Barings BDC Inc (BBDC) 2016 Q3 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 September 30th, 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.

The 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 Tommy Moses, Vice President and Treasurer, for the necessary Safe Harbor disclosures.

Thank you, Vicky, and good morning, everyone.

Triangle Capital Corporation issued a press release yesterday with details of the Company's quarterly and financial 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 31st, 2015 and quarterly report on Form 10-Q for the quarter ended September 30th, 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'd like to turn the call over to Ashton.

Thanks, Tommy, and good morning, everyone.

The third quarter was an extremely active quarter for Triangle in almost every facet of our business. First, as many of you will recall, in late July, we raised approximately $129 million of growth equity. The purpose of the equity offering was to fund our expanding new investment pipeline and to demonstrate certainty of funding to the Small Business Administration in conjunction with our formal application for a third SBA license.

During the quarter, we successfully deployed approximately $88 million of capital. And since quarter end, we have successful deployed an additional $58 million of capital after allowing for investment repayments during the third quarter in the amount of $63 million. That means we have successful deployed approximately $83 million of the capital we raised. Expressed another way, within the first 90 days after raising growth capital, we have successfully invested on a net basis approximately 64% of the proceeds of the offering.

Given that our strategy has always been to invest in capital over a six-month period, we feel especially good about our progress. And we allow for the fact that we are, in essence, holding back $50 million of the capital we raised to fund the third SBA license for which we have applied. We are extremely satisfied with our progress.

In terms of our application to the SBA for the third fund license -- as we stated on last quarter's call, out of respect for the SBA, we will not comment publicly on the process or the progress of our application until we have permission to do so from the SBA. That being said, we of course stand ready to continue to be good partner for the SBA.

From an operational perspective -- on October 3rd, the first business day of the fourth quarter, we announced the well-deserved promotions of three longstanding senior members of our investment team. For those of you who know us well, you know that Jeff Dombcik, Cary Nordan and Doug Vaughn are among the best and most expected investment professionals in the BDC industry. The promotions of Jeff, Cary and Doug create a new operating framework within Triangle.

Our new operating structure creates a singular level of accountability at each stage of the investment process -- origination, which is being led by Cary Nordan; documentation and administration, which is being led by Doug Vaughn; and post-closing investment management, which is being led by Jeff Dombcik.

Cary, Doug and Jeff will join Steven and me on what we call our Management Committee. Going forward, they will each have a lead vote with regard to critical matters relating to our investment process. And with that lead vote, they each will be vested with full accountability of our investment results.

Accountability and trust have long been the harbingers of success in many well-regarded organizations. And my goal at Triangle is to create a scalable operational model which will foster those ideals.

The other significant announcement we recently made is the addition of Mark Mulhern to our Board of Directors. Mark represents the first external TCAP Board appointee in over seven years. And I believe he will add greatly to our board's already strong sense of shareholders-first style of leadership.

Turning to our financial results -- our NII per share during the third quarter was $0.42, as compared to $0.49 during the second quarter. Our third quarter NII per share was naturally affected by the dilutive aspects of our equity offering by approximately $0.05 per share and was further impacted by approximately $0.03 per share due to lower portfolio company dividend and fee income that Steven will discuss shortly.

Our repayments during the quarter resulted in a decline in NII per share of $0.04. And our three new investments, which were somewhat back-ended in the quarter, generated $0.03 of NII per share. Finally, G&A was approximately $0.01 per share lower during the quarter.

On a go-forward basis, as we begin to experience the full-quarter effects of the recent investments we have made, we expect our quarterly NII per share to increase to a level at or above $0.45 per share.

Before I hand the call to Steven to speak in a bit more detail about our operating and financial results for the quarter, I'd like to take a minute to acknowledge Brent Burgess's resignation from the Company. As many of you know, Brent was a founder of TCAP. During his time at Triangle, Brent was a valued member of our team. And we wish him well in the next chapter of his career.

As Triangle looks forward to its own next chapter of growth and development as a leading BDC, we do so with the acknowledgment that it is natural for roles and responsibilities in companies to shift over time to enable those individuals best suited for specific leadership roles to be able to take advantage of those opportunities. And so it is with this perspective that I'm excited to contemplate the future of TCAP.

And now, I'd like to turn the call over to Steven to discuss our quarterly results in more detail.

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.

In terms of the quality of our revenue during the quarter, we recognized approximately $1.6 million of nonrecurring dividend and fee income from portfolio companies. This level of dividend fee income is wider than our historical experience by approximately $1 million to $1.5 million and compares to the $2.6 million of nonrecurring dividend and fee income we experienced during second quarter. Dividend and fee income is difficult to predict with accuracy on a quarter-to-quarter basis, as many of you know who have followed us for some time.

