TPG Specialty Lending's (TSLX) CEO Mike Fishman on Q2 2016 Results - Earnings Call Transcript

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TPG Specialty Lending Inc (NYSE:TSLX) Q2 2016 Results Earnings Conference Call August 4, 2016 8:30 AM ET


Mike Fishman - Co-Chief Executive Officer

Bo Stanley - President

Ian Simmonds - Chief Financial Officer

Josh Easterly - Chairman, Co-Chief Executive Officer


Jonathan Bock - Wells Fargo

Rick Shane - JPMorgan

Mickey Schleien - Ladenburg

Leslie Vandegrift - Raymond James

Chris York - JMP Securities

Doug Mewhirter - SunTrust

Derek Hewett - Bank of America Merrill Lynch


Good morning and welcome to TPG Specialty Lending, Inc.'s June 30, 2016, quarterly earnings conference call.

Before we begin today's call it would like to remind our listeners that remarks made during the call may contain forward-looking statements, including with regard to TPG Specialty Lending, Inc.'s proxy solicitation activities related to TICC Capital Corp.

Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors including those described from time to time in TPG Specialty Lending, Inc.'s filings with the Securities and Exchange Commission. The Company assumes no obligation to update any forward-looking statements.

Yesterday, after the market closed, the Company issued its quarterly earnings press release for the second quarter ended June 30, 2016, and posted a supplemental earnings presentation to the investor resources section of its website, The earnings presentation should be reviewed in conjunction with the Company's Form 10-Q filed yesterday with the SEC. TPG Specialty Lending, Inc.'s earnings release is also available on the Company's website under the Investor Resources section.

As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Mike Fishman, co-Chief Executive Officer of TPG Specialty Lending, Inc.

Mike Fishman

Thank you, Ashley. Good morning, everyone, and thank you for joining us. I will begin today with a brief overview of our quarterly highlights and will turn the call over to our President, Bo Stanley, to discuss our origination and portfolio metrics for the second quarter of 2016. Our CFO, Ian Simmonds, will review our quarterly financial results in more detail, and my partner, Josh Easterly, will conclude with final remarks before opening the call to Q&A.

I am pleased to report solid financial results for the second quarter. Net investment income per share was $0.43 for the second quarter of 2016, which exceeded our second-quarter dividend of $0.39 per share, continuing our track record of over-earning our dividend on a net investment income plus net realized gains basis. Our Board of Directors has declared a third-quarter dividend of $0.39 per share payable to shareholders of record as of September 30th on or about October 31st.

Net asset value per share as of June 30th was $15.55, as compared to $15.11 for the prior quarter. Net asset value per share movement during the second quarter was largely driven by the reversal of prior-period unrealized losses related to a tightening of credit spreads and a rebound in commodity prices, both of which positively impacted our investment valuations.

With the exception of the days following the Brexit referendum, the second quarter of 2016 saw a tightening of credit market spreads and risk premiums across asset classes. From March 31st to June 30th, LCD first-lien spreads tightened by approximately 44 basis points and LCD second-lien spreads tightened by approximately 123 basis points. During the second quarter, oil prices rallied with a quarter-over-quarter spot price increase of $11 per barrel and an uplift in the forward price curve. We did not add any oil and gas positions in Q2 and our exposure was limited to two investments, representing 3.1% of the portfolio on a fair value basis. That said, we will opportunistically review certain energy investments where we can provide conforming first-lien reserve base loans. We expect only focus on upstream companies that are situated low on their respective cost curves.

Given the pervasive Brexit-related market volatility in June, I would like to take a minute to discuss our evaluation of the potential impact on our investment portfolio. As of June 30th, our exposure to both European currency denominated investments and US dollar denominated investments in European-based companies totaled approximately $119 million with 7.3% of the portfolio at amortized cost. This is down from approximately $173 million, or 10.7% of the portfolio, at March 31st, given the full repayment of our dollar-denominated investment in Kewill. As a reminder, Kewill is a UK-based logistics business with a meaningful portion of its revenues derived from Europe. As discussed on prior calls, while we have limited ability as investors to mitigate the impact of market and geopolitical risk in our portfolio, we are acutely focused on identifying and managing the impact of those risks we can control for, namely sector selection, credit, and certain on credit risks--the latter of which includes foreign-currency risk.

Consistent with that approach, we mitigate foreign-currency risk by match funding our assets and liabilities. When we fund investments in currencies other than US dollars, we borrow on our revolver in local currency as this provides a natural hedge for our principal value against foreign-currency fluctuations. As it relates to foreign-currency fluctuations and the underlying earnings power of our investments, the middle-market companies we invest in tend to be domestically oriented with limited reliance on exports. For portfolio companies that do have significant foreign revenue exposure, they typically have costs in the same local currency, thereby providing a natural hedge of operating cash flows against foreign-currency fluctuations.

