Barings BDC Inc (BBDC) 2013 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Triangle Capital Corporation's conference call for the quarter and year ended December 31, 2013. All participants are in a listen-only mode. A question-and-answer session will follow the Company's formal remarks. (Operator Instructions).

Today's call is being recorded and a replay will be available approximately two hours after the conclusion of the call on the Company's website at www.tcap.com under the Investor Relations section.

The hosts for today's call are Triangle Capital Corporation's Chief Executive Officer, Garland Tucker; President and COO Ashton Poole; Chief Financial Officer Steven Lilly; and Chief Investment Officer Brent Burgess.

I would now like to turn the call over to Sheri Colquitt, Vice President of Investor Relations, for the necessary Safe Harbor disclosures.

Thank you, operator, and good morning, everyone. Triangle Capital Corporation issued a press release yesterday afternoon with details of the Company's quarterly and full-year financial and operating results. A copy of the press release is available on our website.

Please note that this call contains forward-looking statements that provide other than historical information including statements regarding our goals, beliefs, strategies, future operating results and cash flows. Although we believe these statements are reasonable, actual results could differ materially from those projected in the forward-looking statements.

These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the sections titled Risk Factors and Forward-looking Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the Securities and Exchange Commission.

TCAP undertakes no obligation to update or revise any forward-looking statements.

And at this time I would like to turn the call over to Garland Tucker.

Okay, Sheri, thanks very much. I would like to welcome everyone to this morning's call. 2013 was another very successful year for TCAP and we are pleased to have an opportunity to share results with you today.

In keeping with our traditional format, I will discuss some of our highlights for 2013; Stephen will discuss our financial results and liquidity position; Ashton will discuss our views regarding the overall investment market; and Brent will provide an update on our investment portfolio.

I would like to start by saying that we are extremely pleased with the operating and financial results that our team generated during 2013. Triangle has operated as a public company for seven years now and during that time we have been able to provide our shareholders with consistent performance. It is our hope that Triangle has earned a reputation as a company which not only communicates a clear strategy to investors, but also one that executes consistently on that strategy.

During 2013, we experienced record results with net investment income of $2.23 per share and we generated approximately $18.4 million of realized gains, bringing our accumulative realized gains since IPO to approximately $31.8 million. In addition to our realized gains, we also recognized net unrealized appreciation across our investment portfolio of approximately $1.8 million.

Dividends per share totaled $2.16, which represented an increase of 6.9% over 2012.

Finally, we are pleased to have recently announced two special cash distributions to shareholders, totaling $0.30 per share. The distributions will be paid in two equal payments of $0.15 per share in both March and June of this year and our tangible example at Triangle is going to be to invest in high-quality, lower middle market companies.

They also come at a time in TCAP's investment cycle where we are engaged in the natural asset rotation of portfolio investing, which occurs any time (technical difficulty) BDC or any other asset manager experiences repayments across its investment portfolio.

We recognize that some firms may not share our strategy of patience as it relates to asset reinvestments. But we plan to continue to move prudently in making new investments. This strategy is certainly facilitated by the realized gains our investment portfolio has already generated, a portion of which we are now distributing to shareholders.

So as you will hear during the balance of the call, Triangle is entering 2014 on a very strong financial and operating footing and we will continue to fulfill our mission of becoming the premier provider of capital to companies in the lower middle market.

With that I would like to turn the call back over to Steven Lilly.

Thanks, Garland. As most of you know, we issued our earnings release and filed our 10-K yesterday afternoon after the market closed. In this section of the call I will focus first on our results for the fourth quarter of 2013 followed by our results for the full year and then I will provide some color around our liquidity and capital resources.

During the fourth quarter of 2013, we generated total investment income of approximately $22 million which represented an 11.9% decrease from the $25 million of total investment income we generated during the fourth quarter of 2012. The decrease in investment income was primarily attributable to year-over-year decrease in the size of our investment portfolio, which resulted from portfolio company repayments and investment realizations, which generated the $18.4 million in net realized long-term gains during the year as Garland mentioned.

Our total operating expenses during the fourth quarter of 2013 were $8.7 million as compared to $9.4 million during the fourth quarter of 2012. Our operating expenses consist of interest expense and other debt financing fees as well as general and administrative expenses. For the three months ended December 31, 2013, interest and other debt financing fees totaled $5.1 million as compared to $4.9 million for the fourth quarter of 2012.

The year-over-year increase of $200,000 in this category was primarily related to interest on our 6 3/8 senior notes which were issued in October 2012 and interest in fees associated with our senior credit facility, which were partially offset by a decrease in interest expense related to the $20.5 million in SBA debentures that we voluntarily prepaid in March of 2013.

G&A expenses for the fourth quarter of 2013 totaled $3.6 million as compared to $4.5 million for the fourth quarter of 2012. The $900,000 year over year decrease in G&A was primarily due to decreased discretionary incentive compensation, partially offset by increased headcount and increased equity-based compensation expense.

From an efficiency ratio standpoint with efficiency ratio being defined as total G&A divided by total revenues, our fourth-quarter efficiency ratio was 16.4%. Net investment income for the fourth quarter of 2013 was $13.2 million or $0.48 per share as compared to $15.5 million or $0.57 per share during the fourth quarter of 2012.

As Garland mentioned in his opening comments, from both an investment portfolio and a net investment income perspective, we are in the natural part of a U-shaped curve where we are recycling assets across our investment portfolio. We believe these periods of asset rotation are normal aspects associated with operating a healthy BDC.

And so, while those of you who have followed us for quite some time know that it is our long-term objective to have our accumulative net investment income exceed our key relative dividends paid, we will naturally have periods where we underearn the dividend as we recycle certain assets within the investment portfolio.