From an efficiency ratio standpoint, with efficiency ratio being defined as total G&A divided by total investment income, our third quarter efficiency ratio was 17.6%, compared to our second quarter efficiency ratio of 18.7%. Our third quarter annualized compensation and G&A expenses as a percentage of average assets totaled 1.8%.

Our NAV per share as of September 30 was $15.33 as compared to $14.82 per share as of June 30th this year. The primary variables affecting our NAV this quarter were the positive effects of our July equity offering and our $0.42 a share of NII for the quarter, partially offset by certain portfolio movements on both a realized and unrealized basis and our $0.45 quarterly dividend.

During the third quarter, we recognized net realized losses totaling $11.2 million, primarily related to the $16.1 million realized loss on our debt investment in BFN Operations, LLC. Our investment in BFN Operations, LLC was already valued at $0 as of June 30 on a fair-value basis. And therefore, the realized loss did not affect our net asset value during the quarter.

This loss was partially offset by gains of $4.9 million, including a $1.5 million gain on the sale of our equity position in Hatch Chile, a $500,000 gain on the sale of our equity position in Applied Cleveland Holdings, a $2.1 million gain on the sale of our equity position and the repayment of our debt on On Event Services and a gain of $700,000 from the sale of our equity position and debt repayment in KT Capital.

From a valuation perspective, we reported pretax net unrealized depreciation on our current investment portfolio totaling $11.1 million for the quarter. We experienced $24.9 million of unrealized depreciation, largely driven by under-performance at our investments in CRS Reprocessing, Nomacorc, PCX Aerostructures, and Women's Marketing. These write-downs were partially offset by pretax write-offs of $13.8 million, including write-offs in stronger-performing companies such as NB Products, Inc.; CIS Secure Computing, and Magpul Industries.

In conjunction with Brent Burgess's departure from the Company that Ashton mentioned earlier, during the fourth quarter of this year, the Company will record a $0.04-per-share charge relating to the accelerated vesting of Brent's previously granted but not-yet-vested shares of restricted stock, as well as Brent's previously granted but not-yet-vested deferred compensation. We want to be sure to call this out to those of you who are constructing your quarterly models, to be sure that you take this $0.04 per share of nonrecurring expense into account. I should note for both of these items that had Brent remained with the Company, those amounts would have been due to him in the normal course of the business.

Finally, from a liquidity standpoint, as of September 30, 2016, we have approximately $375 million of available liquidity to support future investment opportunities, comprised of approximately $168 million of cash on hand and over $200 million of availability under our senior credit facility.

And with that, I'll turn the call over to Ashton for a few comments regarding our investment portfolio, and also the investing environment, before we open the call to questions.

Thanks, Steven.

As of September 30th, 2016, we had investments in 86 portfolio companies with an aggregate cost of $987.3 million, and a total fair value of $947.7 million. As of September 30th, the weighted average yield on our outstanding debt investment was approximately 12.3%. The weighted average yield on all of our outstanding investments, excluding nonaccrual debt investments, was approximately 10.5%.

During the quarter, we made three new investments totaling approximately $83.9 million, which contained a weighted average debt yield of 11.3%. We also made several small follow-on investments in existing portfolio companies totaling $4.5 million. Together, our new investments and follow-on investments equated to $88.4 million in total investments. These investments were offset by principal repayments across our portfolio of $53.1 million, primarily associated with three portfolio company investments which were repaid at par, totaling $45.3 million; and certain other partial repayments.

As of September 30th, the fair value of our nonaccrual assets was $19.5 million, which comprised 2.1% of the total fair value of our portfolio. And the cost of our nonaccrual assets was $38.1 million, which comprised 3.9% of the total cost of our portfolio.

During the quarter, we placed our investment in one portfolio company on [pick] nonaccrual status -- our $16.1 million debt investments in Women's Marketing, Inc.

In terms of color on the investment market, we are continuing to see healthy transaction flow from our network of financial sponsor relationships. The transactions we originated during the third quarter continued to tilt towards companies with higher levels of EBITDA, as we believe those companies will represent stronger credit plays over the coming years.

As those of you have participated on our earnings calls over the last several quarters have heard, we believe there is an increasing tightness in terms of investment pricing in the markets these days. That is, today's market is measurably more efficient than the market was just two or three years ago. As a result, Triangle's new investment activity is focused first on perceived credit quality and second on investment yield at this point in the economic cycle. And we believe our operational platform affords us the ability to be judicious in the capital we deploy.

As many US-based middle-market companies begin to look past the somewhat all-consuming presidential election, we believe the capital markets are poised for meaningful activity during the first half of 2017. Many companies are sitting on significant amounts of available liquidity, but they've been reluctant to spend or invest that liquidity given the uncertainties that have persisted for the last several quarters.

After the election passes, we believe a large amount of this degree of uncertainty will wane, and companies again will look to invest in their own businesses and look to apply our other healthy businesses in an effort to strengthen and diversity their own platforms.

The combination of these forces should present a favorable investment outlook for 2017. And we are very pleased we have sufficient liquidity to take advantage of this potential opportunity.

2016 has been a year of transition for Triangle, and as we have moved from one phase of operational life to another. I'm excited about the recent organizational changes we have made, and I believe the operational structure we have implemented will serve TCAP's stakeholders well for many years to come.

As we move towards 2017 and beyond, I'm excited about the prospects of adding to our team and continuing to add high-quality companies to our investment portfolio.

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

(Operator Instructions) John Hecht, Jefferies.

Not to dwell on the election, but a couple questions around it. Just wonder -- is the pace of deployment -- is it getting choppy, just given the potential disruption around the election, number one? And number two, any of the policies for either candidate, whether it's education, energy or healthcare -- any portfolio companies that you're just kind of watching based on the outcome?

John, good morning, it's Ashton.

Hard to predict as to the outcome. If we knew that, we'd all be doing different things.

No, not predicting the outcome, but is there any kind of binary results for your portfolio companies depending on the outcome?

Yes, that's what I was implying, what those binary results would be. I'd say on the margin, my instinct would say that if the election goes more Democratic, it'll probably be less choppy waters. If it goes Republican, my sense is, in the near term, it'll be more choppy waters. But hard to predict beyond that.

Okay. But nothing like -- there's no companies that you -- in your portfolio that have specific, I guess, sensitivity to near-term education, healthcare, energy kind of policy outcomes?

John, it's Steven.

We don't think the portfolio really tilts one way or the other --

Okay.

-- that the election would tilt the portfolio one way or the other in terms of outcomes.

I do think -- and maybe since we're on a public earnings call, we should say that we as a company are not publicly endorsing either candidate.

(Laughter)

But I would say that I agree with Ashton's comment that the Democratic side of the ticket is -- I think, to the markets, at least the people that we talk to and the conversations we've had -- is more of a known quantity. And if the election were to go Republican, there's more uncertainty in the sense of what types of decisions and appointments will be made. And that, I think, from our stand -- but I think, either way, our view, and what we've heard from other folks whose opinions we respect, is just being finished with the election will be a boon for the capital markets early next year.

Okay. Thanks very much. And understand the vagueness around this.

Okay, moving on from there -- maybe if you could talk about your just general revenue performance and EBITDA performance of the overall portfolio, and kind of the high-level thoughts on the overall credit quality of the middle-market businesses?

Overall, John, I'd say that revenue is flattish overall in the portfolio. I think every industry these days are struggling to find growth. So I'd say, while revenue is probably flattish, I'd say there's probably a little bit of degradation in margin performance. But overall, I'd say, from a holistic perspective, fairly steady-state.

Okay.

And then, just thinking about -- I guess there may be -- and maybe this is an incorrect statement, but it seems like there might be a little bit more clarity with respect to the Fed's plans for rates, I guess, at the time being. And given that, what kind of changes -- or is there any modifications you'd make to the compositions of assets or the duration of your liabilities, number one? And, number two, how do you think your portfolios companies -- like what's the interest coverage ratio, and how does that change as rates change? I know your portfolio is primarily fixed-rate, so there shouldn't be any big modification there as the benchmark rate environment changes.

John, it's Steven.

First, I'd say, on the right side of our balance sheet, we're fortunate to have, as I think you indicate, substantially all of our liabilities are fixed and have a relatively long [tenure] attached to them. Certainly, as Ashton mentioned, being in process with the SBA, we would be hopefully that something positive there could happen, too, which would give us additional capacity in the balance sheet on a fixed-rate basis.

In terms of portfolio companies -- many of the -- right now, the portfolio has about 15% of what we would call LIBOR-based floating-rate type of securities. And most of the time, there's a LIBOR floor of 1, 1.25 on those things -- on those investments. So I don't think that a near-term increase is really going to affect portfolio companies' interest coverages one way or the other. I think the bigger issue would be -- we tend to run, as you've seen our numbers for years, at plus or minus 1.5 times from a total fixed-charge standpoint. That's fully loaded, all fixed charges. So interest coverage is very healthy across the portfolio. And then, given the way that investments are structured, I don't think there'd be any change there.