With regards to our portfolio activity, we are pleased to report that Sports Authority's Chapter 11 liquidation proceeded as anticipated. Following a scheduled repayment of the bulk of our position during May, at June 30th, we had a $6.4 million aggregate principal value investment in Sports Authority that was fully repaid post quarter-end. To note, we recognized OID and prepayment fees associated with our prepetition and DIP investments in the first quarter upon the company's bankruptcy filing and the remainder of the OID during the second quarter. The outcome of Sports Authority's bankruptcy liquidation process is consistent with our base underwriting case, and our gross unlevered IRR was approximately 20%.

With that, I would like to turn the call over to Bo, who will walk you through our quarterly originations and portfolio metrics in more detail.

Bo Stanley

Thanks, Mike. Q2 was a solid originations quarter with gross originations of approximately $200 million. We funded approximately $146 million of investments, which were distributed across three new portfolio companies and three add-ons to existing portfolio companies.

While we experienced an increase in volume of deal opportunities in the second quarter as compared to the first quarter, we remained disciplined in our underwriting approach and focused our investment selection towards high-quality defensive and/or asset-based lending opportunities, such as Aeropostale and Power Solutions. These were opportunities in which the distinct advantage of our human capital allowed for the structuring of favorable risk-adjusted returns.

Our investment in Aeropostale is a DIP “first dollar” asset-based loan that we believe sits well within the liquidation value of the company's working capital and IP assets. As publicly disclosed, the company is in the process of pursuing a full sale of its assets and we expect to receive repayment of our DIP loan starting in the third quarter.

In the case of Power Solutions, we believe our expertise in valuing the company's collateral enabled us to structure an attractive borrowing-base-governed loan with two financial covenants that provide additional downside protection.

During the second quarter we had approximately $115 million aggregate principal amount in repayments from one full investment realization and three partial investment pay downs and sell downs--the latter of which included opportunistic sales of certain Level II investments. In practice, we would expect to exit Level II positions once market prices approach our indifference point of holding the underlying security.

Through our direct originations efforts, 85% of our current portfolio by fair value was sourced through non-intermediated channels. This enables us to control the documentation and investment structuring process and has resulted in our ability to maintain effective voting control in 80% of our debt investments on a fair value basis.

As of June 30th, our portfolio totaled approximately $1.61 billion at fair value, compared to approximately $1.56 billion as of March 31st. 93% of our investments by fair value were first-lien and 97% of investments by fair value were secured. In keeping with our investment theme since early 2014, we have primarily focused on investing at the top of the capital structure. Our junior capital exposure continues to remain low, declining from 11% of the portfolio at fair value as of March 31st to 7% as of June 30th, primarily driven by the repayment of Kewill. Additionally, since the beginning of 2013, we have reduced our exposure to non-energy cyclical industries from approximately 31% of our fair value -- of the portfolio at fair value to less than 7% at second quarter end 2016. Note that this metric excludes our asset-based loan exposure as these loans are supported by liquid collateral value and not underwritten based on enterprise value, which tends to fluctuate with market cycles.

The portfolio is broadly distributed across 50 portfolio companies in 19 industries. Our average investment size is approximately $32 million and our largest position accounts for 4.6% of the portfolio at fair value. At this point in the economic cycle we continue to focus on industries with low cyclicality and the ability to perform throughout credit cycles. Our largest industry exposures by fair value at quarter end were to Healthcare, primarily healthcare information technology with no direct reimbursement risk, which accounted for 16.8% of portfolio, and Business Services, which accounted for 16.1% of the portfolio.

The weighted average total yield on our debt and income-producing securities at amortized cost at June 30th was 10.5% versus 10.3% at March 31st and 10.4% at June 30th, 2015. This yield will vary quarter to quarter as originations and repayments in any single quarter are idiosyncratic given our direct originations model.

As Mike discussed, our investment process continues to be highly selective and predicated on mitigating both credit and non-credit risk. We seek to mitigate credit risk by investing in companies that are scaled and relevant to their supply chain. As of June 30th, our core portfolio of companies had weighted average annual revenues of approximately $139 million and weighted average annual EBITDA of approximately $36 million. Our target borrower profile has inherent downside protection features that may include a high degree of contractual recurring revenues and/or hard asset value depending on the borrower's industry and our investment thesis. Non-credit risks include interest rate, foreign currency, and reinvestment risk, the latter of which is mitigated by call protection on 82% of our investments.

With that, I'd like to turn it over to Ian to discuss our second-quarter financial results in more detail.

