other lenders. At June 30, our third party valuation firm valued this asset at $0.85, resulting in a fair value of just over $15 million. We believe that this valuation reflects the underlying fundamentals of the business, as well as the possibility that the investment will return to full accrual status.

Shortly after quarter end, we received a partial repayment at par of $4.6 million or roughly 25% of our $16 million investment in Grakon's 12% PIK junior notes. This asset had been on non-accrual as recently as December 2010. Since that time, the company's earnings have been on a positive trajectory and the partial repayment demonstrates the benefit of taking a long-term active approach to working with our portfolio companies.

During Q2, Weetabix announced that it has agreed to be acquired by China's Bright Foods. The company expects this transaction to close in the second half of this year, at which time our investment should be repaid in full. In anticipation of this event, the mark on our roughly $53 million face value of investments in Weetabix's both junior and senior notes has increased to $0.98 to reflect an appropriate yield to our expected repayment date. These positions are 2 of our lowest yielding on our portfolio and we anticipate recycling this capital into higher yielding investments during the second half of this year.

On the origination front, second quarter 2012, we committed approximately $192 million par value in 5 new and 1 existing portfolio company. In addition, we received partial repayments totaling under $6 million, resulting in record net originations in excess of $185 million.

Let me provide you a little color on our activity during Q2. We structured a $48 million face value investment in the private senior notes of WireCo formerly known as Wire Rope, the largest global manufacturer of high-performance wire rope and one of the leading manufacturers of industrial cable and wire products worldwide. This financing facilitated the company's acquisition of a leading synthetic wire rope manufacturer, thereby diversifying the company's operations. Financing facilitated -- the all-in yield on the notes approximated 12%. Solar had originally invested in this company in 2007, with a successful exit above par in 2010. Our knowledge of the credit and its steady performance through the 2008 downturn, as well as our close relationship with its sponsor, Fox Spain [ph], helped us secure this proprietary investment. We invested $38 million of par value in Trident health services second lien term loan. Trident is a national provider of outsourced mobile diagnostic health care services to post-acute facilities. The company's majority owned by Audax and Fraser health care. Total leverage approximates 4.5x and the all-in yield on this investment is in the mid-12s.

Additionally, we committed 28 million to FIS Benefit Solutions, a leading provider of software services and card-based technologies for health care benefits, specifically flex spending accounts. We expect this sponsor to close this acquisition in mid-August. The all-in yield is in the mid-12s on this asset as well.

We also invested $25 million face value in the second lien term loan of SMG or Stadia Management Group, which is the largest venue management company providing private services to public assembly facility such as stadiums and concert halls. The all-in yield on this second lien investment exceeds 11%.

In sum, we are totally -- we are extremely pleased with our origination efforts this past quarter and with the overall health of our portfolio. Given the timing of the funding for our new investments, our net investment income for Q2 did not reflect the full run rate benefit of our record net origination. As the last of these new investments fund the incremental interest income will benefit NII on a recurring basis.

Now I'd like to turn the call over back to Michael.

Michael S. Gross

Thank you, Bruce. I'd like to reiterate the quality of our over $190 million of record originations. Each of these assets met our disciplined underwriting criteria and is compelling on a risk-reward basis. The weighted average leverage on our new investments is in the high 4s and the weighted average yield exceeds 13%, a very favorable risk reward.

We are committed to delivering steady performance for our long-term investors, and we believe that these new investments, as well as the enhancements during the quarter on the liability side of our balance sheet, accomplish that objective. We are pleased with the underlying performance of our portfolio and believe we are defensely positioned to weather an uneven economic climate.

Based on the fundamental health of our portfolio, we continue to believe that there's meaningful realizable value above our current NAV.

A month into Q3, we are seeing an attractive pipeline of new investment opportunities. With the funding of the remainder of our Q2 originations together with the current pipeline, we expect our third quarter net investment income to cover our dividend.

At 11:00 this morning, we'll be hosting an earnings call for our second quarter 2012 operations for Solar Senior Capital or SUNS. Our ability to provide senior secured financing through this vehicle continues to enhance our origination team's ability to meet our clients' capital needs. We are seeing benefits of this value proposition in Solar Capital deal flow.