And I think as you know, you've heard us talk over the years, we tend to be a little more sanguine on meaningful rate increases. Still, at this point, I think our view is the Fed really, really wants to find a way to increase rates a little bit, so they will at least have something to play with, if they need to in the future, in terms of reducing rates. But we don't see large-scale rate increases coming anytime in the near future. I don't know, Ashton --

No, I'd just say one more point, John, which is to the extent we were to get some inflation trickling in here -- and that results in increased rates -- I'd say on the margin, we would likely see a benefit with our portfolio companies as they might have more pricing power in those situations. And that would allow them better opportunities to repay principal and fixed amounts.

So I'd say there's two sides to the equation. But on the margin, we might see a little bit of a benefit in terms of pricing power.

Certainly near-term (multiple speakers).

All right. Great, guys. Thanks so much for the details.

Thanks so much.

Thanks, John.

Ryan Lynch, KBW. Your line is now open.

First question -- you guys deployed about $60 million quarter to date. Obviously, if we extrapolate that, that's about $180 million originated in the fourth quarter. I know it's tough to extrapolate a limited amount or a limited timeframe of the quarter to the full quarter. But it looks like you guys are going to do some pretty big numbers in the fourth quarter. I mean, should we be expecting originations to reach north of, say, $150 million? And are you guys seeing -- or have you guys experienced any significant repayments quarter to date so far?

Ryan, it's Steven. You'll probably hear from both of us on this.

In terms of -- could we have a record quarter or almost a record quarter, in terms of originations, I think the record for our company is about $175 million in a single quarter over our entire decade of life. I don't know that I would feel comfortable -- well, I know I certainly would not feel comfortable predicting that for you right now.

I think the point we're trying to make with the comments that Ashton had in the prepared remarks is we had a very health investment pipeline in the second half of this year, which resulted in our desire to raise growth equity capital to fund into that pipeline. We've always said that -- give us kind of six months to invest proceeds of equity offerings. And we've tried to have a just-in-time inventory of capital strategy in terms of new investments.

So to be 90 days in and have invested about two-thirds of the proceeds of that offering, forgetting the capital that we obviously want to demonstrate to the SBA that we have on our balance sheet, we feel really good about where we are.

In terms of the fourth quarter -- as you well know in this industry, not a lot tends to happen from Thanksgiving until the end of the year, unless there's somebody who's really motivated to close a transaction for tax reasons or planning reasons or something of that nature. Activity really begins to wane during the holiday season.

So at this point, are we delighted that we've deployed two-thirds of the proceeds of the equity offering? Absolutely. But do I think we'll move from $60 million roughly, as you point out, in the fourth quarter to a record level? No, I personally don't see that based on where things stand today. But I don't know, Ash, if you'd add anything to that or take anything away from it.

No, I think you've covered it well, Steven.

Ryan, I think the one point -- naturally, as deals ultimately close, there's a gestation period that is typically three to four months associated with those deals. And so deals that you're seeing, having closed in the last month, typically will have been initiated a couple of months prior to that.

The one observation I would make -- it feels like in certain situations, with the current environment that we're in, which -- in some cases, if your company is a really good candidate to be sold in a strong free cash flow-conversion, low-CapEx or maintenance CapEx spend, defensible markets, noncyclical, et cetera -- what we are seeing are accelerated timelines to close. Another way of saying it is when sponsors are getting these companies under LOI, whereas historically you might have 60-day exclusivity periods to get deals closed, you're now getting 30-day exclusivity periods or even sometimes less.

And so that's hard to predict in terms of how we plan our fundings. And I would just say that it's not the norm now, but it's certainly, in certain situations, affecting timing. And it makes it somewhat difficult to plan.

But I think Steven covered it in general that typically fourth quarter, first quarter are typically slower times of the year. We've been very fortunate, thanks to the strength of our sponsor relationships and our origination efforts, to have been able to close on numerous transactions that we think are very good investments. And it's a compliment to our team to their continued efforts. So hope that helps.

Okay, yes, understood. With the recent change in management personnel -- with Brent leaving and then the kind of changes with Jeff, Cary and Doug -- are you all planning on hiring any additional investment professionals? Additionally, you guys -- you've raised equity capital to grow you guys' portfolio a little large. So are you guys looking to hire any new investment professionals? And then also, that, in combination with -- should we expect to see any meaningful changes in the efficiency ratio in 2017?

Ryan, thanks for the question. It's a good one, and certainly one that I've given a lot of thought to. And first, I would say we're always looking to add really high-quality people to Triangle as we continue to grow. And certainly, our intent is to continue to grow. And with that will naturally come additions to the team.

