Barings BDC Inc (BBDC) 2016 Q2 法說會逐字稿

Good day ladies and gentlemen, at this time I would like to welcome everyone to Triangle Capital Corporation's conference call for the quarter ended June 30, 2016. (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.

Your hosts for today's call are Triangle Capital Corporation's President and Chief Executive Officer, Ashton Poole and Chief Financial Officer, Steven Lilly. 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 with details of the company's quarterly operating results, 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, 2015 and quarterly report on Form 10-Q for the quarter ended June 30, 2016. 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 Ashton Poole.

Thanks Sheri and good morning everyone. Given Triangles recent public equity offering and the preliminary disclosures that we voluntarily made in conjunction with that offering, our prepared remarks on today's call will be shorter than normal. Also, Brent is unable to join us today and so Steven and I together will cover his remarks within our respective comments.

It will come as no surprise to you who followed our equity offering last week, we are very pleased with our collective financial and operating results for the second quarter and we are excited about the trends we see on the horizon for the second half of the year. During the second quarter our NII per share was $0.49 which equates to the high end of the range we provided in our perspective supplement filed on July 25. Our NII per share is almost 9% above our $0.45 per share quarterly dividend and represents exactly the type of operating cushion we strive to achieve.

During the quarter we made three new investments totaling approximately $46.3 million and we made several small follow-on investments in existing portfolio companies totaling $17.4 million. Together our new investments and follow-on investments equated to $63.6 million in total investments. These investments were offset by principal repayments across our portfolio of $59.5 million and as we mentioned in our quarterly earnings press release, our new investment pipeline has increased materially over the last 30 to 60 days which was a primary impetus for our equity offering. On a go-forward basis we would expect to invest the proceeds of our equity offering over the next two to three quarters. It's always difficult to predict with accuracy the timeline against which new investments will close and in the current market when both buyers and sellers appear fairly strong-willed, we are seeing transaction timelines become even further extended hence our guidance [of] two to three quarters in terms of investing the proceeds of our equity offering.

Needless to say however, we are certainly pleased to be in a position of strength to capitalize on what we believe are high quality investment opportunities across the lower middle market. In terms of some of the specifics of our investment portfolio, we experienced net realized gains in the quarter of $3.9 million, consisting primarily of a $3.3 million gain on the sale of our equity and Performance Health and a gain of $2.3 million from the sale of our equity position in Top Knobs. These gains were partially offset by a $2 million loss associated with the write-off of our participation interest in UCS (inaudible), a holdover from our prior investment in (inaudible) which had been valued at zero since the third quarter of 2015.

From a valuation perspective, we recorded pretax net unrealized depreciation on our current investment portfolio totaling $8.4 million for the quarter. Across the debt portion of our portfolio, we experienced $14.3 million of net unrealized depreciation largely driven by under performance at our investments in Community Intervention Services, Caf? Enterprises and Women's Marketing.

In addition, we wrote the remaining $2.1 million value of our debt investments in BF [in] operations to zero. These write-downs were partially offset by pre-tax debt write-offs in our equity positions of $5.9 million driven primarily by strong performing companies such as access medical, AGM Automotive, Magpul Industries and NB Products. These results, once again show the benefits of a diverse portfolio and our strategy to hold minority equity positions in a high percentage of our portfolio companies.

As of June 30, our non-accrual assets totaled 5.6% of the portfolio on a cost basis and 2.2% of the portfolio on a fair value basis. As we disclosed in our perspective supplement, during the quarter we received a blockage notice from the senior lender with regard to our $15.4 million subordinated debt investment in Community Intervention Services. As a result, we placed this investment on non-accrual status. We are currently in negotiations with the company and the senior lender to effect an amendment but the timing and results of that amendment are not known at this time.

Also during the quarter we placed our subordinated debt investments totaling $5 million in DP2 holdings which was a picked non-accrual account last quarter on full amount accrual.

Switching gears to the current investment environment, our new investment pipeline continues to yield weighted average rates in the 11% to 13% range for mezzanine investments and 9% to 11% for unitranche investments. Our current pipeline contains numerous opportunities for both types of investments and while it is impossible to predict which opportunities will close and on exactly what terms, I'm pleased that we have meaningful capital available to deploy in order to provide our [customers] with attractive risk adjusted returns.

And with that I'll turn the call over to Steven.

Thanks Ashton. Given that much of our standard financial disclosure is contained in our quarterly Podcast which was released at the time of our quarterly earnings press release, my comments will focus more on the color behind our results. The quality of our revenue during the quarter was very typical, as we would say, in that we experienced approximately $2.6 million of non-recurring divided and fee income which is very much in line with both our long-term average and our guidance range. From an efficiency ratio standpoint, with efficiency ratio being defined as total G&A divided by total investment income, our second quarter efficiency ratio was 18.7% compared to our first quarter efficiency ratio of 19.1%. Both our first and second quarter annualized G&A expenses as a percentage of average assets totaled 2.0%.

Our NAV per share as of June 30 was $14.82, was at the high end of the range of $14.80 to $14.82 which we had previously disclosed in our perspective supplement on July 25.

The primary variables affecting our NAV this quarter were the portfolio movements Ashton discussed, our net investment income which was higher than our quarterly dividend and the positive effects of stock-based compensation during the quarter. I should note that during our equity offering, one of our newer underwriters asked if we had ever conducted an effort equity -- an offering ahead of quarterly earnings? I answered yes, during the first quarter 2012 we did that. He then asked what our NAV per share was at that time. I reported that it was $14.68. This quick story highlights one of Triangle's long-term goals; maintaining and enhancing NAV on a per share basis.

When one contemplates all of the activities since the beginning of 2012 at Triangle, $1.5 billion of cumulative investments, approximately a billion dollars of principal repayments, significant realized long-term gains, supplemental dividends to shareholders from those gains, the contraction in pricing in the investment market over the last two to three years, even realized losses in our portfolio in certain periods. What undergirds all of our operational activities is an NAV per share that not only has been relatively stable but that which is higher than our NAV per share at the time of our IPO back in 2007 and also higher than our last intra-quarter offering in early 2012.

From a liquidity standpoint in May we received an incremental commitment from the SBA totaling $32.8 million consisting of a redraw of $7.8 million of debentures. We had previously repaid [in] $25 million of new debentures representing a new commitment as part of the expanded SBIC investment program. Also relating to the SBA, in conjunction with the green light letter we received in May of this year permitting Triangle to apply for a third SBIC license, we are extremely pleased to report that last week we formally submitted to the SBA our application for a third license and on this development I would like to emphasize two important points. First, we are excited about the prospects of expanding our longstanding relationship with the SBA and we are delighted to have already raised 100% of the $50 million of equity capital required to fund fully the license should it be granted by the SBA.

Second, and we want to be very clear with all of you as members of the investment committee, excuse me the investment community, that the SBA will either approve or deny our application at its sole discretion and that we are incredibly respectful of their process and the degree of privacy that is naturally associated with the application review process.

As a result, we are making this announcement as a matter of record only and out of respect for the SBA we will not provide any additional information publically regarding our application for a third license until we have permission to do so from the SBA.

Finally, from a liquidity standpoint, including the effects of our recent equity offering, we have total liquidity of approximately $390 million representing cash on hand and availability under our $300 million senior credit facility. And with that I'll turn the call over to Ashton for a few closing comments before we open the call for questions.

Thanks Steven. The lifecycle of the BDC contains three phases; raising capital, investing capital and distributing capital to shareholders. TCAP has recently raised a meaningful amount of growth capital. During the ensuing months and quarters we will attempt to invest this capital prudently and during the subsequent quarters and years, we hope and expect those investments will generate meaningful value for our shareholders and as in years past, if we continue to be good stewards of the capital entrusted to us, then we expect to have the opportunity to continue renewing this cycle in the future; a cycle of growth, stability and reward for our shareholders.

We are fortunate to operate in such a dynamic industry and these are clearly exciting times. Many BDC's are delivering meaningful total returns to shareholders, returns which are superior to banks and superior to loan mutual funds. Triangle as a company is proud to be a part of the growing BDC industry. The second half of 2016 looks bright for TCAP. We are poised to take advantage of quality opportunities we see in the marketplace and we are able to do so with a firm operational and financial foundation.

And with that operator we will open the call to questions.

(Operator instructions.) Our first question comes from John Hecht with Jefferies.

Hey guys, thanks very much. Couple of questions. First of all, just thinking about deploying the capital it sounds like you guys are busier now than you were the first part of the year. Maybe talk about personnel needs and where you stand in terms of the kind of human capital positioning with respect to deploying capital?

John, good morning, it's Ashton. Thank you very much for your message, or sorry, for your question. You know, where we stand right now I think we're at 26, 27 employees. We've hired and brought on board two employees recently; one of whom is on the deal team. We still have our core senior deal leads who do a fantastic job of developing our relationships with our financial sponsor partners around the country. I would say that as first half of the year has been slow for the industry in general, slower for Triangle as well, it's typical for what we're seeing over the last couple of years in the environment for this time of year and yet the second half of the year tends to get a little bit more busy. So, you know, I think currently from our staffing levels we appear to be staffed appropriately given the flow that we have. We obviously constantly monitor that but our senior deal leads do a terrific job managing their relationships and the flow that we're seeing right now is not, you know, inconsistent with the flows that we would have experienced in the same timeframes over the last couple of years and our staffing levels have been adequate at those times as well.

That's a good question though and one we constantly monitor.

Okay, thanks for the color there. And then I guess a question, and I know it's hypothetical [and respectful of] -- the SBA with respect to the third license, but should you guys get a third license? Would it change your -- the kind of target total level ratio, not thinking about the BDC, but the total leverage ratio or would you be, kind of use it more as a margin tool? How would you think about using that type of capital?

John, it's Steven, thank you. You know, I don't think it would change our total leverage ratio in terms of approach to the business and where we've operated historically. Obviously the capital that the SBA, when it approves any BDC for a license or a second license or a third license is very, very favorable capital and it's just really almost the best form of capital for what we do in terms of making five, six-year commitments to portfolio companies.

So, I don't think you'd see any real material change for us if the license is granted, we would still approach it the way that we have for our first two licenses.

Okay and then final question is, you talked about some of the activity, more recent, excuse me, investment activity. I'm wondering, can you talk about, you know, activity thus far in Q3, any changes in terms or margins or anything that's noteworthy in terms of the investment climate?

Yeah, John I'd say that the pipeline that we have is healthy, it represents a good mix of mezzanine and unitranche opportunities. As I have mentioned in my remarks, historic pricing for mezzanine has been 11% to 14%, we're currently seeing an irregular 12% to 13% opportunities on the unitranche side kind of [non]-mezzanine side. Yeah, sorry, just to be clear, 12% to 13% on the mezzanine side and then on the unitranche side 9% to 10%.

So fairly consistent with past pipelines in terms of pricing possibilities.

Great, thanks so much guys.

Our next question comes from Ryan Lynch with KBW.

Good morning, thank you for taking my questions. First one I just wanted to dive into the portfolio yield a little bit. So, you know, part of the reason you guys cut the dividend was portfolio yield contracted from about 14.8% to 12.3% and I get why the portfolio yield contracted, you guys did not want to reach for yield, you know, at the risk of putting on bad credit and potentially having credit loss in the future which is the absolute right long-term move to make. But I just want to talk about as we sit here today with a portfolio yield of about 12.3%, you know, given what you guys are seeing in the markets today and where you guys are finding the best opportunities, where do you guys think the portfolio yield will shake out, you know, maybe a year from now, what does that look like?

Ryan, it's Steven, thank you for your question. You know, the pricing that we've seen in the market has been very stable as you, you know, attending our Analyst Day back in June certainly heard, and you've heard us talk about that on more recent conference calls. So, really since kind of late 2014 the pricing has been very stable both on the mezzanine front and also the unitranche front. So since that period of time what's affected our portfolio weighted average yield has been the repayments that we've had and they have still been at higher interest rates and so we've continued to come down a bit. What you also have seen, I think, from us, is over the last several quarters the delta in the portfolio on a total basis has become, you know, sort of ten basis points movement or something like that. So, it's been much more consistent at a level.

I think if we were to make, and obviously we can't predict totally and Ashton alluded to that in his comments of what transactions will close and over what timeline, but I would think in terms of total weighted average yield in the portfolio the level where we are today we should be pretty close to that, I mean, I would say within 25 basis points one way or the other. It would take a fairly meaningful sort of two years plus period of time to get outside of that range based on what we're seeing today and what's likely to, at least in our minds, be a mix of both traditional mezzanine opportunities and then some high quality unitranche opportunities that we might see. Does that help?

Yeah, that's very helpful, that's very good color on it. I actually have one maybe kind of follow-up to that though. You know, you talk about the different yields and the unitranche versus the mezzanine product. You know, historically I would say you guys secondly in a mezzanine portfolio, or percentage of your portfolio has been around, you know, 70% to 80% of your portfolio. Do you guys see that mix shifting, potentially shifting, anymore to the unitranche product or are you guys seeing better opportunities in the unitranche product today or do you guys kind of expect your portfolio, the mix, to kind of stay the same as it has historically been?

Ryan, it's Ashton. You know, we do get asked this question a lot and as I've said in the past, we always look for the right or best risk adjusted return proposition for our shareholders. Sometimes the investments we are asked to provide a sub-debt proposal only, sometimes we're asked to provide a unitranche proposal only. Sometimes we're asked to provide both the unitranche and a senior sub proposal only and, you know, each quarter ends up differently. This last quarter in Q2 we had three new investments, they happened to be two sub-debts and one second lien and the pricings were 11%, 12% and 13% and so in those cases those were the right, what we felt were the best risk adjusted return structures for our shareholders. Should a very high quality unitranche opportunity come along at lower pricing and we feel that that structure is superior to a senior substructure, we would go that route. So it's hard to answer with certainty your question. I can just tell you that we have -- the flow of both types of opportunities comes into the same funnel from our senior deal team and so we're fortunate to have that flow and fortunate to be in a position to be able to think through the structures that we believe provide the best risk adjusted returns for our shareholders.

Ryan, it's Steven, I might add one thing to what Ashton is saying just to try to give you as much color as we can and that is maybe looking at it the other way which is what I don't think you will see is that Triangle's portfolio will become a portfolio that is the majority of which is unitranche driven and then the minority of which is mezzanine driven; that's not a focus that we have, that's not a -- we're not changing the style of investing, we're simply becoming -- with the increase in size of our balance sheet we're able to be more relevant to a larger pool of sponsors who are looking at a larger pool of companies. And so we're certainly pleased with that and we're trying to give you guys the color just how that can play into our portfolio but it's not a -- we're not seeking a major change in strategy certainly.

Sure, I appreciate the color and then just you guys mentioned on the prepared remarks that Caf? Enterprises and Women's Marketing, you know, had pretty big unrealized appreciation in the quarter. Could you guys just give us any update on what drove those market downs in the quarter and what are the outlooks for those two businesses?

Sure Ryan, it's Ashton. I'd say, you know, in -- both of those obviously are private companies so we can't go into too much detail but I'd say from a big picture thematic perspective on Caf?, as you know, that's a kind of medium-sized call it 40 to 50-unit casual dining restaurant chain and like many other casual dining companies over the last quarter, the weather has been a major factor and certainly this company is more southeastern in its geography and so the weather has been a factor in the foot traffic as well as just the general economic environment so they've had slower traffic, weather has exacerbated that and it's put some pressure on some margins for the company but it's a good restaurant chain and, again, I think their performance is more consistent with a broader general theme as opposed to really company specific issues.

With respect to Women's Marketing, as you may know, Women's Marketing is a full service media strategy and planning and buying organization that really serves the women's market. And so I think what the company has experienced is some changing ad spend methodology. So overall ad spend has declined somewhat year-to-date but importantly there's been a shift in methodology on how ads are purchased and whereas in the past there have been more long-term commitments. Those commitments have started to shift in more shorter timeframes and so it's created a little bit of a volatility and performance for the company.

So those -- hopefully that's helpful color on both but hard to go into much more detail.

Yep, that's great color on both of them. Thanks, that's all the questions from me.

The next question comes from Jonathan Bock with Wells Fargo Securities.

Good morning and thank you for taking my questions. I'll reiterate Ryan's point on cost of capital clearly matters and it's very important for folks to look at it proactively as you've done. And so now taking a moment to look at the global landscape, it is -- we are under the impression that there are some fairly large non-bank lenders that have recently been acquired many of whom are seeking to exit the lower end of the middle market namely companies with EBITDA, sub-$10 million, around that. I'm curious if you're finding any structural shift in the actual number of deals that you are looking at as a result of perhaps what could be a fairly large exit from a fairly large lender?

John, I'll start. Good morning, thanks for your question. You know, I'd say that our flow as I call it from quarter-to-quarter is generally pretty consistent. I think we have, as we've highlighted before, the first quarter this year was slower for everyone in general and including us. Interestingly, the second quarter I was looking at some stats from Q2 of 2015 and in the investment activity that we made in Q2 of 2015 it's almost identical in terms of dollar amount to what we had in this past quarter and interestingly repayments are almost identical. So, I would say from the Q2 angle it's very consistent with what we have seen in the past. We have experienced an uptick in the last 30 to 60 days in terms of both the quantity of the flow and the quality of the flow and I think that is a little bit of a departure from what we saw in the earlier part of the year where the quantity was a little lower and certainly we are guilty in respect that the quality wasn't where we wanted it to be. So I'd say that we're very optimistic about the second half of this year in terms of both the quantity and the quality of the flow. It's certainly playing out in what we believe is a very attractive pipeline and certainly played an important part in our thought process around the (inaudible) offering.

Got it and --

Jon, hey Jon? Jon just before you go to your next one, let me just add one thing if I may more in the global nature of what you were asking. There have been some folks that announced that they will maybe move away from the lower middle market and that type of thing. Yeah, I think I would make two points there; one is how one defines the lower middle market is certainly a key point but let's assume for the minute that they define it the same way that we do. We're all for that, we would love for people to move away from our market. Typically groups that choose to move away from the lower middle market who have already had a presence there do so because they perceive it more valuable to write bigger checks and to kind of move into the middle, middle market or the upper middle market and can put more dollars to work in the same amount of timeframe, something like that.

It's why we really value the lower middle market and John Hecht's comment about staffing I think goes to it as well. It's exactly where we want to stay and we think if you can resist the temptation to go to the broader markets where things are more competitive and leverage is higher, it does take a little more work and you have to staff appropriately but the returns really, in our mind, can be meaningfully better to shareholders over a sustained period of time. So we're happy to see people leave and we're happy to have fewer people in the room looking for a dance partner that's why we're still here.

Appreciate that Steven. And maybe only because credit risk appears to be just a bit elevated as folks are hypersensitive, the competition that comes from stretch seniors, competition that comes from unitranche, etc., lower, upper, etc., is kind put in the forefront of a bit of a focus on credit risk particularly if you think of mezzanine. So looking at one investment NB Products, right, this has got a fairly decent economic exposure to the portfolio and there we see a 20% picked junior bridge loan. Can you give us a sense of the situation there in light of what we kind of consider to be a relatively high cost on an investment that matters and should perhaps get a little bit more color on?

Jon, it's Ashton. NB Products is one of our investments that is part of what we would call our unsponsored or fund-less sponsor driven deals and we are partnered with another financial partner as being the primary sources of capital for that company. So it's a little bit of a different breed if you will from the traditional financial sponsor sourced investment opportunity that we typically employ. So, for example, our equity ownership percentage in that business is significantly higher than what you would see in the typical equity co-investment situation.

The company is a leading provider of gloves to the hardware, paint, general landscaping and other related industries if you've been to a Home Depot you will have seen their gloves. They are one of the leaders in the country in that category and the capital that went in to NB Products this quarter was in support of a very strategic acquisition of a competitor that had significant penetration in another major retailer so there was a very good diversification of risk from a concentration perspective and also it added significant complimentary products to their portfolio. So it was viewed as very strategic. The 20% security that you're referencing there was essentially "the equity" or a portion of the equity that was put in in addition to other securities to support that acquisition.

So, it's really a terrific opportunity for the company. We feel very good about the acquisition and it's really one of our best fund-less sponsors that frankly we've ever seen is behind this transaction so we're very comfortable with it.

Additionally, you know, the question comes on PCX Aero right, so about a $20 million exposure and there we kind of see a follow-on but done so with perhaps lower marks on the investment and so if we think of market-to-market often a bit of a canary would we, could we, also think of that follow-on kind of being done to support what perhaps is a declining situation or is it something different?

Jon, it's Steven. PCX is a company that -- PCX Aerostructures, they sell component parts, manufacture and sell component parts primarily for helicopters and things of that nature. They do a lot of DOD work, Department of Defense work and what I think other sort of governmentally exposed companies have seen and you might have seen this in some other BDC portfolios, there's been an elongation to the revenue cycle for folks who have that type of exposure. You know, this is a sizable company, you know, just general thematic points, revenues, much closer to $100 million than to the bottom end of the spectrum so a larger company in our portfolio and so the follow-on investment clearly their cash flow is lower than they would like in the sponsored and we would like given the elongation of the sales cycle but from a support standpoint with the company we sponsor both remain very supportive of the company and its place in the market and so it's more of a -- call it a timing difference but, you know, one that's driven by more the customer that they serve I guess I would say. Does that make sense?

It does thank you and thank you for taking my questions.

Thank you so much.

Thanks Jon.

Our next question comes from Robert Dodd with Raymond James.

Hi guys, just on -- first a question about the global market. Actually you mentioned you're seeing better quantity and quality of deals on prior calls. You've kind of broken down the market for us between kind of ADL's, BDL's, [CDL] etc., and obviously you're focused on the A side. Can you give us a bit more color? Is this on -- I mean, more A deals with better terms or is it, you know, partly the quantities improving because some of the B deals are coming through with much better structures, for example. Can you give us a bit more of a breakdown about exactly where the quality and quantity are coming from in that stratification?

Robert, good morning. The short answer is it's lumpy if you will in terms of flow. You have to look at it both from a large macro perspective and then you have to look at it from a TCAP specific perspective and so I think our sense is both the market has improved and certainly as you know we maintain very good relationships with numerous M&A sell side firms and so we regularly canvas them for their perspective on the markets and they all say that they're busy, they all say that their pitch activity is high and that they're all viewing the second half of the year as one that's going to be, you know, active.

I think you have to then dig down and peel the onion back to not only in TCAP's case, you know, our relationships but really any other firms relationships and understand whether or not the sponsors, if it is a sponsor driven model which is, you know, 75% of our deals are sponsor-driven. Whether or not our sponsors are actually, you know, in the flow and in a position to win the deals in some quarters, you know, our sponsor group is largely defined maybe a little slower and in other cases, in other quarters, you know, there may be an alignment of the stars where, you know, a multiple of our great relationship sponsors are in the final stages of winning or do win the deal.

So you have to marry both the macro perspective and then, you know, peel the onion back to where your best relationships exist and how busy those sponsors are in terms of winning deals and right now I think we seem to be benefiting from a little of both which is the macro environment appeals to be, appears to be, a little bit more buys and consistent and also are really good sponsor relationships. They are positioning themselves well to be in a position to win deals. Certainly -- they're having the at bat, the question is whether or not they're going to win the deals and hopefully if they do we'll be in a good position to be able to capitalize on that.

Okay, great. Thank you, that's great color. Just on Community, obviously [marked] at 76, very good [mark] so that kind of emphasizes your comfort with how that [things] going to go but can you give us any more color, obviously it's a delicate situation but I mean, a [block] notice, you put this deal in Q3 last year, so I mean, what changed? I mean, was this just an incidental hiccup that just happened to trigger a covenant with the [senior guy] or has there been something of a structural problem for that business?

Robert, Community, as you know is a provider of community-based and outpatient behavior health services; it's a multi-state organization. Last fall they made an acquisition and I think there's two issues that have been affecting the company; one has been just a slower integration of that acquisition and realized performance that they had hoped to have and then second, and it's something that's affecting -- it's a healthcare general related issue which is the ability to attract qualified employees and get those employees on board it and then out into the field and record it from a billing perspective. And so I'd say in general those have been the two major issues that have affected this company; the senior lender here has chosen to take a pretty aggressive, you know, path, in regard to the blockage and so it's really more -- and it's consistent quite frankly with the way a lot of senior lenders are acting these days which is to act a little bit quicker on the front-end and then have everybody come to the table to have a conversation as opposed to delaying any action and pushing it out.

So, I think we're just on the front-end of that with this company. I'll be clear that we have a lot of confidence in CIS, it's a good company, it's not a broken company but it's one where they've had a couple of operational missteps and the senior lender is just choosing to get ahead of it as opposed to delay any type of action. So I think the discussions are ongoing and we're actually, you know, confident about the companies future and believe in them.

Robert, it's Steven, I may add one thing to that it's something Ashton gave good color but to your comment on the mark here or the valuation of 76% and that giving some indication of our feeling about the company, it's a really good point on your part and, you know, I think Ashton's color about how senior lenders are acting now, you know, historically it was very typical when there would be a covenant violation in the deal on a senior basis that the senior lender would say, you know, you violated the covenant, we want everybody to come to the table and focus on an amendment and you would negotiate and then something would happen in all likelihood.

Now, in the current market, the difference is many senior lenders, and this is not unique to us of course, we heard it from many, many of our friends across the industry, senior lenders will exercise the notice of blockage and then they will use that notice as a way to bring people to the table more rapidly so to speak and in their mind more focus and clarity of the conversation.

So, it's one strategy versus another. There are frequently times where that could happen in any BDC's portfolio and if you as an analyst or an investor or anyone in the public would not be aware of it because it might just be intra-quarter. Here we had an event where it happened obviously during the quarter but the resolution is still "in process" and so that's why we obviously disclosed that in our perspective supplement and wanted everybody to be aware of it and why we wanted to speak about it on this call. We just wanted you to have that color. It's kind of how the lending, the senior lending market, is acting. The result is the same, the process is just a little different.

Got it, got it. Thank you for that color, really helpful as well. Again, thank you. Just one last one if I can. On the efficiency, 18.7%, obviously a very good number; anything unusual in there? I mean, I presume there wasn't a bonus reversal or anything like that but were there lower bonus accruals, so to speak, as a result of credit issues or anything like that? Obviously you've given -- your target's well established and 18.7% is below that right but is there any color on what drove that this quarter?

It's Steven, Robert, no real color on that. It's, as you know, having known us for quite some time, how we accrue or the compensation committee recommends to the full board for a quarterly bonus amount to be approved is, you know, there's a lot of varying of that every quarter in every year. So, you know, we always say here that one quarter does not a trend make one way or the other. I will be -- I want to be real clear on one point and you allow for it so it doesn't look like there's a bonus reversal. In the history of the company we've never had that, that event occur. So the compensation committees view is when we accrue a number, or whatever that number is and whatever quarter it is, we as the compensation committee want to be as certain as we can that this is a -- call it a good sticky number, and one that we would not later have to go reverse and we don't think that's a good practice.

So, they tend to take a more conservative approach, I guess you might say in the early part of a year, but again, every quarter is unique and they make their own determination but that's the style with which they make their determination I guess I would say. Does that help?

Absolutely, yeah. Thanks a lot.

Great.

Our next question comes from Chris York with JMP Securities.

Morning guys and thanks for taking my questions. Forgive me if it was already asked but first, how many investment professionals do you have at TCAP right now and then secondly, how should we think about your desire to bring on new investment professionals say over the next 18 months as you consider growth in the platform?

Chris, good morning. We have I think the exact number is 26 employees and the split, if you want to split it and we typically have two major groups here within TCAP; one is the investment team side and the other is the shared services team side and obviously there's the senior management as well that includes Steven and Brent and me so you -- I think from a matrix perspective we probably go across both groups. But say that in general it's, we'll call it, 18 and 8 would be a split that would be consistent with how we think about shared services and deal team, so 18 on the deal team side versus eight on a broader shared services support team.

As far as moving forward, you know, we do think about staffing with respect the deal team especially, you know, at all levels. We have analysts, we have associates, we have vice presidents and we have principals and managing directors and so we do have obviously an active recruiting initiative for analysts who join and then continue to matriculate through as associates and VP's but also we have our five senior deal leads and so going forward it's important to note that we are a very inwardly focused company and develop from within. We've been so fortunate over the years to have really high quality employees and TCAP has been a place where folks want to hang their hat for a career and so we work hard on developing our employees so that, you know, when they come in as an analyst we think about them as a long-term hire and ultimately a managing director of the firm and that's the goal.

We will always keep our eyes and ears open for someone externally who can bring a differentiated, especially on the origination side, angle maybe a different way of going to market or a complete set of new relationships that would be complimentary to what we do have but right now I'd say we're adequately staffed in the sense that we have five senior deal leads, we have four vice presidents and then we have associates and analysts underneath that. So I think we -- I feel like we have a good compliment right now that's consistent with the quantity of the deal flow that we have on a quarterly basis.

Very helpful and then maybe Ashton. So, if you did consider an external hire, what specialty or relationship focus would be complimentary to your current roster on the deal team?

Well, you know, that's a hard question to answer. There -- you know, in the world of lower middle market there's roughly 250 financial sponsors who target the lower middle market and, you know, as I've said to many of you before publically, we have relationships with, call it, half of those and then the old 80/20 rule applies and as we've always tried to target the top quartile sponsors, we typically transact with call it 30 of those as a round number. So, you know, for someone to come in and have a differentiated angle, you know, it would have to be someone that has relationships that we don't have, for example, of perhaps a different set of sponsors that are viewed as high quality and where we just typically haven't had relationships or flow before.

You know, each firm has a different way of going to market. The way that we go to market is, you know, we do it the old fashioned way. Our folks are on airplanes every week flying all over the country and developing these relationships and it takes time. This is not something that happens overnight and it's a lot about trust and it's a lot about partnership and it's a lot about the ability for our senior deal leads to convince the financial sponsors that they can deliver TCAP and so, you know, it's an easy question to ask of what type of person would you like to bring on, it's a harder question to answer of what that specific person would look like because it has to be a cultural fit, there has to be a business fit as well and so all of those factors make it a hard question to answer but hopefully the color that I gave you gives you a sense of how we think about it.

No, it's very helpful, I understand it. That's a tough one to answer and many moving parts there so I appreciate it. Lastly, how should we think about your ability to leverage maybe fixed costs over the longer term considering that you may be thinking about investing in some process improvements to prepare for the longer term?

Chris, it's Steven. You know, I think we would echo what we have said in recent quarters and periods that, yeah, Triangle as we continue to get larger incrementally, and the recent offering certainly gives us a step functionability to do that now, you know, we will want to make the investments in the business that we need to from a -- to stay abreast of things from a technology standpoint as Ashton just spent some time discussing with you from a human capital standpoint.

You know, I think for right now our guidance of this plus or minus 20% efficiency ratio in the low 2% of assets under management range is a good range for us. It's not to say we'll be 2.0% in every quarter like we have been for the first two quarters of this year in terms of AUM, percentage of AUM, but in the low two's. I don't think you'll see us spike up to 2.75% so to speak anytime soon on a percentage basis.

So, there will be quarters that will bump around kind of going back to the question just a minute ago on bonus accrual that Robert was asking and we think about it more in the sense of, one, what is a long-term trend look like and, you know, what's the right thing to do for the business over the next three to five years as opposed to, gosh, what does this mean for a specific quarter and where we might be with regard to Street estimates and consensus and those types of things. You know, that really is just frankly not a -- as you know, having known us for a long time, that's just not our driving focus. It's much more the -- as a management team, we would say can "reasonably look out into the future" which we would say would be the brief five-year timeframe of how we want the business to look.

So I think you'll see some of those things occur but just again, hard to dictate which quarter it would be. Does that make sense?

It certainly does. Thanks for that and that's it for me.

Thanks so much.

Our next question comes from Bryce Rowe with Baird.

Good morning. Just wanted to ask about maybe the composition of the liability structure. I see that you guys have $125 million give or take of cash on the balance sheet before the equity offering and so now you're sitting on quite a bit of cash. Understand that you'll be using, potentially using, a portion of that to capitalize a third SBIC license and to deploy into the investment pipeline but curious if there's and opportunity potentially to call some of the senior notes that are callable now and perhaps extend and lower the pricing from a cost of capital per se? Thanks.

Bryce, it's Steven, thanks for your question. I think obviously we're not -- tough to commit unilaterally to one path or the other in a forum such as this. I would tell you that I think a decision to -- we have called in bonds before and we're pleased that we did that and thought it was the right thing to do long-term for the capital structure and for shareholders. You know, I think when you look at where our two baby bond issues are trading and where, call it the reissue, would be, then those things are certainly considerations but also as you look at it from a standpoint of total cash, you know, keep in mind that with two SBIC funds the cash that you see on our balance sheet is not all in what you would commonly call TCC or Triangle Capital Corporation, it's -- some of that cash is obviously in one fund and some is in the other fund and some is what we call the holding company.

So, we try to balance those things and then I think we look at obviously the robustness of the new investment pipeline, clearly paying down our bank line a little bit with some of the proceeds of the offering is great. Clearly being able to demonstrate to the SBA that were they too determined that we are worthy of a third license that we have capital on our balance sheet that is resting and waiting patiently to be used in a third license is a good signal we think and an appropriate signal we think.

So, you know, I don't think we're finding -- we don't have a lack of uses for the cash received from the offering, certainly, and I think some pretty good ways to invest it given Ashton's comments on the pipeline. So, again, I wouldn't commit unilaterally to anything on the baby bond side but right now I think we have a lot of other opportunities to look at if that makes sense?

Yep, it's helpful. Thanks guys.

Thanks so much.

And I'm not showing any further questions at this time, I'd like to turn the call back to Ashton Poole for closing remarks.

Thank you operator and thank you everyone for joining us today for our call and we look forward to staying in touch with you on our next call. Have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.