Barings BDC Inc (BBDC) 2014 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Triangle Capital Corporation conference call for the quarter end September 30th 2014. (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 the Triangle Capital Corporation Chief Executive Officer Garland Tucker, President and COO Ashton Poole, Chief Financial Officer Steven Lilly, and Chief Investment Officer Brent Burgess.

I will now 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 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 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, and quarterly report on Form 10-Q for the quarter ended September 30, 2014, each 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.

Sheri, thank you. I'd like to thank everyone for joining us today.

In keeping with our traditional format, I'll provide a brief overview of some of our highlights for the quarter. Steven will provide more detailed information about our financial results and liquidity. Ashton will discuss our views about the overall investment market and our investment activity, and Brent will provide an update on our investment portfolio.

The third quarter was a very active quarter for Triangle on several fronts. We originated approximately $181 million worth of total investments during the quarter, which was a record for us. We recognized approximately $5 million of net realized gains, and we raised approximately $128 million of additional equity capital.

We're also continuing to experience the effects of interest rate compression relating to the yields associated with our recent investments, and we have recently experienced a higher level of nonaccrual activity within our investment portfolio.

As we near the completion of our eighth year of operation as a publicly traded company, we're reminded that since our IPO in early 2007 we have generated $79 million of realized gains coupled with only $30 million in realized losses. Our almost $80 million in realized gains were spread across 38 different investments, while our long-term losses occurred in 12 investments.

We've always maintained that our long-term goal is for portfolio gains and losses to offset each other, thereby creating low-baited dividend income for our investors.

If you analyze our investment trends even more closely, you'll see that during the last 36 months, we have generated $55 million in realized gains and only $13 million in realized losses, as compared to the prior five-year period, where we generated $25 million of realized gains versus $18 million of losses. A comparison of these two periods of time helps illustrate the fact that our recent pace of realized gains versus realized losses has clearly been well above our historical trend line. And while it's certainly more enjoyable to discuss realized capital gains rather than nonaccruals and principal losses, our goal is to be equally transparent while discussing both.

Before I hand the call off to Steven, let me touch briefly on a bit of forward guidance. As we think about the next several quarters, we are pleased that the origination portion of our business is operating so well. Our investment pipeline has been robust all year, and we remain very pleased with the quality of the new investments we've made.

Top-line interest rate compression, which continues to affect all lenders across all markets, is measurable even in the lower middle market. The weighted average yield associated with the new debt investments we made over the last 12 months has been 12.4%, as compared to the weighted average yield associated with investments made during 2011 and 2012 of 14.7%.

Barring a change in the pricing environment for new investments, as older investments in our portfolio continue to get repaid, our investment portfolio's weighted average yield will continue to move closer to the weighted average yield of 12.4%, which we are generating on our new investments.

In terms of our new nonaccrual assets this quarter -- they generated approximately $0.07 of NII, net investment income, on a quarterly basis. And one account, CRS Reprocessing, generated $0.03 of the $0.07 of quarterly NII. So obviously, we are very focused on working closely with CRS, as Brent will discuss later in the call.

Despite the recent yield compression and our new nonaccrual assets, our core business model of making what we believe to be attractive investments in the lower middle market continues to be very much intact.

Since inception, TCAP has originated over $1.5 billion of investments in lower middle market companies. And on a cumulative basis, our realized equity gains have meaningfully exceeded our principal lending losses. Given that we approach the business today in the same manner we have historically, we expect our positive trend to continue despite the quarter-to-quarter fluctuations that affect any portfolio-based business such as ours.

As a result, given our lower total investment yields and higher nonaccrual assets, we would expect our $0.59 per-share regular quarterly and supplemental dividends to continue to remain stable for the fourth quarter of 2014 and the first half of 2015. Obviously, should our nonaccrual assets successfully work through their situations and return to full accrual, and should the pricing environment for new investments improve, then we would expect to revisit our dividend guidance with a renewed focus on growth.

And with that, I'd like to turn the call over to Steven.

Thanks, Garland.