So I think the broad answer to your question is yes, we will opportunistically look to add to the team. If you had to think about the key areas of what we do, which most BDCs do -- which is originate, underwrite, manage the portfolio, and provide corporate share of services -- my sense is that more near to medium term, we would be focused on -- if we were to add any additional resources, it would be more on the origination side and portfolio management side.

But no decisions have been made at this point. We're certainly comfortable with the structure and the level of full-time equivalents that we have now. But as I mentioned, we always are looking for high-quality candidates.

Ryan, it's Steven.

Let me just add to that in terms of -- as you would think about it from a future modeling standpoint, I think the guidance we've given historically of an efficiency ratio -- again, total G&A divided by revenue -- of plus or minus 20% is still a good -- it obviously bumps around quarter to quarter. But that's a good level for our company right now.

If over time, as we've said before, measured in years, not quarters -- if you increase to something above 20%, but still call it the low to closer to middle 20s, again over a span of future years, that is not unreasonable as you build out and increase assets under management from, call it, $1.2 billion, $1.3 billion today to something closer to $2 billion or $3 billion or $4 billion. And I think you've seen that in other BDCs, so we wouldn't be the first to blaze that trail.

But just from a modeling presentation standpoint, want you to have that color.

Okay. Understood.

And then, just one last -- just maybe a technical question, but why was there approximately $90 million drawn in the credit facility at the end of the quarter, when you guys had $170 million of cash? That just -- because it was a snapshot in time, or what was going on there?

Little bit of snapshot in time. And also, the way our credit facility is structured, as you may recall from looking at that agreement, there is an unused fee associated with the facility. So from our standpoint of having dollars outstanding -- versus even if you don't have dollars outstanding, you're paying a bit of an unused fee -- there's a bit of a different breakpoint in there in terms of what -- as you would analyze it from our standpoint in terms of total cost.

And so there's a little bit of a partnership approach with our bank group. They enjoy having outstandings, and we want to be supportive of that aspect of the relationship, too. But financially, there's a middle point there where it's no better or no worse for us in terms of where the dollars outstanding are.

Overlay that technicality is -- there is always an associated sort of timing issue of when -- strike the end of the quarter, what's going on. But it's mostly that first aspect of the credit facility.

Does that help?

Yes, yes, that makes sense. So that's all for me. Thanks for taking my questions.

Thanks so much.

Thanks, Bryan.

Robert Dodd, Raymond James.

One about Women's Marketing, if I can; and then one about kind of the investment process.

On Women's Marketing -- obviously, for lack of a better term, it's advertising to women. So on the deterioration here -- because it was marked at par in December and March, and it weakened a bit in June, and obviously now (inaudible). Do you think it's a company-specific issue, and if there's any color you can give us on that? Or do you think it's more kind of the early signs of consumer retail issues and things like that, where brands may well cut back discretionary marketing, and that would impact Women's Marketing earlier than maybe other parts of the market? So do you think it's an early macro sign generally, or is it a company-specific issue?

Robert, it's Ashton. Thanks for your message.

And for those on the call, Women's Marketing focuses on helping fashion, beauty and health/wellness brands connect with their target female audiences. So that's what the company does.

There's really, from my perspective, two primary issues affecting the Company. I'd say that the biggest issue is really the marketing landscape in general is experiencing a great deal of transition. So if you step back and you look at what's going on, both generationally as well as technologically -- there are just some transitions going on in that space that create both challenges and opportunities.

I'd say also, just separately, just businesses overall have been challenged by weak demand by core fashion and beauty customers. But I'd say that what the company has experienced is really more of the first thing that I mentioned, which is just a changing marketing landscape that's again influenced by generational shifts as well as technological shifts. That's how we are seeing it at this point.

The good news is we have a really strong sponsor backing Women's Marketing. It's a sponsor with significant media experience in a business that has a related core experience, which is marketing to women. So we're optimistic we're going to be able to manage through some of these current headwinds in conjunction with the company and with the sponsor.

Okay, great. Thank you. Really, really help there.

On the process -- obviously, going back to the transition, obviously you're shifting -- changing the structure of the investment committee, and you're shifting from a majority vote to a unanimous vote? And I've got another follow-up to that, which is a kind of tricky question.

Right. Well, thanks.

Let me just start by saying how excited I am to have Jeff and Cary and Doug become executive officers of the Company, and along with Steven and me, to form the management committee of TCAP. Jeff, Cary and Doug are very seasoned. They collectively have 29 years of experience at TCAP, and their perspective is going to add significantly to our operational and strategic and financial discipline.