Thank you for your time. Operator, this time, will you please 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.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Michael, it almost feels like you flipped the switch in the current quarter with respect to originations. And I'd like to know, what events or what catalyst allowed Solar to post such a strong number in terms of originations? And will that spill over into the coming quarters?

Michael S. Gross

And I wish I did have the power to flip a switch and turn originations on and off. It's just not the nature of our business as you know. It's a very lumpy business. When we look at our business year-to-date, we've originated over $250 million of investments. That's consistent with what our typical 12-month period is of $400 million to $500 million. It's -- we really can't control the timing, it's just a function of how the pipeline works its way through. Many of these transactions we began to work on as late as late as late in the fourth last year. So I would not annualize this quarter and take 4x and say that's what our investment run rate is, but it's really just a function of finding attractive opportunities with timing of one that came to fruition.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Fair enough. Michael, can you give us a sense of the level of prepayment fees that were recorded in the first and second quarters, just so we can have a feeling of what the sort of effective yield of the portfolio was?

Richard L. Peteka

Mickey, this is Rich. We didn't really have much at all in the second quarter, if any. I think we had about $1 million or so in the first quarter, so approximately $0.025 to $0.03 a share.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

$1 million in the first quarter and very little in the second quarter. And lastly, I was a little confused about the Granite Global situation given the level of the mark. What caused the non-accrual? What fundamentals in that business caused the non-accrual to occur?

Richard L. Peteka

Sure. The company breached covenants with a bank group at the end of Q1, as I mentioned it is a Canadian business so it's a bank group that is a club of Canadian lenders. And effectively, the fundamental driver was, given that this is a claims adjuster, believe it or not, the mild winter that Canada experienced this past year really drove their business down in one of their key segments in terms of the volume of activity. And so the sponsor is extremely supportive of the company and has proposed subjecting additional capital in order to deleverage the business and as well as potentially make some add-on acquisitions. So we feel very good about their commitment and view that most of the miss was due unfortunately to unseasonably warm weather in Canada which hopefully will not repeat itself. But we think these conversations are well along and look forward to bringing this back on to accrual status at some point.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

So the covenants are still in violation?

Richard L. Peteka

Yes, they're being reset as we speak and we just haven't finalized the new agreement.

Operator

Your next question comes from the line of Arren Cyganovich of Evercore.

Arren Cyganovich - Evercore Partners Inc., Research Division

Just kind of touching again on the strong investment growth in the quarter. I think you said there was a record level. It is a little bit surprising, I guess, given the slowdown in the economy. Maybe you can talk a little bit about the sponsor's feel for the underlying trends with portfolio of companies, and the EBITDA levels and trends that you're seeing in your own portfolio of companies.

Richard L. Peteka

Yes, I think as you look at our portfolio, what you're seeing is basically things are sort of steady as she goes. We're not seeing a lot of meaningful top line growth. I do think that barring the recent drought, we have seen some pullback in terms of the pressures that the issuers felt on the cost, input and commodity side, so that had abated until late. And so by and large, I think our CEOs at the operating lever are cautiously optimistic. Importantly for us, we don't need a lot of growth. We're underwriting stability and strong free cash flows, deleverage the capital structures and allow us to continue to see leverage come down and derisking of our investment. So this is actually a rather attractive credit environment. Obviously, a bit more challenging if you're trying to drive growth for equity returns.

Arren Cyganovich - Evercore Partners Inc., Research Division

Got it. And then the yields on the new investments that you talked about this quarter, kind of in the 12% range, a little bit below the portfolio yield. Is there attending in terms of pricing that you're seeing in the marketplace?

Richard L. Peteka

No, actually the yields across the entire originations were just over 13% for the quarter. And in Q1, they were high 13s to 14s. So yields have actually been rather stable. And again, you have to really look at the asset mix. Obviously, the secured assets come in with slightly lower yields more in that 11%, 12% range to your point. But generally speaking, pricing has been stable. And importantly, risk has been extremely stable with -- as Michael highlighted, leverage levels starting out in the mid- to high 4s.

Arren Cyganovich - Evercore Partners Inc., Research Division

Great. Okay, and then just one last quick one. On Weetabix, you said sometime in the second half, would you expect it to be a third quarter event or a fourth quarter event?

Michael S. Gross

It's either going to be at the very end of the third quarter or sometime in the beginning of the fourth quarter.

They're just going through regulatory approval process.

Operator

Your next question comes from the line of Jason Futel [ph] of SunTrust.

Unknown Analyst

Some of your competitors have indicated M&A activity in the middle market should increase in the second half of 2012. Do you share this view? And how has this changed over the past quarter given the economic outlook has become less attractive?

Michael S. Gross

I think, as you know the M&A activity has bit of a long lead time. And generally speaking, once that process starts, unless there's severe disruption in either the business or the markets, they tend to continue to grind through their process and see it to closure once buyers and sellers have made commitments. So we really haven't seen any shocks to the system that have slowed the M&A activity. I don't know that we anticipate any great increase in activity, but it's been rather stable, and it has not really changed over the last quarter or so.

Operator

Your next question comes from the line of Jon Bock Wells Fargo.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

This is Jonathan Bock with Wells Fargo. Real quick question high level. Talking about risk reward in the junior debt markets. Can you talk about the risk reward opportunity you're seeing today in that market with respect to the fact that right now high-yield spreads are somewhat tight and people might point out this current market to be slightly frothy?

Michael S. Gross

I think, your statement about the marketing being slightly frothy are totally true as regards to liquid leverage loan and liquid high-yield markets. The high-yield market today trades at 7% to 8% yield. We're in a completely different market because the number of participants in our market is so limited because of illiquidity of the assets that we invest in. And so we continue to see yields in the 11% to 13%, 14% range and leverage in the 4s. And with covenants to every single line of transaction as opposed to covenant-light deals in the liquid market. So I think that the trends you're talking about are much more prevalent in the liquid markets as opposed to our market.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Makes total sense. And then Rich, quick cash flow statement question. I noticed that fee revenue receivable in the cash flow statement increased from about $431,000 to $4.3 million quarter-over-quarter. Can you give us some color on what caused that increase in the cash flow statement?

Richard L. Peteka

Hold on, John. I'll take a peek. Do you have another question while I look that up?

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Yes, and then in addition to that, maybe talk a little bit about the dividend policy. We certainly appreciate coverage from NOI, but also given that there is some amount of PIK income flowing into interest income, maybe talk about how you look at covering this dividend over time with respect to cash as well?

Richard L. Peteka

Yes, I think from our perspective, the dividend is expected to be covered, as we mentioned in Q3. And we see significant upside to that from NII as we continue to deploy these new credit facility that we've put in place in light of our $300 million-plus of uninvested capital. So we're not concerned about coverage, per se. And I think to your point regarding PIK, as a component of that NII going forward, as we have year-to-date, we continue to rotate into cash yielding investments, whether it's AMC in Q1, Weetabix, as we've discussed, and Greycon post quarter end, with a partial monetization. So you continue to see the PIK portion of our income come down longer-term. As you know, we are also focused on monetizing the PIK investment in DS. And then less significantly, but we have been focused on taking down our equity exposure and recycling that into cash pay credit investments, whether it was NSA or NXP earlier this year. So I think you should expect us to continue to increase that coverage both from a total NII perspective, as well as a cash and NII perspective.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Okay. And one additional question related to credit quality and ProSieben. As we look at some potential marks there, can you describe or at least give us some color on that investment and maybe its outlook in light of the concerns in Europe today.

Michael S. Gross

Yes, I think as you may recall, ProSieben, it's actually a publicly-quoted investment and those quotes tend to ebb and flow with the sentiments in Europe. To the extent that you're in Europe, I guess other than being in cereal at Weetabix, ProSieben feels like a good place to be. It is a German broadcaster, the largest broadcaster with approximately EUR 1 billion of EBITDA, and has been rapidly deleveraging and outperforming on a fundamental basis. So we believe similar to Weetabix, which had been aesthetically marked low because of a variety of factors, none of which were fundamentals, all were technicals, given the low yield, the lack of a the floor and the long-dated maturity, ProSieben falls into a similar basket, and at some point, you will see the company refinance that.

Richard L. Peteka

That's when we still expect to get par back on. And with the repayment of Weetabix, we're down to less than 2% of our assets being exposed to Europe.

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Yes, yes. And Rich, if you have that number, the only question was, just curious to see if that change or that delta in those 2 numbers was being run through the interest income line.