During the third quarter of 2014, we generated total investment income of approximately $24.9 million, which was consistent with the second quarter of 2014. Our total operating expenses during the third quarter of 2014 were $9.5 million, as compared to $10.3 million during the second quarter of this year. Our operating expenses consist of interest and other financing fees and general and administrative expenses.

During the third quarter of 2014, interest expense and other financing fees totaled $5.3 million as compared to $5.2 million during the second quarter of 2014, while general and administrative expenses totaled $4.2 million for the third quarter as compared to $5.1 million for the second quarter of this year.

From an efficiency ratio standpoint, with efficiency ratio being defined as total G&A divided by total revenues, our third quarter 2014 efficiency ratio was 16.7%. For the first nine months of 2014, our efficiency ratio was 19.4%, which remains an industry leader.

Net investment income for the third quarter was $15.4 million or $0.51 per share, as compared to $14.7 million or $0.53 per share during the second quarter of this year. Our net decrease in net assets resulting from operations during the third quarter totaled $8.8 million, as compared to a net increase of $24.2 million during the second quarter of this year. On a per-share basis, our net decrease in net assets resulting from operations during the third quarter was $0.29, as compared to a net increase of $0.87 during the second quarter of 2014.

Our net asset value on a per-share basis as of September 30th, 2014 was $16.64, versus $15.95 at June 30, 2014, representing an increase of $0.69 per share. The primary components of the increase in our net asset value during the third quarter were our follow-on offering of common stock of $1.49, our net realized gains, which totaled approximately $5 million or $0.17 per share, partially offset by the impact of the supplemental dividend distribution of $0.05 per share, the $0.03 per share by which our third quarter regular dividend distribution exceeded the third quarter net investment income, and then net unrealized depreciation within our portfolio, which totaled approximately $0.96 per share.

Turning briefly to liquidity and capital resources -- as we mentioned in our last call, in July we borrowed the remaining $31.3 million of SBA debentures, enabling us to fund SBA-eligible investments. At this point, we are fully funded from an SBA debenture perspective.

Also from a funding perspective, in early August, we completed a public offering of 4.9 million shares of common stock, with net proceeds of approximately $127.8 million. Given the depth of our investment pipeline, we were able to deploy 100% of the proceeds from this offering during the third quarter. We believe the ability to deploy capital in an efficient manner following an equity offering enhances shareholder returns over long periods of time, and we are certainly pleased with our investment team's ability to add such credible investment opportunities to our portfolio.

We continue to find ourselves in the fortunate position of enjoying the many benefits of a conservatively structured balance sheet. From a liquidity standpoint as of September of this year, we had approximately $84 million of cash on hand and approximately $154 million available under our senior credit facility.

Based on the increased size of our investment portfolio, coupled with a still-active new investment pipeline that Ashton will discuss in just a minute, we would expect to consider expanding our senior credit facility over the next several months, so as to continue balancing our capital structure, with midterm, long-term and permanent capital.

And with that, I'll turn the call over to Ashton to talk about the general investment environment, and also our investment activity in the third quarter.

Thanks, Steven.

From a new investment perspective, the third quarter of 2014 was a record quarter for Triangle. During the quarter, we originated $180.8 million in total investments, of which $175.1 million were new investments and $5.7 million were follow-on investments. The average size of our 11 new investments was $15.9 million, and the weighted average interest rate associated with all of our new debt investments was 12%.

Competition for new assets across all platforms -- equity, mezzanine debt and senior debt -- continues to be elevated. Private equity sponsors are paying higher cash flow multiples for companies, many of which have experienced meaningful growth over the last two to four years. As a result, sponsors are intensely focused on being sure that they have done their full due diligence on these companies and are naturally focused on working with financial partners whom they know and trust. We believe this investing dynamic has been positive for Triangle, as one of our primary objectives is to be a trusted advisor and partner to the sponsor community.

From an M&A standpoint, 2014 continues to be a very active year, particularly in our target market. And the third quarter was no exception. All of the middle-market investment banking firms with whom we regularly interact report Q3 activity equal to, if not greater than, Q2 activity. And all are forecasting a busy Q4, as well as a record year in terms of numbers of deals and the dollar volume associated with them.

Our year-to-date transaction data for the middle market, where enterprise values are between $100 million and $500 million, shows deal volumes are up 23.9%, and deal values are up a corresponding 25.8%. In the sub-$100 million enterprise value segment of the lower middle market, where Triangle typically plays, our data shows deal volumes are up 6.6%, while deal values are up 15.2%.

With respect to purchase price multiples, the $100 million to $500 million enterprise value segment of the market has averaged 9.9 times EBITDA for the last 12 months, as compared to 7.8 times EBITDA for the sub-$100 million enterprise value segment. This 7.8 multiple compares to an average of 7.2 over the last five years and 7.7 for the last 10 years.

The increases in lower middle market transaction volumes and purchase multiples highlights that buyers have increasingly focused on the segment to pursue attractive risk-adjusted returns and demonstrates that they are willing to marginally stretch on purchase multiples in order to participate. Inherent to their ability to do so has been a receptive financing market, which, thanks to sound company fundamentals and available liquidity, has afforded them the opportunity to lock in attractive capital structures with a low overall cost of debt.

A byproduct of increased purchase multiples is increased buyer scrutiny, which naturally drives longer transaction cycle times. This dynamic has clearly been evident with many of our sponsor partners. And as such, on a forward-looking perspective, it is possible that we may see a temporary slowdown in the pipeline.

Said another way, as sponsors work longer to close contemplated transactions, they inevitably delay their ability to assess other opportunities. We also believe that as we move closer to December 31, some sellers, and indeed some buyers, will be motivated to wait for full-year fiscal 2014 results before going live with an M&A process.

In summary -- for the remainder of this year and in 2015, we believe the M&A environment will continue to be active and competitive, but perhaps more measured than what we have observed in the past several quarters.

Many private equity firms are having to educate their investors on the new norm of mid-teens return expectations, and the debt markets are naturally following suit in terms of their own return expectations.

Historically, Triangle's investments have yielded equity-like returns, while taking debt-centric risks. As we move forward, we hope to continue that performance track record well into 2015 and beyond.

And with that, I'll turn the call over to Brent to discuss our investment portfolio.

Thanks, Ashton.

Our investment portfolio currently consists of 90 companies. During the third quarter, we received four full loan repayments totaling $35.6 million, partial loan repayments of $1.3 million, and proceeds relating to equity securities of $13 million.

Also during the quarter, we realized a $5.9 million loss on our investment in Exchange Technology Group, bringing our net long-term capital gains generated in the quarter to $5 million. The weighted average IRR on our exited investments during the quarter was 16.6%. And the weighted average life of those investments 2.4 years. As of September 30th, 2014, the weighted average debt yield on our investment portfolio was 13.2%, compared to 14.3% as of September 30th, 2013.

From a credit quality standpoint, our nonaccrual investments comprise 8.3% of the investment portfolio on a cost basis and 3.8% on a fair value basis.

Now, I'll provide a brief summary of each of the four new nonaccrual accounts. CRS Reprocessing is an investment we originally made in November of 2009. The company provides a key manufacturing solution for national and international companies in the solar, fossil fuel, aluminum and semiconductor sectors. Unexpectedly, late in the third quarter, CRS's largest customer temporarily suspended operations in order to restructure.

Should the restructuring prove successful, obviously the result could be favorable for CRS and Triangle. However, at this point, it's too early in the process to be predictive.

Recently, the company and its stakeholders completed a supportive financing and executed all required amendments, which we believe has stabilized the business and capital structure for the near to medium term. It should be noted that even without its largest customer, CRS still produces meaningful revenues and cash flow on a normalized basis. But the company's capital structure is obviously geared for a larger-scale operation that includes this customer or other similar customers. We continue to work closely with the company and all its stakeholders in an effort to effectuate a full recovery of the business.

Power Direct Marketing is a marketing company that has operated in close partnership for many years with First Energy, one of Midwest's largest utility companies. Triangle's original investment was made in May of 2011.

A recent change in Ohio law eliminated the marketing program that Power Direct offered to first-introduced customers. As a result, while the company continues to produce revenues and cash flow from other smaller customers, its current capital structure does not support Triangle being able to accrue our interest. We do not expect the situation to change in the near term in a meaningful way, unless the Ohio legislature revisits this legislation.

Tomich Brothers is a commercial fishing and processing company based in San Pedro, California. We made our original investment in April of 2012 alongside a newly formed private equity group whose principles had spun out of a large, historically successful private equity group.

In late September of this year, we learned that the company was experiencing unexpected commercial catch and refrigeration issues. We are receiving daily updates at this point, owing to the critical nature of the situation. We will communicate more facts as we are able to regarding this investment.

Parts Now is the second investment we made alongside the same equity sponsor as Tomich Brothers. We made our investment in August of 2012. The company recently implemented a new ERP system designed to help the company more closely monitor and track its customers and inventory. The implementation unfortunately did not go well. And as a result, the Company experienced significant operational difficulties.

Communications from the financial sponsor led us to believe that things were stabilizing. However, in October, we learned that the company would require additional equity capital and that the sponsor was not inclined toward the business.

While this news came as a surprise, we do believe the underlying business is a good, sustainable one. And so we are prepared to support the business in the role of equity sponsor going forward. As a result, more news will be forthcoming on this account.

As we analyze our investment portfolio, we note that 48% of the value of our entire portfolio was originated in the last 12 months. And while statistic illustrates again how well our origination platform is working, it also illustrates that 50% of our investment portfolio contains equity investments which are being held at or near cost, given that they were originated so recently. As these investments mature, we fully expect that a meaningful amount of these relatively new equity positions will generate future value within our portfolio.

In closing, let me reiterate Garland's earlier point that while we are disciplined in the performance and situation with respect to our new nonaccrual accounts, we recognize that as our investment portfolio cycles from originations to repayments, from periods of realized gains to realized losses, and from positive portfolio company surprises to unfortunate losses of customers, we are still focused on the same above-average risk-adjusted returns that we've always focused on.

The lower middle market continues to offer exceptional value to discerning investors and we plan to continue focusing our efforts in this market for the foreseeable future.

Brent, thank you.

In closing our prepared remarks, I'd like to offer the following four points in summary. First, it was, as we have said, a difficult quarter in terms of the increased nonaccruals. However, I'm very pleased with the focus which Brent and our deal team have brought to bear on these investments. We've had a strong history of working through these type situations in the past, and I'm confident we are addressing these new nonaccruals appropriately.

Second, it was a record quarter in deployments. And I'm very pleased with the quality of these new investments and the way in which Ashton is leading our team in the origination process.

Third, our abilities simultaneously to address this increased level of nonaccruals, while at the same time deploying this record level of new investments, illustrates quite vividly the increased depth of our TCAP management team.

And finally, while the result of this nonaccrual activity is that our $0.59 regular quarterly and supplemental quarterly dividends will likely remain stable for the next several quarters, as opposed to growing, it is important to note that our model continues to operate and grow very much in line with our historical experience.

With that, operator, we'd like to open the call for questions.

(Operator Instructions) Troy Ford, KWB.

Guys, just a couple of quick questions on the new nonaccruals. Brent, you talked about -- obviously, you did mention that two of the nonaccruals, was it Tomich and Parts now, have the same equity sponsor? Can you make any other links between the two as we try to think about systemic risk in the portfolio versus kind of idiosyncratic risk? Is there anything else that you see links between these investments, where you could maybe change underwriting, or hopefully change something to forego this in the future?

Troy, I think the simple answer is no, there's really nothing systemic here. I would say one thing is that -- unfortunately the pattern of communication did not meet our expectations. We monitor our companies very closely, and we of course rely on information that we receive. In these particular cases, we were not pleased with the quality or timeliness of the communications. But beyond that, there's really no common thread.

Okay.

And then, as we look at kind of the quarter over quarter, anyway, the March quarter over quarter -- especially on Parts now and Power Direct and Tomich -- they were basically kind of in the same range, in the 90s. But Tomich here -- as it got marked down, it went much lower, at 20% of original costs, and the others were still at 50% and 60%. Should we be thinking about that as a clear signal that this is probably one that is in a little bit more trouble than maybe the others, and potentially the recovery won't be as great?

Yes. Obviously, we seek to, with every portfolio company, hit the mark in terms of where we think the value is. So clearly, we believe there's been significant value deterioration here, which again, if you had asked us a few weeks ago, we would not have said that. The communications we received on this one have been sudden. And there's always some degree of uncertainty in these situations, but I think we did our best, along with our auditors and third-party valuation firms, to value this appropriately.

Okay.

And then, one final one for me -- can you give us a little insight, Ashton, maybe on the quarter-to-date activity, what you're seeing in the fourth quarter? If not straight numbers, maybe just some continued yield compression, or some type of guidance on kind of what we should expect for fourth quarter?

Sure, Troy. I think the short answer to your question -- I don't want to be glib -- is that our pipeline is healthy. And as you know, we don't typically comment on the specifics of our pipeline, but I do think it's fair to say that, because we're one of the most active mezz platforms, that when the M&A market is busy, so are we. And given the environment that I described earlier in my comments, it would be natural to assume that we are currently seeing a lot of flow, just like we have in every quarter of this year.

I think, obviously the question is always -- what is the quality of that flow, and which investments do we feel are the right ones to pursue on behalf of our shareholders? And I can assure you that we spend quite a bit of time on that question.

And so when we think about pipeline, and when you guys think about pipeline, I think it really has to be measured in two ways. One is just externally, how much -- or what is the amount of flow of opportunities coming in the door, and then the subset of that flow that we choose to pursue. And on both accounts, I can safely say that our pipeline is healthy.

Okay.

And then, just one more. Steven, could you tell us, on the current nonaccruals, how much income was accrued in the third quarter on those investments? Or did they go all nonaccrual at the beginning of the quarter?

Troy, the run rate nonaccrual impact for us is, I think we mentioned in the prepared remarks, $0.07 a quarter. Actually, technically, $0.725. And the impact in the third quarter was $0.06. So there was a little bit of timing difference there for the third quarter, about a penny or a penny and a quarter on a per-share basis.

Great, thank you.

Thank you.

Chris York; JMP Securities.

When I think about the primary causes for the nonaccruals in a couple of your investments, it appears customer concentration issues came up. In light of this, are you guys rethinking your approach to underwriting companies in the event that a large customer leaves?

Thanks for the question. We're always assessing our underwriting strategy, make sure that we are responding to both the good and the bad in our portfolio. I don't envision any change in how we look at things. There certainly will be some learnings as we assess these situations going forward, again as there is in both positive and negative portfolio outcomes. But it's not a systemic issue in our portfolio.

And there are certainly industries where customer concentration is sort of a given if you're going to participate in those industries. And we will continue to be opportunistic in our view of those situations [and] industries.

Chris, this is Steven. Just one thing I'd add to what Brent was saying is there are times when you work with accounts over a multiyear basis. For example, I think Brent mentioned in his prepared remarks that CRS Reprocessing is a company we invested in back in 2009.

The key customer that unfortunately was lost with that account at that time was not a key customer. So as the company grew and became more relevant within its industry and scope of operations, then sometimes you have that phenomenon where companies take on new customers, and they become meaningful in the revenue and cash flow stream. So it's sometimes, at the time of underwriting, a consideration. And sometimes, it is after the fact, I guess, I would say.

But good question. And thank you for that.

Sure. That color makes sense.

And then, throughout most of 2014, the lower middle market has been more, I guess, impervious to new entrants than the middle market. Yet over the last two months, we've seen some new lower middle market mandates by nonbank lenders. Have you guys seen any changes in the competitive landscape for mezz debt in the lower middle market?

It's Steven. I'll give a quick answer. And then, if Ashton wants to give some additional color, certainly can.

I think as we said before, if any group were to tell you that the lower middle market is not competitive, they would not be speaking truthfully. That being said, it's certainly not as competitive as the broader market. And we have enjoyed the elements of that for our business and our shareholders. And there have been some new entrants. We see some folks from time to time.

I would not say that the dynamic of competition has shifted materially in the lower middle market. I think again, back to Ashton's prepared remarks, the increase in purchase price multiple that you've seen on a year-to-date basis, with sponsors moving from about 7.2 times cash flow to 7.8 times cash flow, does illustrate that sponsors are finding value in the lower middle market in terms of an M&A standpoint. And they want to participate there with their portfolio dollars.

So there are other, certainly, lots of debt providers. We tend to be one of the larger ones in terms of balance sheet strength. And so we like that. But it's been competitive. It, I think, will continue to be. But there's not a material shift in competition that we have seen.

Chris, it's Ashton. I would echo Steven's comments. I think in general, when we think about competition, it's from the traditional cast of characters that we normally see in deals. I will acknowledge -- and I agree with your point -- I think there's increased regulatory scrutiny going on by the Fed on banks with leverage loan exposure. And that increased scrutiny is maybe perhaps fueling a perception that nonbank lenders are going to start to gain an advantage and will lead more senior debt and perhaps unitranche financings in the future.

I think you're also seeing some funds out there spin off from existing funds vehicles to pursue different markets. You're seeing the larger funds create focus vehicles for certain markets.

So I think that a lot of that is in the infancy. It takes a long time to build a platform and a reputation and a reputation. So while we're not seeing it as a major part of our competitive landscape currently, we could see it more in the future.

Great. Thank you very much, that was good color.

Lastly here from me, how should we think about your operating expenses going forward? Your efficiency ratio was one of the lowest on record. Yet can you continue to hold the line with expenses, given the growth in the portfolio and increase in nonaccruals?

Chris, it's Steven.

I think the guidance we've given historically has been, from what we would say of an efficiency ratio standpoint -- that is, G&A divided by revenues -- has been kind of plus or minus 20. And I think that's really where we've been for quite some time, and I think where we would expect to be.

There obviously are quarter-to-quarter fluctuations that you get, in that this quarter was a lower quarter. And I think there's some obvious conclusions one can draw there from an operating strategy, a compensation, accrual, bonus accrual nature, those types of things, given the results in the quarter.

But on a year-to-date basis, that's 19% and change. We're in the range where we've been historically. And I think from a modeling standpoint for you, on a go-forward basis, still that plus or minus 20 on an annual basis is probably a pretty good place to be.

Got it.

That's it for me. Thank you very much.

Bryce Rowe, Robert W. Baird.

Just a couple follow-ups on the nonaccrual questions.

Brent, the lost customer issue, or the customer concentration issue -- are there other portfolio companies that kind of fit that profile? And then, the second nonaccrual question, the fundless sponsor tied to the Tomich and Parts Now -- are they sponsors of other portfolio companies?

On the customer concentration issue, Bryce, it's not a systemic issue in our portfolio at all. Again, I think if you look at auto industry, for example, we have a few investments in the auto sector. And almost by definition, you're going to experience a higher customer concentration in that sector. And that is typically offset by the leverage and the structure there. So it's not anything that is, in my opinion, a systemic risk in the portfolio.

To your other question -- no, we do not have any other investments with that particular sponsor.

That's helpful. Thanks, Brent.

And Steven, a follow-up question for you -- you mentioned the potential for the credit facility to grow in size with the increased equity base. You guys have historically not been a big user of the credit facility. Just curious how you think about, or how we should think about from a modeling perspective, maybe increased usage of the credit facility going forward into 2015.

Thanks, Bryce.

I think what we've said historically is that we are certainly comfortable if our capital structure contains somewhere in the 10% to 15% range of floating rate debt more as a ballast than anything else, given that the capital structure is effectively 100% fixed today.

And I think that's a reasonably good guide on a go-forward basis in a capital structure. The capital structure today is around $1 billion. So that can give you a little guidance there of where we would, I think, feel comfortable operating.

But let me be clear to say that that does not mean that we would expect to have on today's capital structure, call it $150 million of bank debt outstanding at all times. It will have natural peaks and valleys. I think the -- but there could be some base level outstanding, certainly. And that might be the more likely scenario on a go-forward basis.

I think the real takeaway there is from a leverage standpoint, from a [full dac] leverage standpoint, the Company is at 0.33. And so that leads to a very high-asset coverage ratio. So we have meaningful capacity, I would say, for various forms of debt in the capital structure.

And as we begin to look to 2015, especially echoing some of Ashton's comments on the pipeline -- and obviously last quarter was a record quarter by all measures, so we may not continue that element of pace -- but as we look to next year with the healthy M&A environment, I think layering in additional potentially bank debt and potentially fixed-rate debt is certainly a possibility for us as we move into next year.

Okay. That's great.

And one follow-up on Chris's questions on the SG&A line -- was there an incentive reversal in the quarter? I missed some of the prepared remarks, and you guys might've mentioned that. But sorry for being redundant if you already covered that.

No, you did not miss anything. The short answer is no, there has not been a reversal of anything. Each quarter, as I think you know, our Compensation Committee and Board meet, and they discuss incentive bonus accruals on a quarterly basis. But we have -- in the history of the Company, we've not reversed anything, and this quarter's no exception to that.

Okay. Thanks. Appreciate it.

Thank you.

Robert Dodd, Raymond James.

On Power Di -- I mean, the other three -- CRS, Tomich, Parts Now -- all look like pretty clear surprises (inaudible). But Power Direct, you mentioned, was a change in Ohio law. And again, if we look back last quarter, it was marked at about 90, give or take. And state legislatures don't typically act that quickly. So can you give us any more color on what really -- was it just expected that the law would not change, and then it did, and that caught the company, Power Di, caught them flatfooted? Or what was the view as to why that seems to have been such a surprise, given how well it was marked last quarter?

Very good question, Robert.

As we understand it, the legislation was not specifically targeted to these programs. It was other legislation. And this particular piece of legislation was sort of slipped in by someone and was passed. And it really -- these are not big-dollar items in government budgets or anything like that. So it was indeed a surprise.

Again, the company, Power Direct, has served First Energy and other utilities with these types of programs for a long time. These are energy-efficiency programs, where utilities have certain incentives to encourage their customers to invest in energy-saving devices around the home. And so these are very typical programs in many, many states, and run by many, many utilities. And typically, utilities engage companies like Power Direct to help them with these programs.

So there's nothing unusual or controversial about the programs. And they've been very successful in Ohio. So it was, in fact, a surprise and a major disappointment. And apparently, to those at First Energy as well, who believed they had a very successful program.

Perfect.

And then, on the other one, Tomich and Parts Now -- as you said, no other deals done with that sponsor. But can you give us some color -- a [new leaf was] spun out from the sponsor back in 2012. You did two deals with them in pretty short order, given you didn't have a long relationship, maybe, with the principals but not with the new entity. And then, nothing since. So since doing those deals, has anything changed? Or, going forward, given how these two have performed, anything changed about how you underwrite new spinouts on the private equities side in terms of those you might have had relationships with, but going their own way? And maybe [you're] expecting to get a little bit more of a track record before your [funded] yields going forward? I mean, anything on how you underwrite those type of new sponsors going forward?

Again, a very good question, Robert. I think we will certainly be evaluating that process on a go-forward basis. We have had historically success with those types of situations. And I think, as you know, data in industry would actually show that the first and second funds perform better than subsequent funds. And typically, there's a tremendous amount of effort and energy on first- and second-time funds to make sure that they establish their track record in order to have a long-term pattern of success.

So we have been successful with spinout type sponsors in the past. This has obviously not been a successful experience for us, and so we'll certainly be, I think, reviewing our process and assessing how we approach those situations in the future.

Okay, got it. Thank you.

Just one kind of housekeeping one, Steven -- on the nonrecurring -- the recurring/nonrecurring that I always ask about every quarter -- looks like there was about $1.2 million in the quarter; average is more like $2.5 million to slightly above $2.5 million. Is there anything, just a random abnormality or anything, to read into that?

No, there's really not, Robert. One thing we've talked about historically has been -- as our portfolio has grown, and given the relatively high percentage of portfolio companies where we maintain some type of equity investment -- that we are in line to receive dividends when a sponsor will do a recap or those types of things. And obviously, in 2013, there was a lot of that type of activity.

And so, if you were to rewind the tape back to 2011, 2010, those types of years, we really didn't have much in the way of nonrecurring dividends. In 2013 and 2014, we have had it, but it's just -- it's lumpy.

So I think I would say this quarter for us is not an unreasonably low quarter, but it's certainly not as -- if you looked at last year, for example, all of 2013, the Company was -- we were about 2x what we have been either historically or since in terms of nonrecurring fees and nonrecurring dividends and things. So we're more average this year, I would say.

Thank you.

You're welcome, thank you.

Greg Nelson, Wells Fargo Securities.

On the nonaccruals, obviously the write-downs to fair value offset a lot of the impact of the equity raise well above NAV. But there's still $32.4 million sitting in the nonaccrual bucket now, fair value. How do you think that's -- is that marked conservatively, or should we expect more downside on there?

Well, Greg, I think it would be appropriate to lead with the facts, which are -- every quarter, fair value is fair value as determined by the Board, and [alded] by ENY and gauged by our independent valuation consultants.

Okay. And then, I noticed another markdown to Front Street, which is marked down a little bit more than $2 million during the quarter but not added nonaccrual. How are you thinking about that position?

Again, in terms of the fair value assessment, the Company has, in this particular case, ample liquidity. But we've had some negative surprises in terms of earnings. And so we're not anticipating it going on nonaccrual. But we are a little more skeptical with their projections. And so we had to -- we felt like that was the appropriate thing to do was to discount it a little more heavily than we had last quarter.

Okay.

And then, on the Parts Now -- you mentioned that you'd be supporting the Company with additional equity. Are you converting debt to equity, or injecting additional equity? Just want to -- and what's your logic behind it? just want to make sure you're not throwing good money after bad?

Yes. We certainly hope and believe that that's not the case. We are not currently planning to convert debt to equity; we are investing in the form of preferred equity.

And then, last question, given some of the nonaccruals you have, but obviously you've been investing a little bit more on unitranche -- are you thinking about the risk-adjusted return of subordinated debt in the lower middle market a little bit differently in light of the nonaccruals? Or are you just finding more attractive deals in unitranche?

Well, I would say that we're always assessing the risk-adjusted returns of subordinated debt in the lower middle market. It's obviously what we've done for a long time. And there are always risks associated with it. I think we would be fooling ourselves and you if we did not say that there is more risk associated with subordinated debt than there is in senior debt, and that we would be fooling ourselves and you if we said that nonaccruals are not part of our business. They are part of our business. They're an ordinary and regular part of our business.

And I think the unusual situation we're dealing with here today is that we've had four of them in one quarter for different reasons that have gone on nonaccrual.

I think that we have always looked to have some balance sheet diversity in our portfolio, both down-balance sheet in the form of equity and up-balance sheet in the form of senior. But clearly, there's some changing conditions in the market as well, that there are sponsors that we have very good relationships with that are trying to finance what we believe to be very good companies that have a strong preference for unitranche.

And so we are looking to leverage our platform. And when we believe we can get very good risk-adjusted pricing, we are evaluating unitranche opportunities.

Ashton, I don't know if you want to add to that.

Sure, I'll just add to that.

Greg, as you may have seen in our third quarter, we had 11 new investments. Out of the 11 new investments, three were unitranche. And interestingly, the pricing for us, we thought, was attractive and reflected a good risk return for our shareholders. It was on the three, it was 10%, 11% and 12%.

I'd make the observation -- unitranche versus sub can go both ways. Sometimes it's driven by what the sponsor would like to invoke from a capital structure perspective or security perspective; sometimes it's driven by us with where our best comfort would be. So it can go both ways. But I'd say that in general, the mezz market and subordinated debt market has provided historically the greatest platform -- the key platform for TCAP. But we remain open and willing to invest in unitranche opportunities where we can find risk-adjusted returns that we think are commensurate for our shareholders.

Yes. No, I would agree it's a great product offering, and you guys got some attractive yields on it. I appreciate the color. Thanks.

At this time, I'm showing no further questions. I would like to turn the call back over to Garland Tucker for closing remarks.

Operator, thank you very much. We appreciate everybody being on the call. Certainly feel free to follow up with any of us if you have additional questions. And we look forward to being in touch.

Thanks again. Bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect.