Barings BDC Inc (BBDC) 2015 Q2 法說會逐字稿

At this time I would like to welcome everyone to Triangle Capital Corporation's Conference Call for the Quarter Ended June 30, 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 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 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 this morning with detail of the company's quarterly financial and operating results. The 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 section titled Risk Factors and Forward-Looking statements in our Annual Report and Form 10-K for the fiscal year ended December 31, 2014 and quarterly report on Form 10-Q for the quarter ended June 30, 2015, each is 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.

Thanks Sheri, our overall investment portfolio remained essentially flat during the quarter, and portfolio yield is almost exactly the same amount of recurring revenue in the second quarter, as it was during the first quarter of this year. Although the size of that investment portfolio remained relatively steady year-to-date, it follows logically that our net investment income continues to be to be somewhat ranged down with small quarter to quarter variances in net investment income per share being based primarily on the amount of non-recurring fees and dividends that we received from portfolio companies on a quarterly basis. We continue to feel comfortable with the overall health and performance of our adjusting investments. We would be remiss if we did not acknowledge that our vast portfolio accruals is based largely on our assessment of the individual transactions we saw during the first and second quarters of this year. In short we decided pass on a greater percentage of transactions during the first half of the year rather than stretch our credit metrics in a manner that would not be consistent with our historical underwriting standards. And while we acknowledge there is a short term cost to our long term investments (inaudible) when we don't grow as rapidly as some of our peers from an assets standpoint. We believe a steady unwavering focus on appropriate risk adjusted returns as the best method of producing above average long-term results.

As we begin to move to second half of this year, there are two major topics to discuss. First from an investment perspective, we are preparing to see improvement in the credit quality of transactions we are currently evaluating and while it would be premature to establish any guidance in terms of what the originations might be next six month, we do feel comfortable that we're well positioned from a relationship and a liquidity standpoint to be opportunistic when high quality investment opportunities present themselves.

Second, from an internal perspective, we announced exactly two years ago that Ashton Poole is joining TCAP as President and Chief Operating Officer as part of a longer term succession plan. I'm pleased to report that this succession plan has proven successful to-date and that we're now entering the final phase of the plan. Our expectation is during the first half of 2016, Ashton will become Chief Executive Officer. During his two year here, Ashton has become established as a very good leader of our field team and he has become (inaudible). Our Board has been steadfast this year that proper succession plan is critical for us. As now we're [closing with] Steven and Brent, the other two members of our internal management committee to establish the operating frameworks that will continue to promote Triangle's culture and teamwork into excellence long after the succession plan is complete. So as we focus on the second half of 2015, (inaudible) investment opportunities we are evaluating and I'm equally encouraged by the strength of our management team and collective opportunities the team has to develop further the Triangle Capital franchise across low-end of the market. With that, I'd like to turn the call over to Steven Lilly.

Thanks, Garland. Our financial results this quarter were fairly straightforward and much of our financial and portfolio discussion is contained in our quarterly podcast, which was made available yesterday at the time our earnings release hit the wire. But from a broader perspective, I would note that our second quarter total revenue of $27.8 million was approximately $3 million below our first quarter revenue of $30.8 million due to as Garland mentioned, a reduction in non-recurring fee and dividend income from portfolio companies. Our interest expense is a bit higher on a sequential basis due to the fact that we have a full quarter of interest and fees on our $86 million 2022 notes and the closing of our new enlarged senior credit facility, which occurred in May. The higher interest expense and debt financing fees partially offset by the redemption of our 2019 Notes, which were redeemed in June and which bore an interest rate of 7%. The redemption of these notes is expected to reduce our interest expense by approximately $3 million per year on a go-forward basis; our G&A expenses of $4.3 million for the quarter compared to $6.6 million during the first quarter of this year and the quarter-over-quarter decrease was primarily related to decreased compensation expense relating to a lower level of bonus accruals during the second of this year. So from an efficiency ratio standpoint for the first half of the year, our efficiency ratio was 18.6% and depending on various assumptions one might make, we would expect our efficiency ratio to be between 19% and 22% of revenue for the full year 2015. Net investment income or NII for the second quarter was $16.2 million or $0.49 per share compared to $17.8 million or $0.54 per share during the first quarter of the year. Our NAV, on a per share basis was $15.47 at June 30 of this year compared to $16.11 at the end of last year. The primary reasons for the $0.64 per share change in our NAV were the $0.10 additional distributions to shareholders, net realized losses in the amount of $0.42 per share relating primarily to our conversion of CRS debt and equity, loss on the extinguishment of debt in the amount of $0.04 relating to the redemption of our 2019 notes and $0.10 for stock based compensation. Finally from a liquidity perspective, we have a total liquidity in excess of $300 million, which feels very comfortable based on the overall size of our investment portfolio. And with that, I will turn the call over to Ashton for a few comments on our quarterly originations and also the overall investment market.

Thanks, Steven. The breakdown of our $65 million in total investments during the quarter is as follows, approximately $50 million were new investments and $15 million were follow-on investments. The average size of our four new investments was $12.5 million, and the weighted average interest rate associated with all of our new debt investments was 12.1%. In terms of market activity, the lower middle market remains one of the more active parts of the broader overall M&A market. During the second quarter, we analyzed approximately $2 billion of new investment opportunities, which represent our second highest quarterly total in the history of our company. However as Garland alluded to in his opening comments, the quality of transactions was noticeably lower than we experienced in recent quarters. As a result we passed on a much higher percentage of transactions and we closed on approximately 2.5% of the transactions we analyzed as compared to our historical closing rate average of 5% to 6%. Based on the status of our current pipeline, it appears the lack of transaction quality in the second quarter and indeed in the first quarter as well, thankfully may have been a temporary phenomenon as opposed to a longer term trend. The broader M&A market however continues to remain slightly above average in terms of both acquisition multiples and debt financing levels. As a result from Triangle's perspective, the best way for us to continue building our brand name in the lower middle market is to focus intently on investment opportunities in which we're comfortable from a risk adjusted return perspective and then to take steps to ensure that we win those opportunities. Interest rate compression continues to affect all BDCs including TCAP as is evidenced by the fact that our new capital was deployed at a weighted average interest rate of 12.1% as compared to our portfolio with payments, which carried a weighted average interest rate of 13.1%. As we have discussed before, interest rate compression makes achieving dividend growth on a per share basis incrementally is more difficult. That being said, since we're analyzing more opportunities today than perhaps at any point in Triangle's history, we believe we will continue to find attractively priced instructor transactions that meet our risk return parameters and with that I will turn the call over to Brent to discuss certain aspects of our investment portfolio in more detail.

Thanks, Ashton. For the reasons we have already discussed, our investment portfolio is essentially flat on a year-to-date basis. From a portfolio management perspective as previously announced, during the second quarter we converted our debt securities in CRS reprocessing to equity and we recognized a corresponding realized loss of $20.4 million during the quarter. In addition, we are working closely with the management team in (inaudible) and hope to be in a position to discuss that transaction in greater detail on our November earnings call. From a more positive standpoint, our non-accrual assets have declined from 5.8% of our investment portfolio on a cost basis at the beginning of 2015 to 3.1% [today]. Also on a positive note, the operating and financial performance of Eckler Holdings has improved and we anticipate that we will be able to convert that investment back to full accrual before the end of 2015. The other investment of note this quarter is BFN operations, which we refer as Berry. During the quarter we received a $2 million principle repayment at par, however the investment was still carried below cost due to ongoing operational difficulties at the company. In response to these operational issues, the company is working through a management change and we expect to be able to provide further guidance on Berry our third quarter earnings call. Our more recent equity investments comprising approximately $52 million of cost basis value, which were originated over the last two plus years continue to season and are currently valued at approximately $56 million. As these investments mature, we expect they will become the foundation of our next series of realized gains in the future.

And with that, I will turn the call back to Garland for a few concluding comments before we take questions.

Thanks, Brent. In the current margin environment of above average evaluation multiples and leverage multiples, we continue to believe and maintain stability both in terms of our investment portfolio and our balance sheet is our best course of action over the near term. The recent additions to our investment portfolio has been well structured opportunities and the steps we have taken recently with underperforming assets almost certainly adds to our market position over the coming quarters. As a result, (inaudible) markets we believe we will prepare ourselves for the future but we continue to believe we will be ready for the opportunities potentially from the lower middle market and Triangle happens to be well positioned to take advantage of that opportunity. And operator with that, we would like to open the call for questions.

Good morning and thank you for taking my questions. The first one is relating to CRS, as part of the restructuring, it looks like you guys also invested another $5 million into CRS, can you just give us some thoughts around putting that additional capital into your investment and how is CRS performing with this new capital structure?

Sure. The vast majority of that capital was put on our balance sheet in senior debt and obviously we believe that the business continues to have value situation of the good business that had some issues with some of its key customers and resulted in what we believe is a temporary down draft. We're encouraged by the current results of the company and the restructuring that we have been able to effect and so obviously stay tuned but we believe that it is certainly a viable business that is worth supporting.

And then with the large loss in our CRS actually crystallized and realized in the current quarter, does that change your thoughts around continuing to pay the $0.05 special dividend going forward for the same also length of three years as you initially declared it?

Ryan, it's Steven. Just a little bit on color on that, is that you certainly recall last year, that is 2014, we paid I think total special distributions in the amount of $0.40 per share based primarily on the gains we had realized in the prior year and this year we're on pace, we've paid $0.10 at this point through the year and would expect that we would pay a nickel in the third quarter and a nickel in the fourth quarter for an incremental $0.10 -- $0.20 for the full year this year, which would be the payout for gains that we had experienced last year. So as we move into next year, I mean it will logically be based on -- our ultimate decision will be based on the performance of the portfolio through the end of this year. Does that help?

Yes, that makes sense. And then sorry to ask just a lame question, but given that portfolio growth is such a big part of TCAP story, you guys only have $9 million in net portfolio growth in the first half of 2015, just wanted to hear your thoughts around your current pipeline and how you guys can substantially increase that portfolio growth in the second half of 2015?

Ryan, it's Ashton. As we alluded and I alluded to in my comments, Q2 marked a -- we analyzed about $2 billion worth of transactions, which as I said was the second highest quarterly number that we have had since the history of the company, that's the good news. We were struggling with the quality of the opportunities we were analyzing and that extended as well into Q1. I think in Q1, we looked at a lower volume of transactions [installed] with the quality, Q2 we had an increased volume of transactions to look at but still struggled with the quality. I would say that the flow is currently consistent with what we did experience in Q2 and fortunately we're encouraged that the quality of what we're seeing is improving. And as you know, we have already announced two transactions quarter to-date. So I think from where we sit, we feel comfortable with the level of the flow. We are encouraged that the quality of the flow maybe improving. All of our banker friends tell us that pitch activity is solid, good not crazy, but they are confident that the remainder of the year will provide a good flow of transactions and also going into the early part of next year. So at the end of the day on a net-net basis, there is not much we can do about the repayments but we can continue to focus on origination and look for the high quality opportunities that we like and fortunately we always stick to our knitting of making good decisions on behalf of our shareholders and seeking those transactions that provide the best risk adjusted return.

Makes sense. I'm just curious what are your thoughts behind why the quality of the investments going forward seems to be improving?

That's a great question. I'm not sure I know the answer, I think that in the second quarter certainly -- the first quarter as you know is typically a slower quarter because those transactions that were not fit in the market in the latter part of the previous year then need to get through their auditing phase to get financials that are helpful for both companies and market, so I think that contributed to a large part of the slowdown in the flow. As far as the quality question goes, I think that we're in the longer stage of a bull M&A market and I think as evaluations have continued to edge up overall for the market, I think that owners have decided that they are going to try to tap into that market and see if they can achieve multiples that are consistent with current levels. So I think it's a little bit of an opportunistic plane quite frankly, I think we are seeing a lot of differentiation and the banker friends we have will tell us that there is a lot of differentiation today between what they would call the A companies and the B companies. The A companies being those characterized by large addressable markets, strong organic growth opportunities and know that's organic not necessarily through acquisition, higher margins and strong free cash flow conversion and so those companies they get put in the A category and they are going for the really high multiples. The B companies that don't have as large of an addressable market are growing as ongoing faster again but need to rely on acquisition growth maybe have lower margins, maybe are more cyclical in nature tending to get much more [soothing] from the buying universe. The one aspect that we are seeing is the role of the strategics in the M&A market, which they are really driving right now the M&A market and the (inaudible), so they have got balance sheet and they have got currency and they are utilizing and are being opportunistic because their underlying growth rates are low as well, so they are using their currency opportunistically to enhance their own growth rates. Hope that helps.

Yes, great, I appreciate your comments. Thanks.

Bryce Rowe, Robert W Baird.

Just had a couple of questions around balance sheet management and maybe two to tag on to what Ryan was talking about. But number one, Steven, you've got almost $120 million of cash on the balance sheet right now and a larger credit line with having being expanded. Just curious how you think about managing that cash position going forward over the back half of this year?

One quick note on the cash position at the end of the quarter, as you say around $120 million, I think it was $117 million and we had a transaction that had a dry closing literally on June 30, and then was funded the first week of July in the amount of $17 million. So that took our cash down to call it $100 million. As Garland alluded to in his comments and Ashton too, with the portfolio relatively static you know in terms of year-to-date activity, we try to prepare ourselves from a balance sheet standpoint so that we can opportunistically pursue growth in the portfolio when those things present themselves and clearly the first thing we would do is use cash from our balance sheet. We do tend to like to keep somewhere $25 million to $30 million of cash on hand pretty much all times, just maybe programmed a little more conservatively than some folks. But I think you then would see the credit facility begin to be utilized as the portfolio does begin to show some signs of expansion and growth in the second half of the year, in all likelihood based on at least what we're seeing now. But the credit facility was clearly put in place to give us the flexibility to fund a meaningful amount of new investment activity, and also be opportunistic with things like calling the 7% bonds and creating an interest rate savings opportunities for us is -- we're obviously a much bigger company now than we were when that bond offering was put in place. Does that help?

Yes, that's very helpful. And then maybe Ashton, just want to really understand the dynamic around origination activity and what you're able to book in, if not book, given the quality of the opportunities. Any visibility into repayment activity for the back half of this year given the higher valuations that we're seeing right now in the market?

We usually don't provide any forward guidance based on that as I said, it's hard to predict. I would say just thematically, it would feel like the industry itself is maybe over the hump of accelerating repayments, it doesn't mean repayments are going away but we would hope that as we continue through this cycle that the level of repayment and the rate of repayments will continue to go down as our portfolio gets recycled. But in terms of forward guidance, we don't disclose.

Robert Dodd, Raymond James.

Hi guys, just a few questions, one quick one first. The non-accrual you expect to come that may come back by the end of the year, which one was that, sorry, I missed the name?

Robert, it's Steven. The name is Eckler.

Eckler, got it. Okay. Thank you. Kind of quality question if I can, I mean can you – actually you talked about A&B companies, I mean of the $2 billion that you declined to participate in, I'm just trying to get a qualitative rather than quantitative feel here, what would you say the difference was between normal, say, this time last year of rejecting those for the point that you didn't like the business fundamentals so much versus the [PEAsk] on the leverage attachment point was too high because I can see, one, the fundamental shift of the type of businesses you see in shifting fairly rapidly or easily, but the [PEAsk] coming down which seemed a bit more of a stretch at this point since that will grab everything they can take at this point in the market or support it. So can you give us any color on that kind of breakdown?

Robert, it's a great question. And I'm not going to be able to give you a precise answer but just to say that it's typically a mixture of a lot of things that go in our decisions to pass on deals, it could be the business model, it could be the stage of the cycle that we're in, it could be the capital structure that's being put around the transaction, it could be perceived quality of management, it could be lack of a rollover percentage selling shareholders, meaning they are just trying to get out and get their money and move on, and as you know one of our key focus areas is to have ongoing management and ownership of founding investors, etcetera. Leverage, pricing, all of that are factors that go into our decision ultimately the [PEAsk], we feel good about the four new investments, the more recent ones, All Metro, CMG, CIS, and Radiant, they were structured – we liked the business models, we liked the management teams, we liked the rollover percentages. From a leverage perspective, they were on the more conservative side of what we're seeing in the marketplace. So three out of the four were between 4x and 4.5x, one was south of 3x leverage, so call it 2.75x. So when you look at the pricing, currently an average of 4x, if you will, which is very consistent with where our overall portfolio is. Robert, you've always asked in the past when we've had -- these were all subdebt investments as well, so we stuck to our knitting of historic investments around the subdebt, as you know we opportunistically invest in unit tranche as well, but all four of the newer investments were priced at 12%, which is very spot on with being in the range of historic subdebt pricing of 11% to 14% and I'd say current market is generally probably 10% to 13%. So I think we felt good about many aspects of the deals that we chose to go forward with, the ones that we decided to pass on either have one or more, a combination thereof of attributes that we felt just weren't right for our shareholders.

Got it, thank you. And if I can one more kind of related to that, I mean historically as we know, I mean Q1 is weak, Q4 is strong typically, that's typically historic seasonality. But the last few years, I saw a different point in kind of the overall cycle, it's become even more shifted, I mean last year the back half was gross originations, $300 million the last two quarters and much, much weaker than that. And the first relatively weaker, and in the first half a net, obviously, substantial growth in the back half and not so much in the first, the same thing kind of applied relatively shifted. So do you think this is a permanent shift in the seasonality of when certain types of A versus B deals have come into market, the good ones are going to wait later in the year consistently going forward, and we're going to see just structurally the second half to be seasonally even stronger than the first half than has historically been true or is this just a temporary blip, and I have realized that's a pretty tough question to answer.

Robert, you always ask the most difficult questions. It's very hard to tell. It's clear that kind of that you just laid out has materialized but I don't need to predict that going forward, it is very, very difficult. So I'm not sure I have any other way to answer it.

Chris York, JMP Securities

Good morning, guys and thanks for taking my questions. So given essentially a flat portfolio this year in 2Q and your views of quality and deal flow, has your view changed for the potential size of the investment portfolio to eclipse the $1 billion level by year end?

Chris, it's Steven. When we gave that guidance, hopeful guidance I guess, I would say on our – what was our fourth quarter earnings call in early March, then the trends we were seeing at that time made us think it was not very logical for the portfolio to grow by, I guess it would have been mathematically, about $75 million over the course of the year. Could we get there by the end of the year in the last six months? Certainly, historically you would look at the ability of the company on a quarter-to-quarter six-month basis and say yes, but I think thematically what you continue to hear from us is, we're not trying to grow the portfolio purely for growth. Say, we're trying to find the best risk adjusted returns we can. Again, the caveat of all of that, I think we are feeling better about the portfolio – with the pipeline that we have in house today versus where it was in many months of the first half of the year. So I think that does bode well. So I think ultimately, certainly we'll get there, it's just a question of time and frankly, repayments have a lot to do with it too. So if we have a couple of quarters where repayments are on the lighter side, I think we could easily be there.

Great. Thanks, Steven, that certainly makes sense. And then next one is for Brent. Brent, can you touch on the performance and potential comfort in capital contractors as it was written down this quarter to I believe 78%, and it feels like the markets have hopped around over the last four quarters. So just wanted to get your thoughts on that.

Sure, Chris. The markets have hopped around as have the results of the business, I think the most encouraging development in the business was that the equity sponsors stepped up with a significant amount of new capital to invest in the business, we joined them in that effort, and that resulted in a meaningful amount of delevering. We are encouraged by the developments of the company in the more recent months. But again, the history has been sketchy there, and so time will tell. But again I think the most positive development was that the equity sponsor injected a significant amount of capital and that was used to delever the balance sheet, so we certainly feel better about the investment today than we did in the latter part of the last year or early this year.

Okay, that's helpful. And then that's it from me. I just wanted to say or share my congratulations to Ashton.

Jonathan Bock, Wells Fargo Securities

Ashton, Steve, just curious as it relates to the $2 billion of opportunities that you look at and we understand that wider the funnel, the greater the opportunities that sift through and find a diamond. But wanting to understand the amount of sheer miss that you look at versus what might have been coming to you in the form of broker/dealer offered second lien/first lien unit tranche. And perhaps the views that you have on owning perhaps a more liquid asset in this environment that some folks are choosing to do to put on balance sheet to generate interest income, I understand you don't want to grow for growth sake but given heavy cash balances, industry is also -- there is a bit of a push-pull dynamic if you can find decent opportunities earning some spread in order to boost NOI. So just your thoughts there?

Jon, good morning, thanks for your message, a lot to address there. I'd say that of the flow that we analyze, 99.9% of our flow is what we originate. And so we do not have anyone in house that has a telephone that is wired to broker/dealers and get daily phone calls and opportunities, so that is just not part of our current DNA, in fact I think there are probably two investments historically that we have ever made that were "black pieces of debt" and that was the cause the sponsor behind we were very comfortable with, we had a good relationship and we knew the companies and we were very comfortable with the credits. I would say that that's less of a norm and more of an abbreviation, it doesn't mean we won't do it in the future in a similar way but I can say that the broker/dealer angle that you asked about, is not something that we currently are engaged in.

As far as, let me stop there, Steven is asking to turn the..

Jon, just real quickly, in terms of your comment on cash balances and maybe parking some cash in lower yielding investment, more liquid investment etcetera, we've looked at that strategy over 8.5 years at different times. We have avoided, I guess what I would say, is that the temptation of doing that with a view that it's a different business strategy than what we have wanted to pursue in taking principal positions in the companies that we partner with. And certainly it's always hard to predict and I'm not trying to predict the next recession or anything like that but it is naturally a true statement that many BDCs engaged in that type of practice, got caught in that type of practice when the market did turn last time around. So for us, the prospect we're trying to arbitrage a very small amount of cash balance, $50 million, $75 million to get a few basis points or something is a little distracting frankly from the core business. We prefer to focus on the core business for the long term.

That's a great answer and I appreciate the candor, it's just a question that surfaces and it's always great when a manager kind of sticks to what they know and what they do. So in terms of sticking to what we know, I guess the question the we'll have as we look at the subdebt originations done in the quarter, historically warrants have been a very valuable portion of the story in that they provide upside and also can cover expected losses because no one bats a thousand. What we've seen is perhaps some of the warrant coverage, would you say that warrants are tougher to get now, hence when we look at a Radiant or others where we might not be seeing warrant coverage today and will that pick up or not because increased coupon is nice but in terms of sticking to the knitting, the warnings, the warrants have also paid significant returns to investors overtime as well.

Jon, it's Ashton, it's a great question. I would say that warrants are more difficult to get today in transactions but that's not a 2015 phenomenon, that's nothing that's been going on now for the last two to three years. So it's just continuing to play out in a theme. I think what has resulted is, we made more direct equity [core] investments, so if you look historically at the mix of "equity in the portfolio", it was probably more balanced with warrants and indirect equity investment, I'd say that over the last two to three years, it has traded more towards direct equity investments. We strike hard, very hard, and maybe I should have added that in my get back to Robert's question earlier about deals that we turned down, our ability to get equity in transactions is a critical part of our filtering when we decide to pursue transactions. So in many cases, we will turn down a transaction because we cannot get equity. So it's a key focal point for us, I think thematically in the industry right now, it's harder to get equities, so while it's not what we exactly want to do, we are finding when are able to invest equity we're probably going a little deeper than we normally would, a little bit more narrow but we're still getting exposure to really good investment opportunities. And so we feel very comfortable with the equity that we're putting out but the warrants point that you raised is not something that's a recent trend, it's been going on for the last two to three years.

I'll circle back real quickly on the flow point because a number of those questions have been asked today about the flow, and one thing I'd like to just be quite honest is, the M&A market for the first half of the year, I think everybody knows that Q1, certainly from publicly available statistics and firms that publish the stats, Q1 deal flow was down, I think, 26% in terms of the number of deals, 24% on the dollar decline in the deals. Q2, if you actually go look at the data that we've seen would suggest that the overall PE market continued its decline in Q2 on a both account and a value basis, so that's kind of the – the [pummeling] is overall. However, the good news out of all of that is that the middle and lower middle market activity was the bright spot in the current M&A market. So middle market deals accounted for about 65% of all the transactions, and about 80% of all the volume of the dollar amount of transaction, and if you want to really break it down into the lower middle market, about 50% of deal activity in the first half of this year occurred in the sub $25 million range. So when we talk about our flow being pretty full at this point, factoid is that influence of the middle market, particularly the lower middle market for us, is really resulting in increased deal flows. So we feel very fortunate to – as your point, stuck to knitting, continue to focus on the lower middle market because it is part of – in conjunction with the middle market right now, the most active part of the M&A landscape.

[Robert Valor], Investor

Yes, first of all, thank you for taking my question, and I must apologize I had a conflict and got in just a little bit late to the conference call. But my question is, with the Fed probably at least whatever one thinks raising interest rates maybe as soon as September this year, how do you all anticipate that affecting originations in the business?

Robert, this is Steven Lilly. I'll start and then Ashton may jump in as well. First in terms of our business and our balance sheet, we are predominantly fixed on the right side of our balance sheet. We are using our senior credit facility to fund some incremental investments but we tend to keep floating rates dipped on our balance sheet as a very small percentage of our total capital structure. And when I say very small, I mean less than 20% of our capital structure, at any point in time would expect it to be in floating rate debt, so we feel very good that we ourselves are well hedged, if you will, in a potential rising rate environment.

And then from a portfolio company standpoint, the first point I'll make before turning it over to Ashton would be that many of our portfolio investments have a floor to their interest rate. So for example, if a LIBOR plus some spread investment there is a 1% or 1.5% or something like that LIBOR floor, so if the incremental interest rate change by the Fed that's being speculated were to occur, I don't think there would be any change in cost of borrowing with our existing portfolio investments in the near to intermediate term, obviously if things really got ramped up from an interest rate standpoint. There would be – some of that frankly would be an offset by the strength of the economy that would necessitate a meaningful increase in rates, I mean, when I say meaningful, something more than 25 basis points or something like that. To us if the Fed would take that action, it would be a signal that the economy certainly was doing better which would help many underlying portfolio companies. But action from a new investment standpoint, I'm not sure we're seeing much different than that in terms of the (inaudible).

Robert, I think that Steven addressed it very appropriately for unit tranche related opportunities, there is typically a LIBOR plus, a spread structure with generally a 1% flow, so again, depending on the amount of the increase, it's probably going to be a negligible impact. From a subdebt perspective, the debt usually is a fixed price, generally not a LIBOR plus spread, it's usually a fixed price. And one of the things that we track and have tracked historically is the weighted average yield of pricing vis-a-vis the 10-year treasury, and that spread has remained very consistent over a long period of time, and generally ranging anywhere call it just on back of the envelope from 900 to 1100 basis points spread. And so we would envision with any increase in rates that the spread that we would achieve would remain in that consistent 900 to 1100 basis point spread range and therefore we would slightly move up in pricing on a subdebt basis. So we would expect there to be really negligible impact on either unit tranche side or a subdebt side for the near to medium term.

(Operator instruction) Thank you. At this time, there is no other question in queue. I would like to turn the call back to Mr. Tucker for any closing remarks.

Thank you very much. Again, we thank everyone for participating in the call, we appreciate your interest and your questions, and of course, stay in touch.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.