Richard L. Peteka

Yes, John, that was the receivables back in December 2011. That's been paid over the last 6 months. It was paid before I arrived here at Solar so I have to do some research on it, but I can confirm it was paid already.

Operator

Your next question comes from the line of Greg Mason of Stifel, Nicolaus.

Greg Mason - Stifel, Nicolaus & Co., Inc., Research Division

The payable for investment purchase on the balance sheet, $125 million, I assume that is part of the originations this quarter, but the cash has not been funded yet. I just want to make sure I understand that correctly.

Michael S. Gross

It was cash that was not funded as of June 30. The vast majority of it has been funded already.

Greg Mason - Stifel, Nicolaus & Co., Inc., Research Division

Great. So it would be reasonable to assume you didn't receive any income from those in the second quarter but should get almost a full run rate given they've funded...

Michael S. Gross

Yes, that's a decent assumption.

Greg Mason - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then of the $300 million of available credit, is that after funding these $125 million or should we think of that more as $175 million?

Michael S. Gross

That is after the funding of that $125 million. So we have a $300 million in addition, on top of that, that we will be borrowing at L plus 250 to invest in the same type of yields we've been investing in. So that's why when Bruce talked earlier about potential growth in that investment we've been going for, that's where it comes from.

Greg Mason - Stifel, Nicolaus & Co., Inc., Research Division

And so as we think about your potential target leverage that we want to get to, what would that $300 million of availability take you to on a debt-to-equity basis?

Michael S. Gross

We'll take it right to about our target leverage of about 0.65.

Operator

Your next question comes from the line of JC (sic) [Casey] Alexander of Gilford Securities.

Casey J. Alexander - Gilford Securities Inc., Research Division

This is Casey Alexander. One last clarifications on that payable for investments purchased. You're also including that $125 million in what you stated was a 0.28 leverage ratio, correct?

Michael S. Gross

No.

Richard L. Peteka

No.

Michael S. Gross

Pro forma of that would be about 0.4.

Casey J. Alexander - Gilford Securities Inc., Research Division

Okay. Secondly, I don't see anything in here about categorizing the investments on a percentage basis based upon risk buckets, and I didn't see anything in the Q about it either. Do you have some sort of a risk bucket ranking? And if so, how did the portfolio investments for the quarter breakdown?

Richard L. Peteka

We haven't typically disclosed that. It's a dynamic process. Theoretically those ratings change every day, so it's tough to try to reconcile quarter-over-quarter. But what we have said is our average is a 2, performing as expected.

Michael S. Gross

And all new asset that come on, come on as a 2.

Operator

Your next question comes from the line of Justin Baker of Sidoti.

Justin Baker

Just had a couple of quick questions for you. I know we've talk a little bit about the risk and reward on some of the new assets here. I was just wondering if you could talk to any trends that you're seeing in call protection on the new additions to the portfolio, and anything that you might see in the pipeline coming up?

Michael S. Gross

Yes, I wouldn't say, Justin, that there is any material change out there. I think that what you will find over time is that we are looking to customize our call protection, if it's a competitive advantage to offer a sponsor who is very late in their hold period. Who was looking to add a little additional capital to the capital structure to fund an acquisition per se. We will be flexible there, although, we never give flexibility, I would say, on refinancing. We don't want to be bridge capital to a cheaper capital market. So generally speaking, we might seek to customize, but I would say, overall, there's no change in call trends out there.

Justin Baker

Okay, great. And then just one other really quick question here. I think that we had principal payments in sales of about $142 million for the first half. And I'm just trying to understand, on the cash flow statement, I think we're showing about $252 million or so in terms of proceeds. Just to looking to see, what else is in that number on the cash flow statement?

Richard L. Peteka

It's the restructuring from DS Waters.

Operator

[Operator Instructions] Your next question comes from the line of Mickey Schleien of Ladenburg with a follow-up.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Bruce, I just wanted to confirm, is the portfolio still more or less 70% in fixed rate investments?

Bruce Spohler

Yes. 70%, 75%.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

70%, 75%.

Operator

At this time, there are no further questions in the audio queue.

Michael S. Gross

Thank you for your attention this morning. We appreciate the opportunity to talk to you about our quarter and updating you on our success this past quarter. We look forward to doing it again 3 months from now. And just speaking to those of you who are following SUNS in the next 20 minutes. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Have a wonderful day.

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