Therefore as we said on our November 2013 earnings call, on a go-forward basis we expect to underearn the dividend for the first half of this year as we continue to recycle cash into new investments and we would hope and expect to overearn the dividend during the second half of this year.

Our net increase in net assets resulting from operations during the fourth quarter of 2013 totaled $17.8 million as compared to $15.6 million during the fourth quarter of 2012. On a per-share basis our net increase in net assets, resulting from operations during the fourth quarter of 2013, was $0.64 as compared to $0.57 during the fourth quarter of 2012.

Our net asset value or NAV on a per-share basis at December 31 was $16.10 as compared to $15.30 a year ago and $15.94 as of the end of the third quarter of 2013. The increase in net asset value during the fourth quarter was primarily due to our net realized gain and net unrealized appreciation across the portfolio which, on a combined basis, totaled approximately $5.1 million.

For the full year ended December 31, 2013, total investment income was $101 million representing almost a 12% increase from the $90.4 million of total investment income during 2012. The increase in investment income was primarily attributable to increases in loan interest income, fee income and dividend income across our investment portfolio.

Our total operating expenses during 2013 were $39.5 million as compared to $32.7 million during 2012. Again, our operating expenses consist of interest and other debt financing fees as well as G&A expenses.

For the year ended December 31, interest expense and other debt financing fees totaled $20.2 million as compared to $16.4 million for 2012. The year-over-year increase of $3.8 million in interest expense and other debt financing fees was primarily related to interest on our 7% senior notes issued in March 2012 and the interest on our 6 3/8 senior notes issued in March of October -- excuse me, issued in October 2012, partially offset by lower interest expense related to approximately $20.5 million of SBA debentures, as I mentioned earlier that we voluntarily prepaid in March of 2013.

G&A expenses for the year ended 2013 totaled $19.3 million as compared to $16.3 million for the year ended December 31, 2012. The $3 million year-over-year increase in G&A was primarily due to increased headcount, discretionary compensation related to successful investment performance and realized gain, as well as increased equity-based compensation expenses.

For the year ended December 31, 2013, our efficiency ratio was 19.1%, a level which is consistent with our past results in which we believe is among the lowest in the BDC industry. Net investment income for the year ended December 31, 2013, totaled $61.5 million as compared to $57.7 million during 2012. NII per share during 2013 was $2.23 as compared to our NII per share during 2012 of $2.16.

Our net increase in net assets resulting from operations during 2013 totaled $81.2 million as compared to $60.1 million in 2012. On a per-share basis, our net increase in net assets resulting from operations during 2013 was $2.94 as compared to $2.25 during 2012. The net increase in net assets resulting from operations was primarily due to an increase in investment income and an increase in net gains across our investment portfolio as we generated $18.4 million of realized gains during the year.

At year end, our total investment portfolio had a fair market value of approximately $664 million. And as we mentioned earlier, on a net -- our net asset value on a per-share basis at December 31 was $16.10 as compared to $15.30 at December 31, 2012, which represents an increase of $0.80 on a per-share basis during the year.

Turning to liquidity and capital resources. From a liquidity standpoint as of December 31, 2013, we had approximately $133 million in cash on hand, $31 million of undrawn SBA debentures and $154 million available under our senior credit facility. As was the case in much of 2013, our continued strong liquidity position provides us with significant flexibility as we evaluate new investment opportunities during 2014.

Our liquidity of approximately $318 million totals almost 50% of the fair value of our investment portfolio, which is a healthy ratio for any BDC, but which is especially strong when you take into account the long-term composition of our balance sheet. As a result, we believe our prudent balance sheet management and our discipline in not raising more equity capital than we have needed on a historical basis positions us very, very well in this environment.

In summary, as Garland said earlier on the call, while 2013 was a record year for TCAP in many regards, we are also pleased that our conservative approach to our dividend policy has enabled us to be in such an enviable position as we recycle our investment portfolio and focus on taking advantage of the improved M&A investment landscape during 2014.

And with that, I will turn the call over to Ashton for some comments regarding the activity and the specific trends we are seeing in the investing market.

Thanks, Steven. On our third-quarter 2013 earnings call, I referenced an improving investment environment versus the first half of 2013, characterized by an increased pipeline of opportunities and a shift back towards traditional M&A and buyout-related transactions as opposed to recapitalizations.

Fourth-quarter 2013 themes were largely consistent with those of the third quarter and given the overall positive momentum combined with what we are seeing so far year to date, we believe 2014 will be an above average year for M&A activity in the lower middle market. In fact, as a specific data point, many middle-market investment banks with whom TCAP has strong relationships state that their backlogs or at or near record levels.

Within the private equity world, we are observing more sponsor-to-sponsor transactions, limited partner pressure on legacy funds to provide meaningful cash distributions and new funds, which are actively focused on making investments with the goal of locking in attractive capital structures. These trends again bode well for a healthy year of M&A across the lower middle market.

From a leading perspective, while in general we have seen capital structures and average interest rates become more aggressive from the early post-recession days, they are still within the boundaries of what historically has proven to be acceptable, especially in the lower middle market. However, senior lenders continue to be aggressive with their pricing and willingness to extend the duration of their commitments in an effort to keep yielding assets on their books.

We believe this aggression, combined with the market's return to more traditional M&A and buyout-related transaction, has resulted in a slight shift in preference towards two tranche deals, a structure which clearly favors TCAP's business model.

Given our positive outlook for investment activity in 2014 and beyond, we are pleased to have withstood the temptation which existed during much of 2013 to participate in the debt-only refinancing wave. By exercising prudence throughout last year, TCAP today is positioned with abundant liquidity and a very healthy investment pipeline which contains significant opportunities for us to make the type of investments we generally favor. That is mezzanine debt with minority equity attachments.

Looking forward, the investments we generate in 2014 and beyond will become the foundation of our portfolio for years to come.

Before I hand the call to Brent, let me briefly recap the investments we made during 2013. During the year, we made 29 investments totaling $174.3 million, consisting of 11 new investments representing $137.6 million and 18 add-on investments represented $36.7 million. Our new investments were tilted significantly towards the back end of the year with substantially all of the investment activity focused during this period.

The weighted average interest rate associated with all debt investments made during the year, including follow-on investments in existing portfolio companies, was 12.9% while the weighted average interest rate associated with new debt investments was 12.6%, which is almost exactly in the middle of the long-term range of sub debt pricing of 11% to 14%.

Our new investments in lower middle market companies were also made at average leverage levels of approximately 3.5 times EBITDA, and average fixed charge coverage levels of approximately 1.5 times, both of which are also in the middle of our long-term range of experiences in the lower middle market.

To summarize, we are optimistic for a healthy M&A market in 2014. And our investment pipeline continues to build with high quality, lower middle market opportunities. We remain confident in our ability to continue to make prudent investment decisions and to generate consistent attractive returns for our shareholders.

With that, I will turn the call over to Brent to discuss certain aspects of TCAP's investment portfolio in more detail.

Thanks, Ashton. As you've heard, 2013 was an excellent year for us, also from a portfolio performance perspective. We experienced net unrealized writeups across our investment portfolio totaling approximately $1.8 million and gross realized gain on investments totaling approximately $24.1 million.

These long-term realized gains will significantly more than offset at $5.7 million in realized losses that we absorbed on three legacy underperforming investments. As a result of these portfolio exits, we generated net realized gains for the year, totaling approximately $18.4 million or $0.67 per share.

On a cumulative basis since our IPO in 2007, our net realized gains have totaled approximately $31.8 million. The weighted average IRR on our exited investments during 2013 was 21.8% and the weighted average life of those investments was 2.9 years.

As of December 31, the weighted average debt yield on our investment portfolio was 14.1% as compared to 14.3% at September 30. And during the fourth quarter, our net new investments totaled approximately $24.7 million.

From a credit quality standpoint, one additional account on nonaccrual during the fourth quarter, in addition to SRC which we had previously announced in our third-quarter earnings call in November of last year. The new nonaccrual account is Minco Technology Labs, which has a cost base of approximately $5.4 million and a fair value of approximately $2 million. Our nonaccrual assets as of December 31, totaled 4.1% of our portfolio on a cost basis and 1.1% on a fair value basis.

SRC, the portfolio company we discussed in our third-quarter earnings call, completed its restructuring on January 9, 2014. Post-restructuring, Triangle is the company's controlling investor; we are we are pleased with the operational progress the company has made and we expect more positive news to emerge from SRC of the next several quarters.

And with that update I will turn the call back to Garland for any concluding comments before we take questions.

Thanks, Brent. As we enter 2014, it is impossible not to look back with some degree of satisfaction on our results from the past year. We experienced record revenues, record NII per share, record dividends per share, and a record amount of realized gains across the investment portfolio.

Looking forward, we see encouraging signs of a healthy but not irrational M&A market. We see elements affirming with regard to pricing and terms. We see credit metrics remaining in their long-term norms, and we see both financial sponsors and operating companies willing to engage with one another. So all in all, the view is a good one, not just for Triangle, but also for the entire lower middle market in general.

And as our view of 2014 continues to develop, we are thankful to have the financial strength and committed liquidity to take advantage of what we believe will be extremely good investment opportunities over the coming quarters.

So with that, operator, we would like to open the call at this point for questions.

(Operator Instructions). Bryce Rowe, Robert W Baird.

Good morning. Wanted to direct a question to you, Garland.

You noted in your prepared remarks that the two $0.15 special dividends only covers a portion of the realized gains you recorded in 2013. So, trying to think about how the Board is thinking about distributing the balance of those gains beyond just the two $0.15 special dividends.

Yes, what you recounted was accurate. The Board has taken concrete action on the two $0.15 distributions and I think at this point probably all we can say is that the Board will consider as we move through the year what to do with the balance there.

But we, you are absolutely right on the computation. We have committed to pay out $0.30. That leaves a balance left for consideration as we move through the year, which we think is a very healthy position to be in.

Great. Thank you, Garland.

Mickey Schleien, Ladenburg.

Good morning. You mentioned that SRC was restructured in January. Can you tell us is that now back -- going to be back on accrual status in the current quarter?

I will give a quick answer and then if Brent wants to add any additional color, we will certainly let him do that. But with the restructuring was completed then Triangle being the Company's sole outside investor, we converted the depositions that we have to equity positions in the Company so that the company has a clean balance sheet upon restructuring. And then I think, on a go-forward basis, we would take our normal majority shareholder action as the credit markets deem appropriate to recapitalize the Company from a debt perspective.

Brett, would you add anything to that?

No, Steven, I think that that captures it.

My next question regards the outlook for the year. I totally agree with you that there seems to be momentum driven by M&A, but we are still seeing pretty decent levels of redemption.

Can you give us any insight into what you expect in terms of redemptions, prepayments in 2014 versus 2013?

Again, Mickey, it's Steven. I Will start off and maybe Ashton can provide some additional color, too, since he is fairly close to our pipeline.

But as you know, historically it is very difficult for us to predict, if not impossible for us to predict repayments. That being said, given the accelerated level of repayments in 2013 that we experienced, especially in the first three quarters of the year, I think it would be somewhat natural that we might experience a lower level of repayments in 2014 on a percentage of the portfolio basis.

But at this point, personally, it is tough for me to say more than that. But Ashton, I will see if you want to chime in.

I think, Stephen, your characterization is exactly right. It is hard to predict. I would just make the note that I think symbolically, hopefully, the ship has turned here where the dynamic of improved investment environment will continue to unfold and a slowing of repayments will continue to unfold.

It is clear that we are -- I don't think repayments are going to stop, the question is how much will they slow down and will that be a slower rate as experienced in 2013. And our hope is that we will see an acceleration on the investment side and a slowing down on the repayment side. And certainly the data from Q4, if you just look at the Q3 versus Q4 trends of both investments and repayments, it would certainly support that direction. So we hope to continue to see that in 2014.

Okay. A couple of quick housekeeping questions. In the prepared remarks there were obviously a lot of figures. I am not sure if I heard whether you announced the weighted average yield on your new investments in on the exits during the fourth quarter alone.

The weighted average yield on new investments made in the -- across all of our investments for the year were 12.9% and that would include follow-on investments in portfolio companies as well as you investments.

If you look just at new investments for the year, not portfolio companies following investments, it would be 12.6. And if you look at just the fourth quarter that number would be 12.5. So as Ashton would say, the long-term norm in the industry of 11 to 14, we are almost exactly right -- I mean, we are right in the middle of that fairway.

In terms of repayment across the portfolio for the full year, the weighted average yield of the debt repayments we experienced was 14.75%.

Okay. And lastly, G&A was down pretty significantly quarter to quarter. I mean, third-quarter to fourth quarter. Could you tell us what accounted for that?

Sure. As we said in the prepared remarks, it was a reduction in discretionary compensation which, for us, tends to move quarter to quarter to some extent. I think as Triangle -- as we said maybe on some other earnings calls, as Triangle has gotten a bit larger as a company, really, the better way to analyze our efficiency ratio in our specific G&A in any given period of time is really on a year-over-year basis or on a full rolling four-quarter basis, which I think is similar to other companies in the industry, too.

You can have one time blips either up or down in a quarter, but for the year we were -- our efficiency ratio was 19.1% which. I think the guidance we have given historically has been an efficiency ratio for a full-year period, rolling four-quarter period of plus or minus 20% is where we would expect to operate.

Does that help, Mickey?

Yes. I thought in the prepared remarks you were talking about year over year, but I guess that also accounted for the quarter-to-quarter move. Thanks for your time this morning.

[Kyle Joseph], Stephens.

Thanks for answering my questions, or taking my questions. A lot of them have been answered, but I just wanted to talk a little bit about competition. You have talked about your 2014 outlook looking strong and that appears to be demand-driven.

But what are you seeing in terms of competition and did it remain somewhat stable in the fourth quarter? Or are you seeing new competitors enter the market?

Good question. I think the competitive environment remains just that, very competitive. We obviously see competition from the traditional cast of characters, that we often see in the market. I would say that there are four or five new public BDCs that went public this past year which have also entered the fray. And obviously trying to live up to their expectations with their investors. We have got SBICs who are being competitive and I think insurance companies are being competitive.

So I don't think you can really pinpoint it to one particular group. I think it's a holistic environment of competitiveness here. And so, obviously, some deals you win or lose on rate only. We like to try to differentiate ourselves with our sponsor relationships and obviously, we are going to do our best to be competitive on rate, but there are other aspects that we bring to the table as well which often tilts the favor towards TCAP, given our history as a company, our commitment to being a good partner both with initial investments and follow-on investments in the fact that we stick by our equity partners in times, good and bad.

So, it is a very competitive environment, that's clear. But we seem to be continuing to differentiate ourselves in being able to attract a healthy pipeline of opportunity. And hopefully, with continued push and focus, our conversion ratios will be consistent with what we have achieved in the past.

Great, thanks. And do you have any commentary on the recent S&P announcement of excluding BDCs from the indices or thoughts on where that -- thoughts on that?

I think the two comments I would make on that would be, one, the single action of S&P removing one BDC from two different indices is by itself not a very material event. The fact that they are north of 30 BDCs in the Russell is kind of really the question of what they do.

I think that the chatter that we hear is -- it's kind of a coin toss and who knows on that front? But, I think the greater question in all of this is, is a BDC an operating company or is the BDC a fund? And, obviously, the SEC has regulated BDCs as funds under the Investment Company Act of 1940.

But I think every operator in the industry, whether we are internally managed or externally managed, would submit that we are operating long-term businesses to the benefit of shareholders, and this is a rapidly developing industry. And the legal orientation of how a company is structured does not really predicate how it pursues its business strategy.

And that is a question that, frankly, Congress and the SEC will -- over time in the industry needs to help them focus on maybe the more appropriate way to look at that. But specific to the S&P announcement, we don't think that's very material at all.

Okay, great. Thanks for answer my questions.

Chris York, JMP Securities.

Good morning. Wanted to get your thoughts on how you guys are thinking about the size of your investment platform. Do you need to expand into new geographies or to add additional investment professionals to meet your pipeline or expectations for growth and the lower middle market?

Hi Chris. Good morning. It's Ashton. Thanks for your message.

I would maybe respond in a couple of ways. If you look at -- and we have published this before in some of our slides, geographically where our investments fall on the United States we are about 20% in the Northeast, 20% in the Southeast, 40% in the Midwest, and about 20% on the West Coast.

So I would say geographically, we are actually reasonably well-represented across the country. And if you checked our originators' frequent-flier miles they would also show many flights all over the country to each of those respective locales. So I am not sure we need to necessarily expand geographically because we have done a pretty good job of making sure we are covering all of the country over the course of the Company's history.

With respect to the overall size and pipeline and investment team, I would say right now we feel appropriately staffed. We actually have two new promotions in our origination team with senior executive officers. They have a lot of bandwidth capacity. Our pipeline is building. And if you look at our investment activity, both in the Q4 quarter as well as the announced transactions Q1 year to date, I think it represents again a compilation of healthy backlog with appropriate coverage and conversion ratio.

So right now, I think we are adequately staffed and we are confident in our ability to continue to see the deals that we want to ultimately have an opportunity to invest in.

That color's great. Thank you. Then following up on that, what or how many investment professionals do you currently have on staff?

We have 25 employees, correct me if I am wrong, so 25 employees total and if you were to divide it up between deal team and finance team, it is approximately, I believe, 19 and six, respectively. We have three Managing Directors, we have two Principals, we have three Vice Presidents, all very experienced employees and all have been with TCAP multiple, multiple years, many since the IPO. So all very experienced professionals, all very rooted in the TCAP culture and approach to business.

Also I would say, in addition to those formal titles, Garland brings origination capability as does Brent, as do I and Stephen does as well. So there are deals that come through the door that are originated through our proprietary relationships that we bring in addition to the stable of relationships that the MDs and the Principals and the VPs already have as well.

Ashton, I would just add. This is Garland. I think this is important. Maybe three out of continuity through our history, even our history is not that long there is a definite thread of continuity here. We from the outset have been very committed to serving the lower middle market and as we have grown, as Ashton pointed out, geographically covering the whole country now, we -- I think when we went public we had a total of seven employees and we've grown steadily and appropriately as the size of the Company has grown.

And I think importantly as we look out into the future, our commitment remains very much to the lower middle market. We think there is -- we know it is a big market. There is a lot of room for growth there and as we are able to find attractive opportunities and if we are able to continue growing, we will certainly rightsize our staff and would expect to see it growing appropriately but commensurately with whatever opportunities we see in that market.

Perfect. Again, that color was extremely helpful. So that is it for me. Thanks, guys.

Robert Dodd, Raymond James.

Couple of housekeeping ones first, if I can, Steven. On the fourth quarter, it looks like fee -- nonrecurring fee and dividend income came at about $1.2 million. Obviously, that is a lower number, but not surprising. But a bit lower than the normal run rate.

Is that the new -- the right kind of number for the portfolio at this size, and we would expect that to grow as you redeploy capital within the portfolio again, or is there any particularly unusually low about that?

It really was -- we didn't call anything out specifically in the fourth quarter and as you know, it is our policy when we do have elevated levels of one-time events, then we call those out to the market as we did a couple of times during 2013. So there wasn't anything unusual. So that's why we didn't make any prepared remarks about it.

In terms of what a typical number is, it's really, really hard to give that. It is more driven by just one-time events across the portfolio from time to time. When we look at it internally or talk about it with the Board, we take the last several quarters, meaning six to eight quarters, and take an average of it and think about it that way. Obviously, that's historical-looking and we are all trying to think about the future.

So it's -- I am not sure I can give you a great answer on it, but we didn't feel based on those comparisons to historical norms that it was out of the fairway one way or the other. So we didn't make any comments about it.

Appreciate that. On Minco, I mean, obviously, it is an asset that has been call it struggling for a little while. And I have had my eye on the scheduled investments, et cetera. Is there anything particularly changed this quarter to drive it on to normal accrual versus just monitoring?

Obviously I am trying to get a sense of was there a change in tone from a senior lender or anything like that in terms of working cash flow? Is that -- and if there was, was that an indicator of senior lenders taking a more aggressive approach with struggling assets? Any color you can give us there?

Yes, thanks, I will -- Brent -- Brent is actually in a remote location today, but, Brent, do you want to give some color on Minco?

Yes, sure. It is a very small business. We are actually effectively the senior debt in the business. So no impact there. The Company has been heavily impacted by the sequester and that's we hope -- well, we know, in fact, because we have a number of companies that supply primarily to the military government contractors, and the fog is beginning to lift in that whole area. But it has been difficult for every company that's a government contractor over the last year and a half due to the uncertainty of the sequester.

So, it has continued to affect that business and so that's really reflected in taking it on nonaccrual. We were not forced to do so, so to speak, by a senior lender. It was more of a let's do what we can to help preserve liquidity and incentivize the equity sponsor to put in some additional capital. So that's the situation in a nutshell.

Okay, great. Thank you. Very, very helpful.

I have one more. You guys have been quite active, January, February, about [$50 million] deployed in traditionally a relatively flat period of the year. How much of that is a function of maybe spillover from Q4 versus the beginning of this 2014 build and increased M&A and (inaudible)?

Good question. Deals take on a life of their own with respect to timing. And I will tell you whenever we have estimated closing dates, nine out of 10 times they always change.

I would say that in 2012 as that year was coming to a close, there was clearly a rush to get things done by the end of the year, that year, for tax reasons where everybody thought things were changing. And so, there was a real rush to get it over the goal line.

Obviously, as I have referenced on our third-quarter call, that if that impetus no longer existed in 2013 and so what I think is safe to say is that the deals that you have seen us prep so far year to date, we are clearly in the pipeline and the backlog in the Q4 time frames. I don't want to get too specific of whether or not they were specifically meant to close in December and then got delayed or not, but I can tell you that we all can see a healthy flow of changes to estimated times for completion. Those inputs can include a number of factors whether or not it is just pure scheduling, whether or not is due diligence, whether or not it's [QOVs] that we need to get. There is a whole host of inputs that cause timings to change.

So I wouldn't necessarily say it is spillover, because that is not the way we looked at it. We just think it's part of a normal course of transaction closings, the life of which they take, each on their own.

I appreciate that. Thanks a lot.

Troy Ward, KBW.

Just a couple follow-ups. First of all, was there any type of income reversal related to Minco this quarter going on nonaccrual?

No.

Okay, so no moving parts there. Okay. And I may have missed this, Steven, but did you provide -- I saw good color on the originations quarter to date. Did you give any repayment activity what you have seen this quarter?

We have not given repayment activity. We historically have not done that, Troy. We -- obviously pursuant to SEC guidelines, we give the subsequent events in terms of the new investments. But repayments are just a normal part of the business, so we haven't given intra-quarter updates there.

But I do think it is fair to say that, given the volume of investments in the first quarter, it's been a pretty good start to the year for us.

Okay, great. Then, given that your target assets tend to have higher yields than many of your BDC brethren even most of the new ones that you alluded to, Garland, have come in. Can you provide some color maybe on how the changes in bank regulation might be impacting your competitive landscape versus maybe folks that are more focused on, let's say, high single digit or low double-digit assets? You seem to be a little bit higher up. And we specifically saw one bank portfolio actually get bought.

Do you see any types of that in your market where you have the opportunity to potentially garner some assets directly from a bank?

Yes, I am not sure we are going to -- you will see us buy a bank portfolio like one of our peers did as announced recently. But I think the -- to your point, some of the regulations that are in the process of coming into the market are, we think, good for us in terms of the lower middle market. I was meeting with a senior official of a senior -- or senior bank recently and he said in their portfolio they really have to be south of three times. Otherwise from their perspective they've got some pretty meaningful higher capital retention rates.

And I think it is things like that across the lower middle market that help us and have generated some of the statistics that we continue to like so much in terms of that risk-adjusted return. If a senior lender is pricing at L plus 400 or L plus 450, for one of our portfolio companies and they are lending 2.5 or 2.75 times into the capital structure and we can come in, as Ashton mentioned, with a mezzanine tranche priced appropriately for mezzanine and have some equity upside as well, it's -- and you are taking three quarters of a turn or another full turn of leverage -- It is just a really nice place to be for us. And it is in the low middle market been very stable for us.

So those credit trends are great, still very much in line with our historical averages and so, I think that the banking landscape is incrementally I would say helping us, but the biggest driver for us has been the reemergence of the M&A tilted, sort of orientation of the market. But, Ashton, would you add anything to that?

No, I think that's right, Steven, you characterized it appropriately. I would say big picture over the last several years we have seen the implication of increased regulation on banks where, for example, they have been forced to divest their private equity businesses, but in the same vein those banks that also had captive mezzanine businesses have chose to keep those businesses.

So, that is one example of where regulation forced the private equity side to go away, but the banks had the ability to keep the mezz businesses.

As far as opportunistically being able to acquire other portfolios that are out there, I think from where we sit there is a couple of different buckets to consider. Obviously there are BDCs out there that trade certainly south of where we do. The question is will they be able to ultimately get back up to their targeted levels of multiples, and if they don't, does that represent an opportunity. Our sense has been that our best opportunities lie frankly straight in front of us with our origination activities.

We tend to have a very healthy pipeline. We see a lot of transactions and we believe are high quality and we would much rather make our own investment decisions as opposed to necessarily acquiring a portfolio that is trading south of NAV. Because typically, they trade south of NAV for a reason. Not to say that we won't ever consider or won't ever do it, but I think our general inclination is to stick to our knitting of what we do best which is originate high-quality transactions in the lower middle market.

Great, that's helpful, thanks. Then one final one. Can you give us some insight into that we saw name change from Glencoe to Carepoint this quarter. This is a large investment, larger, one of your large investments. So could you provide a little color on what's going on there?

Brent, you want to give any color on that?

Just a rebranding exercise. The -- it was two businesses put together and so, yes, that is all it is, just a rebranding exercise.

Okay, great. Thanks.

David Miyazaki, Confluent Investments.

Good morning. Just a comment and then a couple of questions. Regarding the special dividends, I think, Steven, you and I have talked about this in the past and I just want to chime in, I regard specials as a good thing.

I think that there's a debate out there as to whether or not you, as a management team, get credit for special distributions over time. And I view it as any time you are earning attractive returns on capital, if you are distributing them out and you have more gains than losses, that is a victory for shareholders. So I appreciate you doing that.

One of the things that I -- as I look at your point in the recycling of your portfolio, when you originated what is coming back at you, your cost of equity and your cost of debt were substantially higher. And I think that you've earned a lower cost of equity capital the right way.

But, you could make an argument that you are in a position now to consider lower return profile investments in your portfolio because your cost of debt and cost of equity are so much lower. Is that a consideration that you would make against the backdrop of your history of, I guess, Garland, what you describe as high-quality loans in the lower middle market?

Well, first of all, let me comment on -- thank you for your comments on the special distribution. And the only thing I would add to that is that we view the opportunity to earn capital gains as an ongoing part of our business. It has been a factor since the very beginning even as a fund before the BDC. And it is one of the reasons we like the mezzanine lower middle market as a place to invest because it does give us the opportunity to have that equity upside.

So, even though we are dealing with a concrete amount this year, which is a very good thing, we don't view it as a special situation that's only applicable for 2014. We're very much hoping and planning for gains in the future and intend to continue making investments with equity upside potential. So that -- and I appreciate your comments on that.

As far as the yields in the lower middle market, I think our -- the starting point for us is [with the] -- obviously is one of a large number of competitors in the market, as Ashton pointed out, it is a competitive market, we certainly don't get to set the rates or to return expectations, but we very much like and from an historical sense and as far as we can see out in the future, we like the risk reward relationship in the mezzanine space and lower middle market. We think it's a very good market to operate in.

Certainly return expectations vary over time and we don't influence those, but we are convinced that if we stay in that market and have a chance to exploit the relationships we have that whatever the expectations are that we expect, certainly expect our team to originate better-than-average transactions there.

So I don't think there's any feeling at our end that we want to either move more towards senior debt or move more in the equity direction. We really like the opportunity to make mezzanine investments and have equity upside.

And what we're seeing right now is at least returns that appear to be very much in the fairway of what they have been historically. But they do, those expectations do bounce around and we don't get -- unfortunately, we don't get to set those. We have to react to the market, but we continue to very much like the space that we are investing in.

Maybe I would add one thing to what Garland is saying, first agreeing with it with the way you characterized it.

If the proposed legislation were to pass, I think you could make the argument, not just for Triangle, but for other BDCs as well that we would then have additional leverage capacity on our collective balance sheets. And you can make an argument really kind of both ways on that, that if you like the markets you are in, as we very much do, then you would -- could have the chance as an operator to take the additional attractively priced capital and make additional investments in your, quote, sweet spot.

There is an argument to I think it can be promoted that would say with that incremental leverage you would -- might consider shifting a portion of your business into what at least historically has been thought of as a higher grade, lower risk asset class that could be mixed in with, quote, base business.

Given that the legislation hasn't passed, it's not -- we wouldn't have any firm decisions on that question, but I think it is a natural question that any operator thinking about his or her business would wrestle with and hopefully it falls away.

Great, that's really helpful to hear how you guys are thinking about your business strategically. And I wouldn't suggest that you come out of the focus on your sweet spot.

In fact it troubles me when I see other BDCs that are beginning to creep into new areas of lending that they have no history lending in. I think that will probably work at the easy part of the credit cycle, but will probably end badly at the hard part of the credit cycle.

That said, you reference also some of the other BDCs that are trading at much higher cost of equity and sometimes below net asset value. And I wouldn't necessarily encourage this, but I would like to hear your thoughts on it.

If you are in a position of having these gains, then do you have any thoughts on acquiring the equity, not the portfolios as you have mentioned a competitor recently did, but the equity so that you may acquire the embedded losses within those portfolios? And that would actually make that transaction have higher utility to you guys because it you are in, as you said earlier, the enviable position to actually have gains in your portfolio. Is that a consideration that you think of strategically?

You are as thoughtful and accurate as ever in your comments and questions. It is -- is the short answer something that we would take into account if we were considering a purchase of a portfolio or another BDC or something like that.

The real benefit to a company like Triangle operating in a position of net gain would be the -- all of the long-term losses and really on the excise tax is where the difference would come into play.

We paid the excise tax at the end of December, early January for the gains we had last year that we are in the process of distributing this year. But it's a multipronged strategy and you have known us for a long time. Initially when we began having gains in the -- key relative gains in the portfolio, we did a few deemed distributions as a way to begin to build a bit, the capital base in the Company. And there also are certain rewards to shareholders, not as great as cash distribution, obviously, but it was, we felt the appropriate first step to take -- which now puts us in a position where we can think about the right way over a period of time as Garland laid out earlier in the call to distribute a meaningful amount of gains that we were fortunate to have last year that, I guess, in total would be about $0.66 a share based on today's share count. And we announced $0.30 of distribution.

So taking that kind of systematic approach, but it is a benefit on a buy side, acquiring the equity as you talk about of a third-party operator. Given that the primary benefit is in the excise tax area, it is a bit limited on a year-to-year basis, but it does give you some optionality as a new owner, I guess, of those assets.

So it would not be the primary driver of a decision to buy portfolio, but it certainly is one that we would take into account.

Okay, great. Great. I Appreciate all of your comments in your thoughts. I will leave you with this comment that maybe the whole issue around index inclusion could be answered if the index creators just decided to include the internally managed ones only.

We would not oppose that.

All right, thank you.

[Jon Bock], Wells Fargo Securities.

Good morning. First, it will start with repayments, which gets into a focus on maybe a bit more of a senior secured asset class, et cetera. But looking at repayment risk, I think, Ashton, I heard you mention obviously the environment is more competitive. Investment banks have a backlog that we have not seen in recent memory so there is quite a bit of deal flow.

But when I look at the repayments just this past quarter, I think they came off the books and they had yielded roughly 13.2-ish type percent. And if I look at assets that have at least one year of seasoning that are in excess of 15%, that is in excess of $150 million.

And so the question is, as we get into an environment of more liquidity, there is more competition in assets that are coming off the books and coming off with handles much lower than what sits on the books today. I am trying to get a little bit more color and perhaps maybe even confidence that repayment should slow relative to last year. Because as I would look at it, maybe that might not be the case. So what am I missing?

I will start out and you may get five opinions from four people here, who knows? But I think the comments we made earlier in the call about repayments historically for 2013 and then a bit prospectively for 2014 is really based on the percentage of the starting portfolio, that the portfolio was $707 million at 1/1/13 and the total repayments we had as a percentage was the highest we have had since IPO. And we all know the underpinning reasons for that lots of refinancings.

In our minds, we have seen a lot of the refinancing wave pushed through and the third quarter was the transition quarter last year. And the market and private equity funds are focused, we think, more on new portfolio company acquisitions. I think it's an intelligent debate, I am not sure if anybody sitting here in February of 2014 can really know the answer.

But I think it's -- as Dave pointed out in his comments, he was complimentary and we very much appreciate it, that we have earned a lower cost of capital in a healthy way as a company. And so as we look at it, even though spreads are not as elevated as they were for Triangle or for any other company as well, they are still higher for us than they are any BDCs.

The spread to our cost of weighted average cost of debt or the spread to our weighted average cost of total capital is meaningfully higher than many BDCs. So even though we are pricing credit, I guess I would say in the middle of the fairway on the total gross yield, the underlying spread is one that works very, very well for us.

Is there compression? Absolutely. There has been since the really low leverage and high pricing days of 2010 and 2011, no question about that. Everybody knows those were above average pricing points for folks who lend money. So, we don't need those days, thankfully, to survive as a company.

We could survive, we think, and even in an aggressively competitive market which I wouldn't say we're in. I think we are in a very typical market right now from credit on the lower end of the middle market. But, again, that's one perspective. My guess is you will get a few more.

Great question and the data in the facts that you point out are what they are. We obviously have no control over the reinvestments.

I would just make a couple of observations, though. If you look at Q4, just a couple of the selected investments that we've made on the new side.

Berry was 13 and 3 or 16 total. We had Flowchem at 13% on the add on side. We had Applied at 12, Hatch at 14, Glencoe at 14 and ILS at 15.5. And quarter to date we have got two at 12 and two at 13.

And so, I would say that if you just get back, holistically you are right. There's a fair chunk out there at the rate that you talked about, but I think we are doing a pretty good job of putting money back to work at levels that are certainly attractive for this market and, certainly, within the range of historic experience for sub debt that pricing.

And as Garland alluded to in his summary comments, the environment feels like it is firming on pricing. So, I would say that we feel more encouraged today than we did three months ago about the pricing dynamics that are going on in the market.

I don't want to just summarily dismiss the competitive nature of the market, because as we have alluded to, it is very competitive out there. But the pricing does feel like it is firming to some degree and if you look at the actual data behind the majority of our originations, the terms and the pricing or, we believe, on a risk-adjusted basis very attractive and consistent with where they should be for sub debt pricing.

Much appreciated. And maybe jumping into the risk element really quickly and please correct me if I am wrong, but I think you mentioned fixed charge at roughly 1.5. Was that correct?

That's right.

So looking at that, in light that we focus on a much less efficient portion of the market because we are dealing with smaller companies and you guys absolutely have proven that this model works. So, that's where we will start with that.

Looking at a fixed charge ratio of 1.5, which seems attractive, maybe another discerning question people would say would be that's also benefiting from historically all-time low levels of LIBOR.

And so, it is not a question of asset liability matching longer term for BDC portfolios. Lots of people talk about that and it is important.

I am a little more interested in how the portfolio company can continue, based on the fact that while we are looking at positive credit metrics on fixed charges today, LIBOR, let's make the assumption eventually it doesn't go up, what happens to the underlying credit quality of the portfolio in light of the fact that we [wouldn't] be getting 18% returns as we were in the past? Maybe you say 13 today, but we all know we are in a much lower interest rate environment and it won't always be like this. So maybe some color around the credit risks associated with rising LIBOR on the individual portfolio companies themselves.

Quickly, I would say a point that we have made before is most of the companies in our portfolio when they are pricing bank debt, when they secure that then we mentioned earlier LIBOR plus 400 or LIBOR plus 450 or something, in most cases there is a LIBOR floor for the portfolio company which is typically somewhere in the 1 to 1.25 or even 1.5 range.

So looking at where LIBOR is today and has been for a fairly sustained, obviously low interest-rate period, there is an ability for that to float up before there is -- by a factor of between four and six times where it is today, I guess. Obviously, on a pretty meaningful move before any of -- not any, but the majority of our portfolio companies would see any impact to their interest coverage or their fixed charge coverage. So as investors we take a lot of security in that. It's something we analyze closely, clearly. So that is our starting point. I guess I would say, but Garland adds to.

Well, in addition we look at basically every investment. One of the runs we will do to just do a run with substantially higher cost of senior debt to see how the coverage holds up. And, frankly, we think that is one of the pluses of being in the mezzanine space. But, even though if you have substantially higher senior cost, senior debt cost, it does impede your coverage, but we won't do a deal if it appears that the mezzanine would be shoved down into the equity situation if LIBOR doubled or tripled or even quadrupled.

So, it's (technical difficulty) it is a theoretical concern and we agree with you at some point LIBOR is going to be substantially higher that it is today and that is the reason we look at that downside run when we -- before we will make a mezzanine commitment.

I wanted to add one other point. A little bit of a nuance point from a conversation I had yesterday with the head of a middle-market investment bank that is quite active in the space, and this person was making the observation that -- and he was pointing to increased M&A activity for 2014. And the observation was that, in 2013, a lot of sponsors didn't have the confidence to take their portfolio companies to market because of not only the absolute amount of profit that they were earning, but also the volatility with which they were achieving their results.

And now that 2013 has come to a close, there has been another set of data points that can be applied. And there is, frankly, better confidence that these portfolio companies are performing, not only from an overall quantum of earnings, but also from a reduced level of volatility. And I raise that point because I think it helps also support that the answer to your question, which is I think in general, we have got a grouping of portfolio companies that are just frankly performing better.

And so, when you combine the 100 basis point floor that Steven talked about and incremental headwind there, plus the fact that as a general rule of thumb in the environment portfolio companies are performing better systemwide, I think it helps mitigate to some extent the concern or the questions that you have raised.

No, much appreciated, and, again, more of a question that outlines the process of thoughts as much as it does a particular center that the color there in the three perspectives that definitely we will benefit from.

And then lastly and this kind of comes in more of the form of a statement and, Dave, took the question from me. But it does relate to diversifying the business into other asset classes. Your cost of equity is more than earned and that's as a result of the fact that you are disappointed in terms of how you raise. And that's something that we and I know many others choose to highlight, so that is a credit to you.

The question is, is there are complements to both senior and subordinated debt and to the extent that one cost of equity can allow them to accretively invest in both areas, its diversifier or by definition an option has always had positive value it is something that we would say it's just worthwhile, and people perhaps wouldn't take issue with focusing on lower yielding loans at much higher levels of quality.

And so, I think we have beaten that to death already, but that is just more of a broad comment.

And lastly I would say going over about an hour and 15 minutes, that is just a credit to the interest in you guys and so thank you for taking my questions.

Thank you. We appreciate your questions in your comments. Thank you.

Thank you. There are no further questions at this time. I would like to turn the call back over to Garland Tucker for closing remarks.

I would like to thank everybody for being on the call. We appreciate your interest, your questions. Looking forward to being on next quarter with you, but in the interim if there are any further questions, don't hesitate to call any of the four of us. Thanks again.

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.