With respect to your question on the investment committee -- we will not change from how it has historically been structured, in the sense that it is majority vote. So that does not change.

What does change, though, is what I alluded to in my prepared comments, which is each of Cary and Doug and Jeff having what I would call lead votes at various points in the investment process. And so Cary's going to have a lead vote on origination, which includes initial vetting of deals and ultimate final approval. Doug will have a lead vote on documentation as it goes through with Legal. And to the extent that there are any significant variances from what we would call our best practices or best legal protections, Doug will have a veto vote. Even if we like the deal significantly, if there's a significant deviation away from the legal documentation norms, Doug will have the ability to have a veto vote. And finally, Jeff will have the lead vote on any post-closing investment matters. But importantly, to the extent that there's a deal Cary would being along, he would have a lead veto vote on any deal that Cary would bring along.

So there's natural checks and balances that we've implemented in the investment process, that ultimately then -- assuming we get through those, it gets to the committee for the formal vote, which is, again, still based on majority.

Does that help?

Yes, yes, yes. So if I can paraphrase that, it's a simple majority at the committee, but there are more stages where it can get vetoed even in the preliminary stages than there were before. So that's the change, so to speak.

Bingo. I think you said it --

Okay. Got it.

-- much better than I said it.

Okay.

(Laughter)

Now, to ask you the really unfair question -- because hindsight's 20/20 -- but have you kind of backed -- when you look at some of the problem assets you have had over the last several years, were there issues raised that you can point, maybe by these individuals or others, where somebody had a strong opinion, but when it came to an investment committee, one no is not enough to block it. But in this new structure, a no from the right person can kill a deal much earlier. I mean, have you back-checked kind of the deals that did get approved that subsequently have issues against this new structure? I mean, that's an unfair question, but I'll ask it anyway.

No, it is a fair question, and I appreciate you asking it. Because it obviously factored a lot into my thought process around the reorg.

I'd have to be honest and say that I think the answer to your question is yes, that if you go back, the former structure we had in place might've had elements. Not in every case, but in some cases might've influenced decisions that ultimately came back to bite us.

The one thing I would say that we have done, Robert, is we went back, and we've certainly looked at all of the problem situations that we've had in the past. And I think it's fair to say that in every case that we have had investments go south, for the reasons they went south, all of those risks were appropriately identified in our investment memo. So it wasn't as though we didn't highlight potential risks that may've ultimately materialized. But the way that -- maybe there were fewer checks and balances in the investment process at that time, and we had a larger investment committee at that time. And it probably contributed to -- even if you had a voice that may've been contrarian -- not being able to carry the day.

And so what I'm trying to do is implement a more wholesome, upfront check-and-balance process that will hopefully, on the margin, continue to tighten up that underwriting process and improve the investment results, which overall, frankly, from a corporate perspective, have been pretty good.

So I'd say this is tweaking, but I think it's a good tweak that's going to instill greater discipline going forward. And importantly, it's a scalable model that I believe is going to allow for us not only better deal with us at our current size but also be able to allow us accommodate growth.

Great.

And Robert, it's Seven. Let me add one thing to what Ashton said.

I think your question is -- [as Ashton], I think it is fair. And appreciate you giving us latitude in what you said, but it is fair.

And one thing that I would add is that our company has grown. No one has ever said at Triangle -- we've never said publicly, we've never said privately with the Board -- that when you invest in sort of mid- to down-balance sheet investments coupled with minority equity attachments, that it is reasonable or expected that you would have no losses. Right?

I mean, you're getting paid kind of double-digit coupons. You are taking incrementally more risk than a secured bank or a senior lender. And you're getting paid, in our opinion, in many cases, very handsomely. And it's an attractive risk-adjusted return. But it is not to say that there are certain periods where we've had very low or zero nonaccruals. There have been certain periods where we've had higher nonaccruals. But on the balance, I think that we would say the body of work, so to speak, has been, really, a very, very good one for shareholders. And we would hope that would continue.

I think the approach that Ashton has created for the investment committee and operations of the Company going forward, by creating the cross-accountability, if you will, will improve some things that maybe weren't focused on, as he described well, maybe over the last couple of years. And as our investments get larger in size, as our assets under management continue to increase, it's important that you create that [feel] of accountability within the organization. And accountability, obviously, breeds trust.

Yes. No, I appreciate the commentary. Thanks, guys, yes.

Thank you for the question.

Jonathan Bock, Wells Fargo.

Fin O'Shea, in for Jonathan this morning. Can you hear me?

Yes, right, Fin, how you doing?

Good, very well. Just a couple questions, most have been asked.

I kind of wanted to get back to the portfolio globally. I think there were some comments earlier on general lack of growth but general stability. And with several names beyond the obvious couple -- Women's Marketing, CRS -- you saw slight markdowns. And I think in the quarter, there was a positive technical bid. So can you help us kind of walk to what the process was? Is it technical, is it economic, or is it idiosyncratic across the portfolio?

Fin, it's Steven. Help me, if you will, bring that just a little [bit more]?

Yes, just pointing out the unrealized marks this quarter?

Yes.

So I can look at several names that were slightly off -- say, Community Intervention, Eckler's, Cafe Enterprises, ACA -- just beyond the couple --

Sure.

-- beyond Women's Marketing, for example, which was obviously more idiosyncratic -- just helping to understand that?

Sure. Well, let me give maybe just a bit more color on what Ashton had mentioned earlier in terms of revenue growth being a bit challenging in general, in the general landscape of S&P 500, middle-market, lower-middle-market type companies in the US.

What we're seeing -- a typical example that we would see would be a reasonably well-performing portfolio company wants to diversify its revenue stream. And let's just assume it has $100 million in revenue and $20 million cash flow. It's willing to take on a new customer to diversify revenue at a lower-cash flow contribution margin than its base business.

And so what happens with this is the Company, obviously, has a new customer, and that's great. It has incremental dollars of cash flow, and that's nice. But its overall cash flow margin declines.

And when you add in that there are increased operational costs -- if nothing else, just a bit of salary pressure, obviously low single digits -- healthcare pressures for companies -- those are real for everybody -- then you've got a little bit higher operating expense year over year.

So what that does is it creates -- as Ashton says, there's stability there from a financial standpoint. But there still is a lower overall contribution margin that you might have with a typical portfolio company. Can they handle their debt obligations? Absolutely. Can they generate sufficient returns for the stakeholders across the capital structure? Yes. Is the equity return from the private equity sponsor group lower? Without question.

But in this market, where yields are continuing to find their right place in terms of spread to the risk free, then I think you still have a competitive environment for lenders and investors looking to make investments in good quality companies.

And so, as we look at it, as you describe in your question, from a technical standpoint, you might have a company whose cash flow went from $100 down to $97. But as you compare to the price of securities in the market, when you look to value a level three security, you might still be taking a bit of an ASC 820 discount on that piece of paper because of tightness in the market.

Does that make sense?

No, absolutely. Appreciate the color there.

And then, just one more -- with the potential for a third SBIC, are you holding consistent target leverage, regulatory and economic? Any color there would help.

Well, in terms of commenting on the SBA, we obviously, as Ash said, we will defer that, will not make any comments there in terms of the process of the license. Leverage today for the Company is, on a gross basis, 0.82; and, on a net basis, for [40 Act] purposes, in terms of the covenants there, is 0.42.

So I think we're very comfortable where we are. Obviously, the SBA leverage in our capital structure does not count, thanks to the [exentive] relief we have to the overall regulatory leverage. We view that capital as really nice ballast capital in our capital structure. It functions basically as equity capital. And we look at it that way. We obviously manage our business, as anybody would, from a -- what's your interest coverage, what's our own fixed charge coverage, those types of things.

But we are just inherently very comfortable with the SBA. We hope we've been a good partner to them over the years. They have been a fabulous partner to us. And we would -- if we were granted a third license, we would be very excited about that and hope to make productive use of it.

Okay, very well. Thank you guys very much.

Andy Stapp, Hilliard Lyons.

All my questions have been answered. Thank you for the good color.

Thanks, Andy.

Any time.

Christopher Testa, National Securities Corporation.

Thanks for taking my questions.

Just wondering if you could give some additional color on what the attachment point leverage is through your last dollar of risk.

Yes, Chris, it's Steven.

From the overall portfolio, our average attachment point is around 3.25 to 3.5 times in terms of where our debt starts. And then, in terms of through our last dollar, it would be the low fours, about 4.25, 4.3 times total leverage. As Ashton indicated in investments that we've made recently this year, we have had -- EBITDA has been, right, much higher than our portfolio average, meaning portfolio average cash flows in the high teens -- $18 million, $19 million across the entire portfolio. And frankly, that skewed north by a couple larger companies in the portfolio.

But in 2016, the investment we made have had, on average, $28 million of EBITDA, so much higher. And the beginning attachment point there has been about 3.75 times to 4.1 times. And then, the last dollar of debt in terms of the attachment point has been 4.75 to 5.1, 5.2 times. So it averages to right at five times total leverage.

Does that help?

Got it. Yes, very helpful, thank you.

And just wondering, with what you see as the repayments of that going forward, are there a lot of new entrants trying to reach for yield and get into sub debt that should drive repayments in that asset class? Or should this remain relatively where it's been from past years?

Chris, it's Ashton.

I'd say that -- fairly stable asset class. My guess is, over the years, past three to four years, the [mez] market has been increasing a bit. But I'd say in general we're seeing clearly a preference for unit tranche in the market these days we're also seeing, and our guys are regularly bidding on both. Our sponsors are asking both for senior sub structures as well as unit tranche structures.

So we're seeing both. I think, to my point earlier, what we are seeing is general tightness in pricing.

Yes.

So [certainly], the range of pricing on those has been 11% to 14%. And we as a company have been able to achieve -- realize yields on the higher end of that range. I'd say that more regularly now, we're seeing 12%, 11%, in that general range as kind of the norm. There obviously are exceptions to those rules.

But I'd say in general, we're slightly declining in the favor of unit tranche. I think it's probably due, if I had to say holistically, to the amount of capital that's come into the space broadly defined, and those investors on the margin preferring more capital preservation, which dictates more [of a first security] (multiple speakers) --

Right.

-- type structure. But mez has its place. And we're certainly well positioned as anyone, because of our leading platform in the mez market, to be able to respond in the event that sponsors want the senior sub structures.

Chris, the only --

Right.

The only thing I'd add to what Ashton said is I think statistically, as he alluded to in his comments, in 2013, 2014 and 2015, our portfolio experienced on a percentage basis higher repayments as a percentage of the total portfolio than we had in prior years, than we had from 2007 to 2012, call it.

Right.

I think -- and again, we can't really predict repayments. I mean, you truly get a telephone call from a sponsor that says -- hey, in two weeks, we're going to close on the sale of the company or close on a refinance that doesn't include you guys. And that's not a bad thing; it's a good thing, especially if we have equity in the company.

And so, from that standpoint this year, 2016, my guess is going to be lower than it has been in 2015, 2014 and 2013 on a percentage basis. And the outlook as the portfolio has continued to coalesce more in terms of weighted average yields being -- as they've all come down, not just for us but for everybody -- there's less of a rush to refinance to just save on rate. So I think we'll return to more historical norms there in terms of repayments.

That being said, one quarter could be really elevated, and another quarter could be really low. I'm just talking kind of year-over-year averages, if that makes sense.

Yes. Absolutely.

And just curious -- what are you seeing from sponsors in sub debt now? Obviously, the pricing has come in. But what about the structures of the deals? Are you seeing sponsors kind of push the envelope of leverage, maybe not just with you guys, but just in general? Is that a theme that you're seeing in the sub debt market?

I'd say what we're seeing, Chris -- again, as we've stated on the previous calls, it's a bifurcated market, where there are companies that are really high quality that exhibit those characteristics, which I mentioned earlier, you're going to see our transaction multiples in higher leverage. That's the bad news.

The good news, though, is, in most if not all of those situations, you're seeing a significant amount of equity being put to work. Another way of saying it is you're not seeing the high leverage levels being coupled with a low debt-to-equity percentage, meaning it's fairly balanced. And historically, our ranges have been 40/60, 50/50, 60/40.

So I'd say that in the higher-leverage, higher-transaction multiple deals, we're also seeing 50/50 equity-debt structures, which gives us a lot of comfort that there's a significant equity cushion underneath that.

But in general, I'd say that sponsors, in our view, are being more cautious these days about overall transaction multiples and leverage levels. It feels like they're exhibiting discipline as they go through the processes, and importantly, putting appropriate capital structures in place when they are able to transact.

Great. That's all for me. Thanks for taking my questions.

Great.

Thanks so much.

I'm showing no further questions at this time. I would now like to turn the call back over to Ashton Poole for closing remarks.

Great. Thank you, operator. And thank you, everyone, for joining our call today.

As I alluded to in my earlier comments, Q3 was a very active quarter for TCAP. In our view, it was a very good quarter and one which sets, in a very positive way, the future direction of the Company. From our origination angle, the origination activity that we experienced in the quarter, and then also have experienced quarter to date in Q4, is consistent to what we signaled when we raised equity growth capital back in July. The recent organizational and board changes are only going to improve the operational and strategic and financial decision-making of the Company.

And last but not least, our ample liquidity that we have, and perhaps ultimately in conjunction with additional liquidity should the SBA afford us incremental opportunities, is really going to position us well for growth going forward.

So we appreciate your continued interest in TCAP. We always are available for questions should you have them. And we thank you for your continued trust and support.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect.