Barings BDC Inc (BBDC) 2016 Q4 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 and year-ended December 31, 2016. (Operator Instructions) Today's call is being recorded and a replay will be available approximately 2 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, James, and good morning, everyone. Triangle Capital Corporation issued a press release yesterday with details of the Company's fourth-quarter and full-year 2016 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 these sections titled Risk Factors and Forward-looking Statements in our annual report on Form 10-K for the fiscal year ended December 31, 2016, as filed with the Securities and Exchange Commission.

TCAP undertakes no obligation to update or revise any forward-looking statements. At this time I'd like to turn the call over to Ashton.

Thanks, Tommy. As we begin today's call, I'm reminded how things looked almost exactly one year ago today. We had just come off 2015, which was a turbulent year in both the debt and equity markets and a year where the BDC industry experienced a negative 4% total return. On last year's call, we highlighted how fortunate we felt to have generated a positive 5.8% total return for our shareholders during 2015.

As we think about the BDC industry today, one year later, we are pleased to see so many companies moving in such positive directions including, of course, Triangle. During 2016, many BDCs, including TCAP, did the right thing for their shareholders by proactively adjusting their quarterly dividend. This type of decision-making is good for the entire industry as it illustrates that BDC operators are focused not just on quarter to quarter results but the long-term.

When investment yields are low, as they are currently, then BDC dividends naturally will be lower. Likewise, when investment yields expand, BDCs should seek to expand their dividends. During 2016, many BDCs made intelligent business-minded decisions and, consequently, are being rewarded by shareholders. Indeed, of the 21 BDCs that the Wells Fargo research team tracks closely, all but two of them have generated total returns for shareholders for the trailing 12 month period in excess of 20%. And we, again, are gratified that TCAP is in this positive total return group.

On our November 3, earnings call we spoke about the potential for postelection optimism, regardless of the outcome of the presidential election. Clearly this sense of optimism has been widespread, not just in terms of the public markets but in terms of private companies doing business in cities and communities across our country. Many entrepreneurs with whom we speak regularly, tell us that they are busier than they have been at any time since the Great Recession. After years of maintenance only capital spending, company owners are beginning to invest real dollars in capital equipment for expansion purposes, looking to expand their operational footprints and seeking to acquire competitors.

In addition, many companies tied to home-improvement are also reporting strong activity and, in our local area, architects and builders are as active as they have been in over a decade. What is also interesting is that within all of this positive activity, we are also seeing declines in restaurant spending and in certain pockets of advertising which lead us to conclude that even though many people are willing to spend and invest, they are trying to save incrementally on what they perceive to be as discretionary items.

Aside from investment portfolio impacts, and there are some to TCAP, positive examples like in the case of Magpul Industries and NB Products, and negative examples like in the case of Cafe Enterprises and Women's Marketing. We view all of this greater economic activity with a very positive lens and believe this type of activity will help extend the current economic cycle longer than many people may previously have thought.

Fortunately for TCAP we are well-positioned to take advantage of continued economic growth and the recent approval of our third SBIC license, which will provide us with up to $100 million of additional SBA-guaranteed debentures, is one tangible example of a competitive advantage, which we intend to leverage on behalf of our shareholders.

Now let me turn to a few operational highlights. Adjusted for one-time expense items, during the fourth quarter we earned $0.46 per share of net investment income. For the full year 2016, adjusted for one-time expense items, we earned NII of $1.81 per share as compared to our annualized dividend of $1.80 per share. We feel especially good about generating this level of NII on a per-share basis given that we raised $130 million of new equity in late July of last year. And, therefore, we were investing that new capital during much of the last two quarters of the year.

During the fourth quarter we recognized net realized gains totaling $8.7 million, primarily related to the sales of three equity investments, American De-Rosa Lamparts, which generated a gain of $3.6 million; All Aboard America! Holdings*, which generated a gain of $3.1 million; and the Chromaflo Technologies, which generated a gain of $1.9 million. These net realized gains during the fourth quarter brought our total net realized gains for the year to $2 million making 2016 the fifth out of the last six years where our investment portfolio generated net realized gains.

Realized gains and losses generated by any investment portfolio will fluctuate during calendar years with some years resulting in a net loss and some years resulting in a net gain. We are certainly pleased that our realized gains have outpaced our realized losses by approximately $20 million in the 10 years since our IPO and we continue to believe that our investment strategy of having equity upside in a high percentage of our portfolio companies will help protect shareholder capital over the longer-term.

In terms of our current investment portfolio, we've reported pretax unrealized appreciation totaling $11.9 million during the fourth quarter and $31 million for the year. The majority of this net unrealized appreciation in the fourth quarter was driven by underperformance of our investments in Dialog Direct, PCX Aerostructures, Capital Contractors, CRS Reprocessing, and DCWV. These write-downs were partially offset by unrealized appreciation driven by strong performance at companies including Magpul Industries, NB Products and WSO Holdings.

Finally, our net asset value per share was $15.13 as of December 2016 as compared to $15.33 as of September 30 and $15.23 as of December 31, 2015. With that I'll turn the call over to Steven.

Ashton, thanks. A detailed financial analysis of our fourth-quarter and full-year 2016 financial results is contained in our podcast which was made available yesterday at the time our earnings release hit the wire so my comments on today's call will focus on just a few high-level earnings points as well as providing you with some additional color behind the numbers.

In terms of our quarterly results, our fourth-quarter total revenue of $31.2 million represented our second highest quarterly revenue in our history. During the quarter, we recognized healthy amounts of recurring revenue from existing portfolio companies. We made 10 new investments and we received $3 million in non-recurring fees and dividends from portfolio companies. Our interest expense was slightly lower on a sequential basis due to lower average borrowings on our senior credit facility. And our compensation and G&A expenses, adjusted for previously announced one-time items, were $1 million higher quarter over quarter due to increased discretionary comp expenses as well as public company expenses.

From an efficiency ratio standpoint, for the fourth quarter of the year, our efficiency ratio is 18.8%, again excluding one-time expense items. As compared to 17.6% during the third quarter. Going forward we still consider an appropriate efficiency ratio target to be plus or minus 2-% of revenue. As Ashton mentioned, adjusted for one-time items, net investment income for the fourth quarter was $0.46 per share, $18.6 million. This compares to NII of $15.8 million or $0.42 per share during the third quarter.

From a liquidity perspective, we ended the year with total liquidity of approximately $280 million, not including our recently approved SBIC license which provides us with up to $100 million of long-term SBA-guaranteed debentures. We expect to fund and utilize this SBA license during the balance of 2017 and beyond.

Before I hand the call back to Ashton I'd like to take a minute to provide some details around Triangle's first 10 years or 40 quarters as a publicly traded Company. We believe the following statistics provide an interesting and meaningful overview of how our business operates over a sustained period of time. Over 40 quarters, our investment portfolio has been carried above cost in 22 quarters or 55% of the time and below cost in 18 quarters or 45% of the time.

Over 40 quarters our investment portfolio has generated total net gains in 24 quarters or 60% of the time and total net losses in 16 quarters or 40% of the time. On an annual basis, we have generated net realized gains during seven years and net realized losses during three years. During our first 40 quarters we have recorded nonaccrual assets on a cost basis that were below 5% of our investment portfolio's cost basis, 75% of the time, and which were above 5% of our investment portfolios cost basis 25% of the time.

Our NAV per share has moved within a band of plus or minus 2% of the prior quarters' NAV in 23 of the 40 quarters and it has moved greater than 2% of the prior quarters' NAV in 17 of the 40 quarters and of these 17 larger NAV moves, 10 of them have been upward and 7 of them have been downward. Over our first 40 quarters, we have had nine follow-on public equity offerings and eight of the nine follow-on equity offerings investors have achieved a positive IRR. And in all eight of these offerings, a positive IRR has been 10% or higher and in the one negative IRR offering, the investor's IRR is negative 2%.

Over our first 40 quarters we have increased our investment portfolio from just $55 million to $1.1 billion. Over our first 40 quarters we have paid $18.50 per share in dividends and distributions and we are providing our IPO shareholders with an IRR of approximately 14%. And finally, over our first 40 quarters, our NAV per share has increased by more than $2.00 per share.

We highlight these data points to illustrate the ideological view that we have at Triangle, which is that if we consistently apply a conservative lens to investing in the lower middle market then we will have the opportunity to reward our shareholders with above average returns while they in turn, take below average risk coupled with the option of daily liquidity.

On one level, 10 years or 40 quarters is a long time, and indeed, we have seen certain companies, advisors, lenders and bankers come and go in our industry during this period of time. However, on another level, our 40th quarter is just that, just another quarter, a time to report our activities to each of you in the market, a time to reflect back on our successes and our challenges and a time to look forward with optimism and continued conservativeness.

With the first quarter of 2017, begins our second 10 years of life is a publicly traded Company and we believe our next 10 years will be equally, if not more, rewarding for shareholders than our first 10 years. So finally in terms of our outlook for 2017, a few of the key drivers are as follows. First, our yielding debt portfolio totals approximately $970 million including those investments we have announced after December 31, 2016, and has a weighted average yield of 11.7%.

Second, our annual recurring fee income is approximately $3 million per year and our nonrecurring fee and dividend income is expected to range between $8 million and $10 million per year, though admittedly, that is a difficult number to forecast. These items yield total annualized revenue of approximately $124 million to $126 million, before allowing for any investment portfolio fluctuations in terms of repayments, which obviously would lower our revenue and new investments, which obviously would increase our revenue.

Our total interest expense should approximate $28 million to $29 million and our total G&A, inclusive of compensation and publicly traded company expenses should approximate $23 million to $25 million. These expense items total approximately $51 million to $54 million which results in a baseline net investment income range of $72 million to $74 million, which on a per-share basis equals $1.80 at the midpoint.

And with that I'll turn the call over to Ashton for some specific comments related to our 4Q investment activity before he closes and opens the call to questions.

Thanks, Steven. During the quarter, we made 10 new investments, including recapitalization, totaling approximately $144 million which contained a weighted average debt yield of 10%. We also made several small follow-on investments in existing portfolio companies totaling $11.6 million. Together, our new investments and follow-on investments totaled approximately $155 million. These investments were offset by principal repayments of $40.9 million, primarily associated with four portfolio company investments which were repaid at par totaling $33.4 million in certain other partial repayments.

As of December 31, 2016, we had investments in 88 portfolio companies with an aggregate cost of $1.097 billion and a total fair value of $1.038 billion. As of December 31, the weighted average yield on our outstanding debt investments was approximately 11.7%. The weighted average yield on all of our outstanding investments, excluding nonaccrual debt investments, was approximately 10.2%.

As of December 31, the fair value of our nonaccrual assets was $15.9 million which comprised 1.5% of the total fair value of our portfolio and the cost basis of our nonaccrual assets was $38.4 million which comprised 3.5% of the total cost basis of our portfolio. In terms of additional color regarding our nonaccrual assets, during the quarter we restored one investment, Community Intervention Services, to cash accrual from nonaccrual. However, the investment remains on PIK nonaccrual status until further improvement is exhibited.

Also during the quarter we moved our debt investment in Women?s Marketing, Inc., to full nonaccrual status from PIK nonaccrual. As we highlighted on last quarter's earnings call, we're working actively with a constructive financial sponsor on an amendment to Women?s Marketing and we are hopeful to have positive news on that investment in the next quarter or two.

In terms of color on the investment market, we obviously were active during the fourth quarter, although admittedly many of the transactions we closed during the quarter were actually initiated during the third quarter of the year. One aspect of the current market environment that we have found particularly interesting is that the winter lull, as we have called it over the last several years, appears to be much shorter this year. Specifically, while we saw a temporary slowdown in transaction volume around the holiday season and the first two weeks of January, since that time, sponsors have been very active and the senior members of our investment group are active alongside them. And while overall M&A transaction volumes were down during 2016, it is important to remember that they were up meaningfully for the last three years.

And given the pace with which our pipeline has filled over the last 30 days, our view is that the economic activity we are seeing across our investment portfolio and the discussions we're having with entrepreneurs that I mentioned earlier in this call, are real and tangible data points supporting the view that individuals, operating companies and financial sponsors are all as active as they have historically been but perhaps with a slight more positive tilt in their view towards longer term economic expansion.

During the fourth quarter, we continued exercising our view of investing in companies with incrementally larger amounts of revenue and larger levels of cash flow. To that end, of the 10 new investments we made during the fourth quarter, seven of them had EBITDA levels north of $10 million. For the full year 2016, 13 of the 16 new investments we originated contained EBITDA of more than $10 million and eight of the 16 investments contained EBITDA of more than $20 million. As we have said on our third-quarter earnings call, we believe these incrementally larger companies will represent stronger credit plays over the coming years.

In closing, I'd like to say how pleased I am with the new operational structure we put in place at Triangle close to six months ago. Our investment teams are covering the market more actively than ever before; our legal and documentation focus is more crisp and is being applied in a more uniform manner across all of our relationships. And, finally, our focus on credit and unbiased risk-based assessments has improved materially. And while it would be easy to acknowledge that every organization can and should improve, it is another matter to take a well performing organization and challenge those individuals within it to think differently, to try new approaches and to trust in a new leadership structure.

I am pleased to say that the Triangle team has embraced these views and, as a result, I am both delighted and excited as we usher in our second 10 years together. And with that, operator, we will open the call to questions.

(Operator Instructions) Ryan Lynch, KBW.

Good morning. First question. Last quarter you guys talked a little about the new investment process you put into place and some changes you made in the management committee. So there are some stressed investments in your portfolio today that were originated prior to this new credit process that was put into place. So can you explain how this new credit process can help drive better solutions to existing stressed portfolio companies, companies that were already on your balance sheet before the new credit process perhaps now showing a little bit of signs of weakness?

Ryan, good morning; thank you for your question. In terms of the new structure we put in place and process we put in place, I created multiple points of what I would call veto authority for transactions, whether in the original inception mode and contemplation mode, all the way through documentation modes and ultimately through final approval models.

So at each point of the process, unlike before, certain individuals within the organization have full veto rights on a transaction and therefore we have a much better ability to provide checks and balances as transactions are vetted through the system. So I feel very comfortable about the checks and balances that we have in place and, hopefully, the impact that will have long-term on the credit performance of the portfolio.

Okay, and you mentioned, obviously, P/E sponsors, you're talking about consumers and there is just a general positive sentiment across the economy and the marketplace that's created some lofty multiples really across all asset classes. With you guys having about 15% of your portfolio in equity investments, are you pushing any harder to try to sell off some of those equity investments in this environment where multiples are a little bit higher? And how much of that process can you actually control of selling those equity investments offered? Do more just have to wait for some sort of M&A process or takeout?

Ryan, as you know, we generally get equity in, call it, 80% of our transactions. Typically those equity ownership percentages are in the low single-digit range, anywhere from, I would say 3% to 6% would be kind of an historical range, so with that type of level of ownership, it's very difficult for us to drive the bus on any decisions made relative to exits.

We certainly have good relationships with our sponsors and are in constant contact with them and share our views on the market. But our ability to influence exits in a material way is definitely limited.

Ryan, it's Steven. The only thing I would add to what Ashton said and I agree with everything he said, is that from our perspective -- I think historically the broad numbers would say that we've had basically somewhere around $200 million of equity investments cumulatively and they've yielded $122 million of realized gains. So it's been clearly a nice way for us to invest, but in terms of -- we have analyzed it, frankly, but to take a package of these smaller positions and sell to someone a minority position with no ability, as Ashton says, to affect when the takeout occurs, there is more of a limited market for that. And frankly, we've enjoyed the performance of these and we will come out at a natural time. Does that help?

Yes, yes, that's helpful. And then just one last one. Your portfolio growth was very strong in the fourth quarter. It looks like quarter to date in the first quarter you guys disclosed $65 million of new capital deployments which is a strong number. Can you just talk about your outlook for capital deployment in 2017 and also on the repayment side? In the fourth quarter repayments were at a fairly normal pace. Can you talk about your expectations for repayments? I know those are difficult per (inaudible) payments but are you guys seeing any -- maybe even strong repayments in the first quarter to maybe offset those strong originations?

Ryan, it's Steven. Thank you early in the queue for asking the impossible question. (laughter) I think I would echo a little bit what Ashton said in his prepared remarks. There is a lot of activity in the market. The quote, winter lull, that we historically have seen was much shorter this year than in prior years going all the way back to 2012. So we're seeing really good healthy activity.

From -- on the origination front, obviously with us, I think especially given the new structure we have in place from a diligence standpoint, I think you should expect to see it be lumpy for us from a quarter to quarter basis. We are going to really seek to make the strong credit play investments and be where we would like to be in the capital structure with each specific company.

On the repayment side, one thing that we are gratified by is, as we were saying for a couple of years, repayments are elevated. We would expect them to return more to a normal level, quote-unquote, with -- as a percentage of our investment portfolio. And I think in 2016, we saw that happen really for the first time as we, on a quarter to quarter basis, we averaged -- if you had to pick an average, you would say we averaged somewhere around 40 million to 45 million. And for the whole portfolio we were about 20% for the year in terms of on a percentage basis. So that's -- it's good that we are getting back to that because we did go through a period where there was just really high velocity in terms of turnover in the portfolio and we were not the only BDC that experienced that; a lot of folks clearly did. So it's nice to have the waters be a little calmer there I guess I'd say in terms of repayments. Does that help?

Yes, that's very helpful. Thanks for my questions.

Bryce Rowe, Baird.

Great, thanks. Good morning. Was curious, you've noted the activity thus far in the first quarter and the new SBIC license. Just wondering if you have the opportunity to draw down debentures tied to those new investments in the first quarter of 2017.

Bryce, it's Steven; thank you for the question. The answer is no, we have not exercised the complete draw of debentures at this point. I would tell you we are were in process with the SBA on that. As I think you know, we received the license formally from the SBA in early January and we, frankly, have had some incremental liquidity in our other pre-existing funds and best to use that first before drawing down just in the natural course. And that's really why I made the comment earlier of we would expect to use it in 2017 and beyond. It's there. We are funding it as we need to but we have not yet drawn down debentures.

Great. That's helpful. And then maybe another follow-up on pricing. Ashton you noted the weighted average yield on new investments here in the fourth quarter was roughly 10% and you had a good mix of unitranche, second lien and subdebt so just curious of the new investments here in 2017. Are you seeing comparable pricing with those investments you saw in the fourth quarter?

Bryce, the short answer to your question is, yes. The pricing that we're seeing and have experienced on the three transactions announced year to date is very consistent with the levels that you would have seen in Q4. So the environment certainly hasn't changed in the last month or two; it's very consistent with what we saw in the latter part of last year.

Bryce, it's Steven. To add one thing to what Ashton said is, as you have known as you've covered us over the years and the data that we made public last year in our Investor Day, there had been times historically where Triangle has stretched a bit for yield. And we have found that statistically that's not a great game to play when you are operating at certain points in the market. And so I think, as you hear our comments of incrementally larger, more ballast heavy companies from an EBITDA sizing standpoint, we will accept an incrementally lower yield to be sure that we are where we want to be in the capital structure at this point in the cycle, which probably sounds natural to you and would echo most of what we've done historically.

But the couple of times we did stretch for yield way back when really I don't think we got the right returns for that and experienced some credit issues.

Yes, appreciate it. That makes a lot of sense. That's all I've got. Thank you.

Chris York, JMP Securities.

Good morning, guys, and thanks for taking my questions. So only a couple and I did want to maybe continue Steven's theme of reflection. So focus on Ashton's recent operational enhancements? So Triangle is one of the few BDCs that is committed to grant restricted stock to employees, so a couple questions on that. So has the mix changed for discretionary comp stock versus cash over time?

What is the mix maybe today and some of those metrics tied to that distribution for restricted stock and then what do you expect is the total ownership of all employees today because if we can get Form 4s for executive officers, but I'm trying to get non-directors and trying to accumulate that, the distribution of restricted stock is very positive for shareholders.

Chris, it's Steven. I'll start and then if there is anything of a strategic nature that Ashton would like to add on to this, certainly he can do that. We were granted exemptive relief by the SEC back in 2008 to be able to grant restricted stock as an internally managed BDC. We do think it helps align the management team and Board's interests and motivations alongside those of our shareholders. Restricted stock makes up a component of compensation that historically has ranged, I would say, anywhere from call it a third to 40% or 42% of a certain individuals compensation.

It is something that we share with all officers of the Company and, as our Company has grown over a decade, we obviously have many more officer level team members and it frankly is one of the joys of operating a publicly traded company to be able to have that type of longer-term incentive-based compensation with a wide group. And so we're really -- we like what it does and the way the program is structured with the four year annual vest, 25% each year for four years.

We think it helps with retention, clearly. I think you all would see that as you look at Triangle. In terms of management ownership, the management and the Board own somewhere about 4.5% of the total outstanding shares and some of that is still in restricted form. Other components of that if you were to look at the annual filings, you would see if you went back and really pushed through all the math, you would come to the conclusion that people own a meaningful number of shares outside of what is restricted. You would see that in the annual proxy, so to speak.

So, trying to give you some of the details you were asking for there, and we haven't really changed -- the final piece I guess I would say to your question, we haven't changed materially our outlook in terms of the granting of shares other than what you would see if you lined up all of our proxies and 10-K's and really pushed through the math, you would see the total number of shares granted on an annual basis has increased over the years. And the majority of that has really gone in the sense that as we have expanded the team and you have, as I said earlier, more officers and employees participating in the program then you had originally back in 2008 when we only had nine or so total employees. Does that help?

It does. A lot of good color in there, so thankful for that. So you talk a little bit about expanding the team and that being the driver of the increase there, so what are the employees at year end, which I believe there was 26 at year end 2015, and then do you need to hire more employees as you continue to plant a flag as a leading lender in the lower middle market?

Chris, it's Ashton. You're asking a very operational question so I'm going to give you a very operational answer. And the short answer to your question is we constantly are looking at resource requirements within the Company and, as you know, as part of our investment group, the analysts and associates, for example, are a critical part of our team. And we have a more, what I would call, normalized and formalized recruiting function that occurs yearly for those employees that encompasses both internships as well as full-time placement of those titles. So that's an example of what we do on a regular ongoing basis yearly.

And, Doug Vaughn, who is our Chief Administrative Officer, is responsible for all of the recruiting functions for the firm. When you get into more senior-level positions and you look across different functions of the firms such as originations, such as portfolio management and other titles and responsibilities within our shared services team, those potential hires become very strategic in nature and you often have to search for the right person, the right cultural fit, the right need and the right balance of experience and history for that individual. So those are harder to answer specifically for you because we're always looking for the highest caliber employees to join TCAP.

We always want to bring in those employees which are going to really expand our platform and provide for above average performance. So as we continue to grow, which we are currently and will continue to be in growth mode going forward, that's obviously our goal. We will regularly look back and figure out if we need additional resources and, if appropriate, we will onboard those individuals. I will say that historically the fabric of this Company has been to grow from within and to promote and develop those employees that we currently have and we're very focused on that and we're very committed to that. And a big part of our yearly discussions at the executive officer level was how do we continue to train and bring along and develop employees at all levels of the organization and we will continue with that focus.

That's very helpful. So if I just maybe some summarize how I am thinking about it for a modeling purposes, so Ashton, maybe as we think about growing the business, your pursuit of directors and originators, if you will, or senior investment professionals, is more opportunistic as opposed to a blanket mandate to grow employees to support. Is that the right frame to think about it? And then secondly, do you have a number -- maybe it's a Steven number and we can take it off -- of the comparison of 26 employees at year end 2015 and what would that be at 2016?

Chris, I'm not sure it's opportunistic is the right word; I'm not sure it's linear either. I would say that it's just a well thought out process that we have in place and as we continue to grow we constantly are assessing what we would call stress on the system and whether or not we have adequate capacity within the system to handle what we have and what could come down the pike.

Culture is really important for us and given our location, given our one office construct as we've had since the inception of the Company, it's important to find the right folks that may want to join the TCAP family. And so I wish it were a more straightforward answer for you; unfortunately it's not. It's one right now where I think we are comfortable certainly for the near to medium term from an origination perspective and working with the team that we have here and helping to bring up some of the junior officers who have been here for quite a period of time and who have been working with our senior originators for years and will be going out and originating on their own going forward. So I think we're very comfortable working within that construct.

I would say from the portfolio management side, with Jeff Dombcik's leadership, we already have added one to his team and could conceivably add more as we continue to go through this year. So it's a constant assessment that we have regarding our overall full-time employment numbers.

Chris, it's Steven. Why don't we jump off-line if you have more specific questions just from a modeling standpoint and we can certainly cover those maybe later today, if that's okay, just to give other folks in the queue a chance. But I don't want to shortcut any other topics you might want to discuss.

Certainly. Nope, that's it for me. Thanks for your time, guys.

Robert Dodd, Raymond James.

Hi, guys. On a couple of interrelated questions, first of all on the equity side, in the investments in the fourth quarter you made obviously a wide range here, some you didn't get any equity, some -- one you got up to 20% of your capital was in equity in the Del Real transaction. So from 0% to 20%, pretty wide range. Would you say the dynamic has changed in the market about how we have to go about getting that equity? And also just (inaudible) would you still expect your portfolio on a cost basis that you would like to be around 10% equity and 90%, obviously, income generating and 10% potential gain generating? Is that still the right way to think about it?

Robert, good morning; it's Ashton. Thanks for your message. You know, I would say that nothing has changed with our strategy of coinvesting alongside our financial sponsor partners and historically the model has been 10% to 20% of what we invest from a debt perspective. We like to invest from an equity perspective. So that strategic intent has not changed and I do not see that changing going forward.

I think I've highlighted before on previous calls that while our track record of being able to obtain equity in our investments has not materially changed over the years, in certain quarters it's been more lumpy than others. So in some cases you might see a more concentrated equity exposure than you would see in some of the historic quarters. So I'm not sure that you can look and say any particular quarter's results are systemic in nature. I'd say it just -- facts are the facts.

Typically when you are investing in some of the larger companies, as was the case in Q4, typically those situations it may be a little bit more difficult to get equity, where as when you are investing in some of the smaller companies, the ability to get equity is on a relative basis, easier to come by. So, we get equity ownership in multiple ways to support several of our sponsors from an LP perspective. In a small way we get equity there. We obviously equity invest with our new transactions in the form of either a direct check or a warrant or some type of royalty.

Got it, thank you. And then just on the split unitranche versus subdebt, obviously, very high levels of deployment in Q4 and you gave the weighted average coupon but when I look at the unitranche three deals average about $22 million per deal, obviously larger companies that you talked about average coupon, call it 9.2 on the subdebt side average per loan and there is a wide range here. But the average is $52 million, $5 million per loan, but from 15 to 3, right? So average coupon, 10.

So, obviously, unitranche, as you said, larger companies, probably better security, the unitranche alone higher security then subdebt, and yet you are only giving up 80 basis points which seems to make unitranche even more compelling on the relative value versus subdebt. So, given -- if that is indicative of the market rates for those kind of structures should we just be expecting you more unitranche given it's not much lower coupon but much more security in combined for the legal structure plus the size of the Company?

Robert, we agree with everything you just said and I would say that every situation is obviously unique. I'd say that almost in every case now we are being afforded the opportunity or we are being requested to provide both the unitranche as well as the senior subtype structure and we, in conjunction with other sponsors are making the best risk-based or risk-adjusted assessment on behalf of our shareholders.

The reality is the unitranche right now that we are seeing and pricing is generally between 9% and 10% and the subdebt is between 10% and 12%. And so we constantly look for that relative premium to see whether or not it's worth the incremental risk of the subdebt versus the unitranche in the first lien position, vis-a-vis, the delta between the rates. So I think everything you have said is very accurate; it's very consistent with what we're debating on a weekly basis as we look at transactions in which to invest.

Okay, perfect. Thank you. Just one more if I can, on the Lakeview, was there anything particularly unique about that transaction? Obviously, a 7 8 coupon but you got a pretty nice equity (inaudible) right, so is there anything unique about that one that met your internal total return target hurdles despite a pretty low coupon, even below the range you just indicated that unitranche 9 to 10, 7, 8 obviously below that but good equity. Anything special there?

I would say the specialty there, Robert, was we really, really liked the Company. We really liked the credit. We really liked the sponsor and its one -- a sponsor with whom we have historically had a relationship. We wanted to continue to be supportive. And I would just say it's one of those deals where, yes, you're right, it's below historically the rate that we would go, but we felt very, very good about the credit and thought it was a good opportunity for our shareholders and, importantly, was a very good relationship related approach to hopefully continued involvement and partnership with the sponsor.

Okay, thank you.

Jonathan Bock, Wells Fargo Securities.

Thank you and this is Mr. Block asking a question. So, I do have a quick item. Everyone loves unitranche, Ashton and Steven, and, yes, it sounds great. We're able to get better pricing, better protection, downside. But that's from our perspective as lenders and investors but from sponsors or families, what we're finding in the bank term loan and mezz market or the non-bank term loan plus the second lien, there right now is a structural or a cost advantage to be moving towards non-unitranche structures given the lack of volatility or given the general lack of volatility, lack of fear in the market, which would imply to us that what's going down the unitranche route is what couldn't effectively have been done by more traditional means. And so walk us through the credit, underlying credit quality of today's unitranche deals that you are doing and why they are in fact better than the financing options that could of been afforded to those PE sponsor firms that were both likely cheaper and less restrictive than the unitranche that you gave.

Mr. Block, it is Steven. Appreciate your question. And you covered a lot in there but you will probably hear from both of us on this. You know, there always has been a cost advantage if you just truly look at cost of capital to an underlying portfolio company or that company and its sponsor, to have a traditional bank and call it mezzanine structure. Sponsors historically have been willing to -- and this really emerged back in 2013 in the wave of dividend recaps where sponsors have said I'm willing to pay a little bit more for ease of execution and not to have to negotiate with multiple parties and have those people effectively on staff in my office, the sponsor's office, to do that work and I can kind of offload some of that.

And I'm willing to pay a premium for one structure that might afford me incremental flexibility from an operational perspective with my portfolio company. So I'd be a little wary of going down the path of sponsors and operating companies that choose unitranche or not creditworthy to approach a true bank lender because frequently I'd say in 90%-plus of the cases that we look at and in 100% of the term sheets we issue, they are able to do that.

We are not a lender of last resort, so to speak, in terms of how we would approach the market. So any transaction on which we close you would know that there is -- it's not that they only can do one type of financing. So from that standpoint, as we move later in the economic cycles, certainly I think from our standpoint you've heard on multiple calls now, that view of nice to tilt a little more up balance sheet, nice to tilt a little bit larger in terms of portfolio company size.

But again, Ashton is totally right. Every credit analysis is unique and there are times when we are very content to be behind a bank lender and we like where we are in the capital structure with an operating company and with a sponsor. So I hear exactly what you are saying. I would say to some of the really good research you and your firm have put out recently in terms of what potential future tax impacts and things might be, we believe there really could be more of a pendulum move back in 2017 and beyond to a quote, more traditional bank and mezzanine structure than has existed in the market in the last, call it 24 to 36 months.

So, frankly, I think what you're really hearing from us is we want to have a foot in both camps to be able to be very responsive and nimble with our sponsor relationships when a good credit opportunity presents itself. And, Ashton, I don't know if you would add anything to that, but --.

Yes, Jon, that is actually the point I was going to finish with the Steven is I have impressed upon Cary Nordan, who is our Chief Origination Officer, that while unitranche may broadly be the preferred flavor of ice cream currently, we fortunately as a Company have had one of the most, if not the most, active mezzanine platforms in the country historically and we are certainly not going to lose that DNA nor that market position going forward.

So we are actively mining both opportunities, as I mentioned. They all come down the same funnel for us. So there is no incremental cost to TCAP, if you will, to mine those opportunities. The question ultimately is what's the right structure and risk-adjusted returns for our shareholders and as I mentioned in my response to Robert's question, more often than not now we're being asked to provide both structures, a unitranche structure as well as a senior sub perspective as well. And so we will not lose that position in the market and should Steven's point to be true, which is we swing more back into the traditional senior sub structures being quoted as the preferred route, we will be equally well positioned to take advantage of those opportunities.

So then maybe just a small follow-up, more of a data point answer. Are the new unit -- from a total leverage perspective, are the unitranche deals that you are doing lower from a total leverage perspective than the bank mezz offering or higher?

Jon, it's Steven. It is totally case-by-case; that is your data point answer. Sometimes it is incrementally lower, sometimes it is equal but with more flexibility clearly in the capital structure for the sponsor who might intend to make acquisitions. We have seen cases where people have asked for higher. We frankly have shied away from a lot of those just again based on how we analyze it. Does that make sense?

Yes, it does. Thank you then the last question is a tie-in. So the third SBIC. I'm curious, does that change what you would view to be your true long-term economic leverage position, right? Meaning that with more senior secured unitranche deals as part of the make-up over time, and assuming that doesn't change, would you likely to be looking for a higher level of economic leverage and/or consider some form of off balance sheet joint venture to better put more appropriate levels of leverage on those deals?

A lot contained in that. We have looked at off balance sheet funds before. We will continue to analyze those. I think what -- by our actions which have been not to move in that direction, I think what you've seen is the way we look at it is what's our long-term return on equity, not one quarter or two quarters or even one year? What's our long-term return on equity opportunity in our base business and is anything else that we might analyze, is that enhancing, competing or degrading to that existing return on equity where we believe we are in our base business.

So we like to tell ourselves that our shareholders have benefited greatly by our team maintaining a tight focus on what we do. It is certainly true that as you analyze opportunities in your pipeline you could say, well, gosh, if this is more of a senior opportunity wouldn't it be nice to have a senior bucket, so to speak, to put that in that does have a little more leverage to it. So it's an ongoing discussion that we've had that we have with our Board. But again, the action that we have taken actively is one of inaction on that front, I guess I would say.

All right. Thank you so much.

Andy Stapp, Hilliard Lyons.

Good morning. Were there any common themes driving the unrealized losses in Q4?

Andy, good morning; it's Ashton. The short answer is not from where we sit. I think that if you looked across each of the companies and the drivers of underperformance, it would be idiosyncratic and not something that we could step back and attribute as systemic.

Okay. And realized and unrealized losses have tended to outweigh gains in recent quarters, obviously an improving economy should help stem such losses. How should we think about these gains and losses in 2017?

Andy, it's Steven. It's difficult for us, if not impossible, to forecast how gains and losses will play out. I agree with your statistical point, certainly, but it's a little bit like repayments in the portfolio when people -- there was an earlier question in the queue on what future repayments might be, and it -- you really just can't predict with any degree of accuracy. When I went through some of the historical data points earlier in my prepared remarks, it is interesting to us that if you look at the portfolio on a cost fair value standpoint when we were above cost and below cost, you've been below cost 45% of the time of our public life yet we only had true losses in 40% of the quarters.

So I think you are going to go through periods, and if you look back, if you were to do the analysis that we did and we were just trying to save all of you the efforts of lining up all the 10-Qs, I think what you would see is there are patterns of -- there are some quarters where Triangle's NAV was moving up, Triangle's portfolio was existing -- contributing meaningful realized gains. There other periods where you would say there have been not necessarily tied to a recession, where Triangle has had realized losses as well. And it tends to just be a little more cycle dependent.

I could tell you that our in terms of cycle to us, I could tell you that our existing equity investments today are carried about $12 million above cost in total and that we believe there to be some relatively new equity investments that have been made there in the last 12 months. We originated about one-third of our total portfolio in the last 12 months, so naturally the equity investments tied there are either at cost or very close to cost.

So, how we'll actually settle out of a realized event either again or a loss quarter to quarter or year to year is really difficult to predict. Year to date through the third quarter of 2016, we were net realized losses for the first three quarters on a realized basis. As Ashton commented, in the fourth quarter, with close to $9 million of realized gains, we swung to a positive for the year. So, it's just really tough to predict. I'm not trying to drone on about it. I'm trying to give you the data points that we look at from an historical standpoint to help us predict but inherently it's really challenging, if not impossible.

Yes, I realize that, just looking more for high-level color. Okay, thank you.

Christopher Testa, National Securities.

Thanks for taking my questions. Just not to beat a dead horse but just going back to the senior debt and unitranche versus the subdebt. Obviously, your senior debt has increased pretty steadily over the past couple years, especially the last year. And given your comments on the credit cycle, should we expect more additions to senior debt as opposed to subdebt and potentially more balance sheet leverage? In other words, are you just getting better economics with higher advance rates on the senior debt that you are seeing today as opposed to lower advance rates on the subdebt? Could you just -- any color there would be great.

Chris, it Steven. I'll start and let Ashton chime in too, maybe on the first part of your question; I'll cover the second part initially. In terms of our credit facility, our senior credit facility, our advance rates are higher on a first lien transaction than on a second lien or mezzanine piece, but the overriding mathematical proxy, I guess I would tell you, is we don't rely heavily on bank financing to begin with.

Our credit facility is $300 million. It's basically, call it 25% on a committed basis of our capital structure today; a little less than that. And what we have outstanding at any given point in time, call it anywhere from $100 million to $250 million would be, obviously, an even lower percentage. So it's -- we're not really a match fund lender in the sense of some BDCs that might say I'm going to have a senior lending program that's really low from a return on equity standpoint and I'm going to really try to match some leverage just with that asset.

We take a more portfolio-centric approach frankly so that we are not artificially incented to make one type of investment over another. And it gives our investment committee the opportunity to analyze -- you hear us say frequently on these calls -- we said it today three or four times -- every transaction is unique and we want the ability to think that way. And so we try to construct our capital structure to give us that latitude. But in terms of maybe the first part of your question, I'll let Ashton address that and you may even need to repeat it because I know I've lost what it is.

No, I think what --.

Maybe you've got it.

Chris, what you -- I think where you were headed was given what appears to be some -- an increasing component of unitranche related investments over the last couple of years, what type of trajectory would we see going forward. I just want to confirm that's what you were seeking clarity on. Is that right?

Yes, that's correct.

Right, yes and it's hard to predict -- Robert Dodd has been very consistent over many quarters asking that same question and there are some quarters where we will have a heavier influence of unitranche; there will be quarters where we have a heavier influence of subdebt. So it's really hard to say. I think as I have answered Robert in the past and I'll say the same to you, we don't have targets for unitranche or subdebt; what we have targets for are the investments in the structures which provide the best risk-adjusted return for our shareholders. And so however that plays out ultimately is the way it plays out and the data will present itself as it is.

It is safe to say that on the margin we are getting requests now more for unitranche proposals than we have in the past, partly for reasons that Steven had mentioned earlier, whether it be the administrative efficiency within the financial sponsors, just the market demanding it, and it being the current preferred flavor of ice cream. But we could see that shift again and, as I mentioned to Jon Bock's questions, we will be well positioned to take advantage of either structure going forward. But first and foremost we're going to make the best decision on behalf of our shareholders that is from a risk-adjusted perspective.

That's great color. Thank you. And just on the -- obviously robust portfolio growth last quarter -- just wondering if you give us an idea on the timing of when a lot of those close, whether it was balanced or more weighted towards the end of the quarter? And also if you could just quantify how much, if any, OID acceleration there was during the quarter.

Chris, it's Steven. In terms of the closings in the quarter, it was -- there were, I guess, four -- well, including the five that closed from November 30 through the end of the year. So you would say, but there is a group in October, a group in November and then a group in December, so from a dollar standpoint, I would say it's fairly evenly weighted. There are quarters, really to your point, and it's a very good question -- there are quarters where we kind of get backend weighted. Things just happen to close right at the end of a quarter and we're not -- a lot of BDCs are that way. But this was a fairly balanced quarter for us in terms of the contribution.

Yes, Chris, we had three in October, we had two in November and we had five in December.

Great, thank you. And how much OID acceleration was there during the quarter?

Chris, we will have to come back to you on the specifics there. It was not an out-of-line number, I can tell you, because it was not in the headlines of when we talk about one-time items; it was very, very consistent, to the point of not raising itself as something for us to be thoughtful about in terms of mentioning on the call. If it had been, we would've mentioned it.

Okay, great. And just last one for me, just wondering, obviously, M&A is very muted. Just wondering if you are seeing any potential bright spots where you have some equity investments, just in terms of industry?

You know, it's Steven. We're kind of smiling at each other a little bit here because, frankly, to echo Ashton's comments at the beginning, there's a lot of really positive activity out there in a lot of sectors. People just -- I was meeting with somebody recently and said it was the owner of a company said I haven't spent meaningful CapEx dollars in six years. He said I am so excited to have a project to work on that's really going to add some long-term value to my company. And that perspective is one that I think is really good and healthy.

The Journal article this morning talking about S&P 500 companies spending CapEx dollars and that might minimize stock buybacks, etc., we don't get impacted that way. When our companies invest, it really does enhance their footprint because they are not worried from their standpoint, on what one is doing with a public currency. They are just in the business of creating longer-term value for their investors. And it's a great thing for us to piggyback on, so I'm not sure I would say there is really one industry; it's frankly pretty widespread.

Yes, I would say more from my -- obviously, consumer staples would be one example of an industry where right now there is an alignment of the stars for really high valuations. Consumer discretionary I would say a little bit less so. Further comments we had in our prepared remarks. But I would say that if you are a company and an owner of a company right now that has a strong management team, a good market share, a defensible position in your market, one where there is organic growth opportunities as opposed to the requirement for acquisition-led growth, and you've got strong free cash flow conversion, regardless of the industry you are in right now, you're in a pretty good spot to be able to monetize that investment.

So I would say that I would think more holistically, those themes as opposed to any industry specific and that's how we think about it from our portfolio's perspective.

That's great detail. That's all for me. Thank you for taking my questions.

Thank you. I show no further questions at this time. I'd now like to turn the call back over to Mr. Poole for closing remarks.

Great, operator. Thank you very much for joining our call today. As I mentioned in my comments, we're very pleased with the way that 2016 concluded and we're very optimistic about 2017 and we appreciate your continued interest in Triangle and our story. And we look forward to many conversations with you going forward.

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect. Have a great day.