Ian Simmonds

Thanks, Bo. We ended the second quarter of 2016 with total investments of $1.61 billion, debt outstanding of $673 million, and net assets of $924 million or $15.55 per share. Our average debt-to-equity ratio was 0.79x, which remains consistent with our target leverage ratio of 0.75x to 0.85x and in line with the first quarter's average. And as Mike mentioned at the beginning of the call, our net investment income for the second quarter was $0.43 per share.

We maintained significant liquidity with approximately $261 million of undrawn commitments on our revolver prior to regulatory leverage constraints, and we believe we remain match-funded from an interest rate and duration perspective.

As demonstrated by our first-quarter equity raise of 5 million shares, the net proceeds of which were deployed with no J curve impact on earnings, we are committed to a disciplined capital-raising approach and expect to only raise equity if it is accretive on both an earnings and book-value basis. We are especially pleased to be able to deliver solid earnings in the quarter immediately following an equity raise as evidence of the benefits of our approach.

Moving over to the presentation materials, slide 8 contains an NAV bridge for the quarter. Walking through the various components, we added $0.43 per share from net investment income against a dividend of $0.39 per share and we had $0.04 per share gain in NAV from the reversal of unrealized losses from the full realization of one investment during the quarter. There were two other factors impacting net asset value movement in Q2. $0.23 per share can be attributed to the reversal of previous-period unrealized losses from the impact of credit spreads and $0.14 per share can be attributed to the net impact of other unrealized gains, of which the majority was related to positive credit adjustments from idiosyncratic events at the portfolio company level. Approximately 50% of these positive credit adjustments are due to our energy investments, which benefited from the uplift in the forward oil price curve, as Mike discussed earlier.

From an overall portfolio perspective, the weighted average performance rating was 1.3 based on our assessment scale of 1 to 5, with one being the highest, compared to a rating of 1.4 the prior quarter. As of June 30th, Vertellus’s first-lien loan continues to be our sole investment on nonaccrual status, with our position in the company's pre-petition loan representing 0.7% of the portfolio at amortized cost and 0.5% of the portfolio at fair value.

Moving to the income statement on slide 10, total investment income for the second quarter was $46 million. This is up $3.3 million, or approximately 8%, from the previous quarter, driven by higher interest income and, to a lesser extent, an increase in other income.

Interest income was $42.8 million for the quarter ended June 30th, which was up compared to $39.8 million the previous quarter. “Other Fees” were $1.8 million for the quarter compared to $2.2 million in the previous quarter. This revenue line will be uneven over time as it is generally correlated with movements in credit spreads and risk premiums. Our “Other Income” was $1.5 million for the second quarter compared to $0.8 million the previous quarter. This revenue line is primarily comprised of amendment and syndication fees.

For the quarter ended June 30th, net expenses were $20.0 million, which was up slightly from $19.1 million in the first quarter. Our management and incentive fees this quarter continued to reflect the voluntary waiver of base management and incentive fees related to our investment in TICC Capital.

For the six months ended June 30th, we generated an annualized ROE based on the net investment income of 11.2%. Based on our current asset-level yields and as we continue to operate within our target leverage ratio, our target return on equity is 10.5% to 11.5% over the intermediate term based on our December 31, 2015 book value. This corresponds to $1.59 to $1.74 per share for the full year on a net investment income basis, which compares to our annualized dividend of $1.56 per share.

As we've stated, we view our dividend as a liability that must be financed with real cash earnings and, therefore, our dividend policy is reflective of the earnings power of our business over the intermediate term at a level that can be consistently earned. As discussed on last quarter's call, an important consideration for our dividend level is interest rates, given the asset-sensitive nature of our balance sheet. Since June 30th, the three-month LIBOR has increased by approximately 12 basis points. If the three-month LIBOR continues to increase, we will revisit our current dividend level to ensure it is commensurate with the increased earnings power of our portfolio.

Our Board has recently approved a renewal of our $50 million stock repurchase plan, which automatically purchases stock based on threshold prices beginning $0.01 below our most recently published NAV per share. There were no repurchases triggered under this program in the second quarter. We hope shareholders view our ongoing stock repurchase plan as a reflection of both our high degree of confidence in the value of our portfolio and our continued shareholder alignment.

As a final note, in the 12-month period ended June 30th, our investment portfolio grew on a fair value basis while we experienced slight positive trends in the operating leverage and unit economics of our business. Our portfolio's weighted average yield at amortized cost increased from 10.4% in the second quarter of 2015 to 10.5% in the second quarter of 2016. Meanwhile, during this time period, our total interest expense decreased from 3.6% to 3.2% as a percentage of average debt outstanding. We may pursue financing alternatives for our business that could provide us with greater balance sheet flexibility, but may also result in increased debt costs. However, we will only do so if we believe it accrues long-term benefits to our shareholders.

In closing, we had a solid quarter, over-earning our dividend on both an NII and NII plus net realized gains basis. The consistent core earnings power of the portfolio continues to drive our quarterly results.

With that, I would like to turn it over to Josh for concluding remarks.

Josh Easterly

Thank you, Ian. For much of the second quarter, we experienced a tightening of risk premiums across asset classes. We remain cautiously positive on the US economy, although we believe there are increased sources of tail risk, and we believe the elevated volatility will continue given the political uncertainty both domestically and abroad. The illiquid market-which serves as a backdrop for our primary investment activities- is not immune to the dynamics of the liquid market, which at times include fluctuations in loan pricing, leverage, and terms. Not only are we able to mitigate these pressures by focusing on direct, non-intermediated investments with a dedicated team skilled at sourcing, structuring, and managing complex transactions, we have also demonstrated the ability to opportunistically participate in liquid markets when attractive risk return exists. Since inception through June 30th, we have generated a gross unlevered IRR of 15.9% on fully-realized investments totaling over $1.3 billion of cash invested.

Regardless of where we are in the market cycle, we believe risk management is essential to the originations, underwriting, and asset management stages of our business. While credit risk may be more salient and top of mind in the current economic environment for managers and investors alike, we have always emphasized the ongoing identification and mitigation of both credit and non-credit risks in our business. As middle market credit investors, we are keenly aware of our limited competitive advantage in driving investment profit from bets on interest rates, currencies, and other instruments whose price fluctuate based on changes in economic policies and global capital flows. Therefore, we believe our long-standing practice of match funding our assets and liabilities, along with other forms of non-credit downside risk protection, are of paramount importance in generating high-quality risk-adjusted returns for our shareholders. We believe our competitive advantage continues to be the combination of our people, the long-term nature of our capital, and our distinctive investment process of putting the collective wisdom of our human capital and our platform against the current investment opportunity set.

Finally, I would like to provide an update on our activities related to TICC. During the second quarter, TICC's management continued to adopt what I believe to be poor and conflicted corporate governance measures to preserve the external manager’s fee stream at the expense of shareholders. For the first time in its history as a public company, TICC delayed its annual meeting to September, even though it has historically never held -- been held later than mid-June. Meanwhile, the owners of the external manager, which include two TICC Board members, bought TICC shares for the first time in four years in direct proportion to their respective ownership interest in the external manager.

As TICC's largest single shareholder, we are determined to end more than a decade of governance and performance failures. As such, we are soliciting TICC shareholders to vote for the termination of the current external manager’s contract and for the election of our highly-qualified, independent candidate to TICC's Board. We are hopeful that September 2nd- the late date of TICC's annual meeting- marks a turning point for TICC shareholders, which includes ourselves.

I would like to conclude by noting our solid Q2 results, especially in light of our March equity raise. Given the timing of our equity raise and the market opportunities afforded to us, we were able to de-risk the portfolio while improving asset yields and the underlying operating leverage of our business. It is our belief that our steadfast commitment to the investment and capital allocation principles that have brought us here will continue to serve in the best long-term interest of our shareholders.

On behalf of the TSLX team, thank you for your continued interest and for your time today. Ashley, please open up the line for questions.

Question-and-Answer Session


[Operator Instructions] Jonathan Bock, Wells Fargo Securities.

Jonathan Bock

Good morning and thank you very much for taking my questions. Maybe just a start, because you did mention the assets that you were -- opportunistic assets that you took advantage of when prices were certainly lower, and when we look at names like IDERA or APX or Vivint, how do you weigh the rotation out of some of those assets today versus what could easily be another very accretive and attractive equity offering in terms of what you'd use as sources to fund new investments?

Josh Easterly

Jonathan, it's Josh. First of all, thanks for the question. So I think there are -- let me parse your single question. I think there's two questions. One is how do we think about an equity raise? And the second question, I think is, if you are growing the portfolio, how would you -- would you do that with an equity raise or selling assets? Are those your two questions?

Jonathan Bock

I would think about it -- Josh, so you could easily grow the portfolio accretively or you could perhaps boost NIMs a bit, in light of the fact that you've made some great opportunistic investments that reflated, and you could sell out of those assets today and redeploy into new assets that you, Bo, or Mike, are originating that are also attractive at a higher yield.

Josh Easterly

Let me -- definitively what I would tell you is we will never hold an asset where we think that asset is past what we believe fundamental value to be just to create growth assets and growth for our balance sheet.

I think we have about $200 million of Level II assets. We will most definitely, and have, quite frankly, been a seller of those assets when they reach our fundamental value or indifference point of holding those assets, which will be a source of liquidity to fund what we believe would be higher risk-adjusted returns in the direct originations market.

Jonathan Bock

Okay. So then, maybe talking about liquidity and prepayments, we did notice that Mediware had a refinancing transaction that was pulled. But we are also knowing that there was volatility at that time, forcing perhaps that deal out of the market. And yet I'm still seeing it marked at 101%.

With the market perhaps coming back and maybe terms coming back the way for that company, can we expect repayment in this asset in the near term? And if so, that's a fairly heavy repayment, which is attractive, with some call protection. But then how do you think about redeployment of the proceeds?

Josh Easterly

Look, I think Mediware as you noted, had launched kind of an opportunistic $300 million covenant-light deal to refinance a dividend to the sponsor. Obviously, that was right in the middle of Brexit or what happened to be Brexit. My guess is, that company will -- that portfolio name at some point will leave our portfolio given the high-quality nature of that business and how it's de-risked, which will be a source of proceeds to fund new originations.

As you know, our portfolio constantly -- there's churn in our portfolio, about 25% to 30% a year, that serves to fund new originations. So I would not be shocked if Mediware refinances at some point, given that business and how that business has grown and has different needs now than when we originated the loan.

Jonathan Bock

This question is for Bo and Mike. Clearly, your deep relationships in the retailer, in the DIP, in the ABL community have actually generated some substantial returns for shareholders. The question that we'd have is, looking at the Aeropostale deal, we also see other folks in it as well only because yesterday we did Solar's earnings and I believe they own Crystal Financial, which is probably a partner that you kind of work with.

How do we know -- how does TSLX's or TSL's involvement in these DIP loans generally work? Because we know you can restructure, you can originate, you can partner. Was this more of a partner-type loan where you and a few other ABLs went in together to provide the DIP? Was it solely originated on your basis and you kind of helped sell it out? Walk us through the ability to originate that loan, which, like all the others, has been fairly attractive.

Josh Easterly

Let me take it; then I will turn it over to Bo. Just real quick, Jonathan.

First of all, I don't think -- we like that space. Clearly, and I don't we've ever said that we have a monopoly on retail ABL. There are guys like Crystal and a handful of other guys, although we think the competition is very low, who understand the nature of those assets and the nature and technology of borrowing base and inventory lending, which, quite frankly, is very, very human capital intensive.

We have a dedicated team in Boston who is focused solely on that opportunity set, but there are other guys who most definitely -- sometimes we compete against and sometimes we partner with in that space. We surely don't have a monopoly, but, quite frankly, I think given the returns in that space that we've been able to generate, it is less competitive than kind of that cash flow sponsor world, where you are one of 10 guys looking at something.

Mike Fishman

I would just add that we have very, very long and deep relationships with the primary ABL providers, the bank providers in the retail finance industry, and are able to work with them in crafting credit agreements that work for both of us and give us the controls that we need.

Jonathan Bock

Okay, thank you for my question. If I could just throw out one other statement, I sometimes think it is lost on folks that the move in LIBOR has put a pinch on BDC ROEs. And while some BDCs have shown certainly declines, here you guys have continued to maintain it, so it's a credit to you guys. And thank you again for taking my questions.


Rick Shane with JPMorgan.

Rick Shane

Thanks for taking my questions. The one thing -- again, it's hard to read too much into any quarter's originations, but there is a modest trend in terms of larger transaction sizes over the last 12 to 18 months. Just curious if that's something, as you continue to build the portfolio, that we should expect because from a concentration perspective it's less of an issue?

Josh Easterly

I think, quite frankly, it depends on the opportunity set. When markets dislocate, we tend to -- which happened in Q1, we happen to go up market. When high-yield markets shutdown or leveraged loan markets, obviously we had -- we had the opportunity with a couple of other lenders that participate in the Qlik underwriting which will generate meaningful syndication income, and so -- in Q3, when that closes and if that closes.

And so I think there will be that opportunity. But when you actually look at our portfolio, ironically, and this is a little bit of our ability to co-invest with other parts of our platform or platforms have the ability to co-invest with us, we have actually not grown the portfolio that much, grown the number of names, and average position sizes have come down. So although we may be involved in larger deals, what I think you will see year over year is that we have had very limited portfolio growth, but we have had the number of portfolio companies go from -- increase by about 25%. And our average position hasn't come down.

So we have a much more diversified portfolio and I think part of that is where we think we are in the economic cycle. But we surely will be involved in larger transactions when market opportunities afford us, but, quite frankly, the portfolio and the nature of the portfolio has been going the other way.

Rick Shane

Got it. That's an important distinction in terms of what you're able to source and syndicate, and actually the idea of smaller hold size, in light of what you are saying about the economy, is a very interesting point, too.

There were some comments yesterday about, due to lack of supply in the market, deal terms that are less favorable to lenders. How are you feeling about current conditions? Is that a concern for you as well?

Josh Easterly

Most definitely. I will turn it over to Mike and Bo. I think generally thematically I would be lying to you to say it's easy out there.

We continue -- I think we are very lucky that we've built a robust business model and origination franchise, which allows us to see a lot of opportunities and be very selective in what we do. I think we do less than 2% of the stuff we see. And so I think we're -- given we are not a taker and we are a manufacturer or creator of our own risk/return, we are somewhat insulated. But it is -- there's a lot of marginal, I think, credits that are going through the system that worry me.

I don't know, Bo or Fish, you have any comments?

Mike Fishman

Yes, I would concur that, again, if you look at what we've done -- and in every quarter -- there could be lumpiness from quarter to quarter. But if you look back over a rolling six months or nine months, we're, on average, finding a handful of interesting transactions each quarter. But because of the direct originations model, we are seeing dozens, if not hundreds, of opportunities get down to those handful of opportunities that we think provide interesting risk returns.

The other thing I would add is, as we have grown our portfolio, we have also seen -- we continue to see opportunities from the existing portfolio. So there's add-on opportunities from quarter to quarter that supplement our originations activities.

Josh Easterly

Rick, the last thing I would say is it's not just a function of our direct originations, it's a function of the amount of human capital that we have against the portfolio we are managing. So if we have a direct originations platform and we are managing 10 times the amount of capital, we would not be as insulated from these moments in time. And given that we do sponsored and non-sponsored deals and given that, quite frankly, we only -- our portfolio is only $1.6 billion and we only have to do $150 million to $200 million a quarter in originations, it, quite frankly, makes their life a lot easier. If we were doing -- if we were a $14 billion or $20 billion or $6 billion and we had to compete against the high-yield market and leveraged loan market in every moment of our life, quite frankly, I would probably throw myself out the window. So I think it's not only a function of the human capital we have deployed, but it's really a function of the human capital we have deployed versus the assets we have under management.

Rick Shane

Got it, okay. Don't throw yourself out the window. I guess the two comments are thank you for not lying to us and don't throw yourself out the window.

A - Josh Easterly Yes, thanks.


Mickey Schleien from Ladenburg.

Mickey Schleien

Good morning, everyone. I wanted to follow-up on Jonathan's question about repayments. I'm just curious how significant repricing pressure was in the quarter with respect to repayments, given the rally we saw in the middle-market loans.

Josh Easterly

I think if you look at the math, we -- the math was that we invested- on new investments, the yield at amortized cost -- and some of this is hard to figure out because of our schedule investments and some of the first-out stuff. But the yield at amortized cost on new investments this quarter was 11.7% versus the previous quarter yield at amortized costs was about 10.5%. And so you actually had an uplift in the yield quarter over quarter.

Mickey Schleien

Fair enough. Josh, given TPG's expertise in investments outside the US, I sort of wanted to take the flipside of the question on Brexit and perhaps get some color from you on what types of opportunities you might be seeing over there, given that vote.

Josh Easterly

Just to be clear, for the BDC there is limited -- I will answer your question and then I'll -- but first I should note that for the BDC, there is a limited opportunity to invest over there given that we have a direct middle-market lending fund in Europe that actually has a contractual first right of offer.

As you know, and as I think everybody knows, the US BDC has a -- gets to see all the originations for US middle-market deals, not on a worldwide basis. And there's an important reason why that's the case. Because for foreign investors in the BDC, there is a significant tax drag on non-US sourced income, but when the extenders legislation -- and I'm going deep, but it's important to understand.

Given the extenders legislation was permanentized, I think, last year as it relates to no withholding tax for foreign investors for BDC dividends, the exception to that is non-US sourced income. And so the rules and the laws and regulation were set up so that the BDC, the tax advantage embedded in the BDC was only there if it served US middle-market companies.

And so we will not -- you probably won't see opportunity -- we won't be able to participate in that opportunity as it relates to Europe. I will give you my view on Europe, because other people might be thinking about it. I think with any -- with life, and not to get kind of philosophical, but with life what uncertainty provides people is a reason not to do things. And so, most definitely, given Brexit and given the political climate in Europe, my guess is you're going to have a downward drift, maybe not in asset prices given kind of monetary policy in Europe and given people are going to be cutting rates, but you are surely going to see a downward drift in activity which will most definitely hurt both M&A and GDP.

I think that is offset largely, if not in whole, by -- I think banks are trying to figure out what to do next and so I think the competition is going to be less in Europe. Although there's going to be risk to the downside on GDP and risk to the downside on kind of deal flow activity, given the uncertainty that Brexit provided.

Mickey Schleien

That's very helpful. And one final question, just mostly for my own education and perhaps for others listeners.

I'm assuming on these ABLs that you're doing and the DIP that you're doing in the retail space that's mostly on inventory, as opposed to receivables. And I'm curious, this team that you mentioned in Boston, do they actually manage the sale of that inventory, which I suppose is probably an auction process? Where is that inventory ending up?

Josh Easterly

Those are all very good questions, so let me start backwards, which is the team in Boston are not running liquidations.

There are a group of well-known liquidators, retail liquidators in the US that buy retail inventory or run processes to liquidate retail stores. From Tiger to Hilco to Gordon Brothers, it is a very small, niche industry. The Great American -- I will get shot by some of my friends if I don't mention all their names, as I'm doing a commercial for them. But there is a group of people who are well-known and doing this.

The really interesting thing about retail inventory -- and I will give Sports Authority as an analogy, because that case is done. It's gold and it's gold because the margin structure in retail inventory is about 50%.

And so those guys -- so when you go and buy a pair of tennis shoes -- and I know you're out there running -- but when you go buy a pair of tennis shoes for $100 that cost the retailer $50. So if we are lending at a percentage of cost, which equates back to a percentage of net orderly liquidation value, those liquidators in that community can drive demand, and the elasticity of demand is high, based on discounting. So at 40% off they are still collecting 70 bucks less cost. You're getting over -- you're getting less cost to run a liquidation; you're getting over cost.

For example, on Sports Authority we thought the inventory would be at a liquidation value of $0.91. We lent a percentage against that $0.91. The liquidators bit it at I think $1.01 -- this is all public -- and what we are hearing is they did much better than that.

And so it ends up in your closet: you have an extra basketball, you have an extra golf driver or golf club, you have an extra pair of tennis shoes. Most of these -- the bulk of the exposure is in inventory. There are some -- you are leaning against some receivables, but they are credit card receivables that turn in three days. And so it's very good collateral, but most of your exposure is in inventory.

Mickey Schleien

You said the inventory ends up in my closet, but is it going through an online retailer nowadays, given the pressure on brick-and-mortar or --? How does it get to my closet?

Josh Easterly

Sometimes it is, but most often what you will see is -- you probably don't see as much if you live in the city or in New York, but if you live in suburbs you will drive down the street and you'll see going out [of business] sale signs- 30% or 40% off- or people in the street holding up signs. It's being done through those brick-and-mortar with high discounts.

Mickey Schleien

Understand, that's very helpful.

Josh Easterly

But high recovery of cost.

Mickey Schleien

That's really helpful. I appreciate your time today and look forward to your next earnings call. Thank you.


Leslie Vandegrift, Raymond James.

Leslie Vandegrift

Good morning. Just a quick question just to clarify also what Mickey was talking about just last there on the ABLs like Aeropostale and Sports Authority. That's the only way you guys get into retail investments right now, correct?

Josh Easterly

Yes, we are not doing -- we are very, I think, generally bearish on retail given the transition from how people interact with brick-and-mortar and Amazon. Every room I go -- I spend a lot of time traveling the country and every question, every room I'm in I ask how many people are on Amazon Prime. It's gone from probably 50% up to 70% or 80% or 90%.

There might be occasion where we might lend on a brand where we think that brand has value in an omni-channel environment, but it's all asset-based lending technology.

Leslie Vandegrift

Okay, perfect. Thank you. Then, on Vertellus, I saw the restructuring data came out May 31. It looked like the bids were about 80%. Your mark was at 73.5%, about there. So what's your outlook there to get more than the current bid possibly from that restructuring?

Josh Easterly

Look, I think that Vertellus -- it's a Level II name, so the valuation of that name is actually pretty simple. You go get broker-dealer quotes where it's traded.

I think at the quarter end we had it marked at 67% and I think that name has rallied. It is going through an auction process where the first-lien lenders, which we are a small piece of, have credit bid. And so either one of two things will happen: one is we will get topped or somebody else will buy the asset, or second thing will happen is we will end up reorganizing that and my guess is that we will own a small piece of equity and we will own a reorganized piece of bank debt.

But if that name gets to our indifference point, which, quite frankly, at 67% we weren't a seller, we will end up moving that when it gets to our indifference point or where we believe fundamental value is.

Leslie Vandegrift

All right. And then just the last quick modeling question, because you've answered the rest of them today, on dividend income. This quarter was same as first quarter. Is that a good run rate going forward? Do you see some growth opportunity there or maybe it's going to come back a little bit?

Ian Simmonds

Sorry, Leslie, I missed the very first part of your question. What income? What line?

Leslie Vandegrift

The dividend income this quarter was the same as the first quarter, so I was curious if you guys think that's a good run rate for the year?

Josh Easterly

It's just TICC.

Ian Simmonds

That's the only dividend income.

Leslie Vandegrift

So that's all of it; you guys don't see anything else coming in?

Josh Easterly

Here's what I would tell you is we are not taking obviously any incentive fee or any management fee on TICC. We don't believe that dividend income is real in that we don't believe they earned their dividend, as you can see from our presentations.

If it's a modeling exercise, they surely have an incentive not to cut their dividend prior to a vote, given their shareholder base is mostly retail. So I wouldn't expect them to cut their dividend prior to a vote on their management contract. But when you look at the long-term sustainability of that dividend, like we -- we're obviously not taking incentive fees on it because we don't think it's real.

Leslie Vandegrift

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


Chris York, JMP Securities.

Chris York

Good morning, guys. Most of my questions have been asked, but, Josh or Mike, maybe you could just update us on your interest in any off-balance-sheet joint ventures or acquisitions. Because a couple BDCs recently reported developments in off-balance-sheet initiatives and earnings strategies. And I do recognize that their ROEs are lower than yours.

Josh Easterly

Look, we constantly look at -- our filter for those type of opportunities is will they be accretive on an ROE basis to our core base activities, both on the -- and on a risk-adjusted basis. So I think with the JVs they're a way to add synthetic leverage and so you can't look at the JVs only in light -- only in the context of what return they provide. You have to look at it as it relates to risk-adjusted returns.

And so the question is we will continue to look at them, but we haven't found one where we think it's -- again, this is not anything against our competitors; they might be smarter than us. But we haven't found anything that we say to ourselves, on a risk-adjusted return basis, that is super ROE-accretive for our shareholders.

And then on the acquisitions it's the same lens, which is: is it accretive? Or given the execution risk and the amount of portfolio names that you take on and that you didn't underwrite and structure every deal and your lack of institutional knowledge, is it significantly accretive on an ROE basis compared to our baseline activities? So call us a little bit vanilla, but that's okay. That's our framework of looking at these things.

Chris York

Makes sense. That's it for me. Congrats on another good quarter.


[Operator Instructions] Doug Mewhirter with SunTrust.

Doug Mewhirter

Good morning. I just had one question that was left. It was probably in the original press release, but could you remind me if it's been finalized what your piece of the Qlik software deal was total value and then how much your hold size will probably be?

Also, what is --? It sounds like you were fairly confident of a third-quarter closing. What do you think the chances are of that?

Josh Easterly

I think Qlik, we tend not to make a habit of discussing things that haven't closed so what I think you can expect for Click is that will be a -- that position, hold position will be consistent with kind of our average holds in a range on our balance sheet. So our average -- I think that would be the base case I would work from.

And I think we have pretty good certainty, although not as close to it obviously as the company and the sponsor, of that closing in Q3. If that closes, we do expect that there will be meaningful syndication fees in Q3 that our shareholders will participate in.

Doug Mewhirter

Okay, great. Thanks. That's all my questions.


Derek Hewett, Bank of America Merrill Lynch.

Derek Hewett

Good morning and thank you for taking my question. Maybe this is for Josh. Given the rise in negative interest rates, is the opportunity to effectively tap the capital markets and diversify funding becoming more attractive at this point?

Josh Easterly

I'll turn that over to Ian. What I would say is the great news about -- again, we think our size is a little bit of an advantage in that we can be opportunistic about how we -- not only the deals we do, but how we fund our balance sheet. And so I think if -- surely it's on the table and surely we will be opportunistic, but Ian is obviously our CFO and Ian, what are your thoughts?

Ian Simmonds

The only thing I would add to that, Derek, is it's something that we look at all the time. We've said before I think on our last earnings call that we don't -- we're not in the position given the mix of our assets that we need duration, so some alternatives on the financing side don't fit our model.

We are not interested necessarily and taking call on interest rates, so we take the view that we will maintain as much flexibility as we can. We will be opportunistic if it makes sense for our shareholders and that increases the overall flexibility of our financing structure, but it's something that we just keep a watchful eye on.

Derek Hewett

Okay, great. Thank you very much.


Thank you. I'm not showing any further questions in queue at this time. I would like to turn the call back over to management for any further remarks.

Josh Easterly

Great, thank you. I hope people enjoy the rest of their summer and Labor Day. If we don't get a chance to talk to you prior to our Q3 call, we wish you and your family a great rest of the summer. Thank you.


Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a wonderful day.

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