Barings BDC Inc (BBDC) 2017 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Triangle Capital Corporation's Conference Call for the Quarter Ended March 31, 2017. (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 host for today's call are Triangle Capital Corporation's Chairman 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, Tanya, and good morning, everyone. Triangle Capital Corporation issued a press release yesterday with details of the company's quarterly financial and operating results. A copy of the press release is available on our website. Please note that this call contains forward-looking statements that provide other than historical information, including statements regarding our goals, beliefs, strategies, future operating results and cash flows. Although we believe these statements are reasonable, actual results could differ materially from those projected in the forward-looking statement. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the sections titled risk factors and forward-looking statements in our annual report on Form 10-K for the fiscal year ended December 31, 2016, and quarterly report on Form 10-Q for the quarter ended March 31, 2017. 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 like to turn the call over to Ashton.

Thanks, Tommy. To say that 2017 has gotten off to a rapid start for TCAP would be an understatement, especially when you consider that since the year started we have originated over $160 million of new portfolio company investments, raised over $130 million of equity growth capital, received formal approval of our third SBIC license, seeded that new fund with capital and made our first investment in the new fund, and expanded our senior credit facility by $135 million and extended the maturity by 2 years, all while not losing a single lender and gaining increased commitments from 11 of our 13 lenders. If you have noticed that much of this activity centers around expanding our balance sheet, then you are right because that is exactly what we are doing, expanding our balance sheet in preparation for a meaningful expansion of TCAP's operational footprint over the next 2 to 3 years.

As we sit today, we have accessed over $500 million of liquidity, an amount of capital equal to almost 50% of the current value of our investment portfolio and an amount equal to almost 60% of our equity market capitalization. From an investing standpoint, during the first quarter, we made 9 new investments consisting of a combination of mezzanine investments, unitranche investments, second lien investments and senior investments across both lower middle market and middle market companies.

As those of you who have known us for some time are aware, for the last few years we have made selective investments in unitranche structures when we have concluded that the risk/return analysis has been favorable to us. Since 2014, we have made 22 unitranche investments and those investments have generated low to mid-teens returns on a consistent basis. To be a bit more specific, since 2014 we have made approximately $410 million of unitranche investments.

Over that same period, we have originated approximately $620 million of mezzanine investments and approximately $155 million of second lien investments. Almost all of these investments have been originated on the back of our relationship based network of financial sponsors and bankers. As we translate our recent investing experience into a view for the balance of 2017, we are encouraged by our ability to screen for and find suitable risk adjusted returns across the traditional mezzanine market, the unitranche market and the second lien market.

From a financial return perspective, the blended weighted average yield we have been receiving on this mix of investments, which has been plus or minus 50% mezzanine, 35% unitranche, 10% second lien and 5% first lien senior, is sufficient for us to meet our return hurdles while providing a competitive edge for TCAP from a product mix standpoint.

We have long held the belief that while mezzanine investing produces an attractive risk adjusted return and therefore an attractive return on equity, it is also appropriate to combine that style of investing with a certain level of more senior oriented structures, which provides a laddering effect in terms of overall yield and tenure across our investment portfolio.

As we move through the balance of 2017, we are extremely pleased to have such a sound financial foundation, which will enable us to continue to construct a balanced investment portfolio from an overall yield and investment structure standpoint.

And with that, I will turn the call over to Steven for some comments on our financial and operational results.

Thanks, Ashton. During the first quarter, we generated net investment income or NII per share of $0.42. While there clearly are a lot of moving parts to any quarter's revenue, direct operating expenses and net investment income, our NII per share during the first quarter was $0.03 lower than the guidance of $0.45 per quarter that we provided on our February 23 earnings call, due to $0.02 per share of operational dilution from our equity offering and $0.01 per share of lower nonrecurring dividend and fee income than we had expected from various portfolio companies.

If you analyze our results on a quarter-over-quarter perspective and compare the quality of our revenue during the first quarter with the fourth quarter of last year, you will note that we recognized approximately $1.8 million of nonrecurring dividend and fee income from portfolio companies during the first quarter of this year as compared to $3 million of nonrecurring dividend and fee income during the fourth quarter of last year. This $1.2 million difference equates to $0.03 per share on a quarter-over-quarter basis.

As many of you know, nonrecurring dividend and fee income is impossible to predict with accuracy on a quarter-to-quarter basis, which is why we tend to focus on it in an annual context. From a historical perspective, if you analyze our NII per share during the 10 follow-on equity offerings we have completed since our 2007 IPO, in 7 of the 10 offerings you would find that our net investment income per share was lower during the immediate quarters after the offering. This analysis makes sense given the fact that we naturally are in the process of deploying the new equity proceeds. As those equity proceeds are invested and as we move to utilize at least a portion of the more than $500 million of committed capital we have on our expanded balance sheet, our NII per share should accrete in future quarters.

From an efficiency ratio standpoint, with efficiency ratio being defined as total compensation and G&A expenses divided by total investment income, our first quarter efficiency ratio was 18.1%. This compares to our fourth quarter efficiency ratio of 18.8% excluding onetime expenses previously discussed on last quarter's call.

Our first quarter annualized compensation and G&A expenses as a percentage of average assets totaled 1.8%. Our NAV per share as of March 31 was $15.29 as compared to $15.13 per share as of December 31 of last year. The primary variables affecting our NAV this quarter were the positive effects of our March equity offering and our $0.42 of NII per share during the quarter, partially offset by certain portfolio movements on both the realized and unrealized basis and our $0.45 quarterly dividend.

During the first quarter, we recognized net realized losses totaling $13.3 million primarily related to the write-off of 3 legacy investments: a $12.2 million realized loss on our debt and equity investments in Capital Contractors, Inc.; a $500,000 realized loss on our equity investment in Fresh-G Restaurant Holding LLC, which is commonly referred to as Garden Fresh; and a $4.5 million loss on our debt and equity investments in Gerli & Company.

The investments in Capital Contractors, Garden Fresh and Gerli were already valued at 0 as of December 31 of last year and therefore the realized losses did not affect our net asset value during the quarter. These companies also, as I mentioned, were legacy companies with 2 of them dating back close to the time of our IPO.

These losses were partially offset by realized gains of $4.1 million, including a $3.4 million gain on the sale of our equity position in MS Bakery Holding, Inc. and a $600,000 gain on the partial sale of our equity position in Centerfield Media Holding Company.

From a valuation perspective, we recorded pretax net unrealized depreciation on our current investment portfolio totaling $11 million for the quarter. We experienced $19.5 million of unrealized depreciation, largely driven by underperformance at our investments in CRS Reprocessing, FrontStreet Facility Solutions, Community Intervention Services and DialogDirect. These write-downs were partially offset by pretax write-offs of $8.6 million, including write-offs in strong performing companies such as NB Products, Inc., Comverge and HALO Brands [sic] [Halo Branded Solutions].

From a liquidity standpoint, on May 1, we amended our senior credit facility, increasing the total commitments by 45% from $300 million to $435 million and extending the final maturity to April 30, 2022. And this enlarged facility provides the company with a more streamlined ability to borrow to support our investing and operational activities. And as I mentioned earlier, including the effects of our expanded credit facility, our total liquidity as of March 31 is in excess of $500 million.

And with that, I will turn the call back to Ashton for a few comments regarding our investment portfolio as well as the investing environment before we open the call to questions.

Thanks, Steven. As of March 31, 2017, we had investments in 92 portfolio companies with an aggregate cost of $1.19 billion and total fair value of $1.13 billion. As of March 31, the weighted average yield on our outstanding debt investments was approximately 11.5%. The weighted average yield on all of our outstanding investments excluding nonaccrual debt investments was approximately 10.1%.

During the quarter, we made 9 new investments totaling approximately $146.6 million, which contained a weighted average debt yield of 10.4%. We also made several small follow-on investments in existing portfolio companies totaling $14.9 million.

Together our new investments and follow-on investments equal $161.5 million. These investments were offset by principal repayments across our portfolio of $47.5 million primarily associated with 3 portfolio company investments, which were repaid at par totaling $43.6 million and certain other partial repayments.

As of March 31, the fair value of our nonaccrual assets was $24.5 million, which comprised 2.2% of the total fair value of our portfolio, and the cost of our nonaccrual assets was $50.5 million, which comprised 4.2% of the total cost of our portfolio. During the quarter, we placed our investment in one portfolio company on nonaccrual status, our $16 million debt investment in DialogDirect.

In terms of color on the investing market, following my comments from our February 23 earnings call, the market continues to be extremely tight or some might say efficient in terms of pricing for mezzanine opportunities. This market dynamic is another reason we have been moving towards other more senior-oriented investment opportunities, where we believe risk adjusted returns and overall credit protection is better.

Our transaction flow continues to be healthy as both lenders and financial sponsors report full pipelines coupled with healthy transaction opportunities, albeit at still full purchase multiples.

In another continuation of our comments from last quarter's earnings call, we are seeing a healthy focus from both existing portfolio companies and financial sponsors tilting towards proactive investment in terms of footprint expansion, product enhancement and infrastructure build through CapEx investments. EBITDA margins generally are stable, even though many sponsors and operators alike are trying to budget for growth.

These data points lead us to conclude that having committed liquidity is a competitive advantage in today's market. During the coming quarters as we invest the committed capital which has been entrusted to us, we believe we will be in the fortunate position of being able to continue to deliver foundational results from an earnings standpoint, which should enable the market to appreciate our quarterly dividend and security that naturally should go along with it.

As I look back over my first 15 months as CEO of this great company, I’m humbled that we've been able to create such a firm foundation for our next chapter of footprint and market expansion. During the last 3 months, we've added 5 new employees to the Triangle team. As these new employees immerse themselves in the TCAP culture, they undoubtedly will be instrumental in helping us to achieve the market opportunity that I believe is ahead of us.

And indeed on this point it is important for all you to know that my primary focus as Chairman and CEO is for Triangle Capital to continue to grow and to participate richly as the BDC industry continues to evolve and develop into a major component of our country's capital market system.

And with that, Tanya, we will open the call to question.

(Operator Instructions) And our first question comes from Ryan Lynch of KBW.

First one, you mentioned a full pipeline as far as deploying capital, that you're seeing some pretty good opportunities, but they are full deal prices. We know that the middle market and certainly the upper middle market is very competitive today. Are you seeing any of that competition from maybe some of the larger players starting to dip down into the lower middle market, into maybe some of the more investments you guys track in trying to seek better returns?

I think the short answer to your question is, yes, I wouldn't call it a systemic assault on the lower middle market. I would say it's more episodic in nature. But certainly from time to time, we do some of the larger players coming down into the lower middle market.

And it's going on steam, so it's kind of a competitive environment. And one thing that happens with a competitive environment, heated debt market, is that a lot of existing loans can either get repriced or refinanced. So when I look at you guys' repayments this quarter, it was actually pretty much in line with -- the $50-plus million was pretty much in line with where you guys have historically been at. Are you guys seeing any sort of -- or how are you guys viewing the potential for repricing risk in this competitive environment in you guys' portfolio?

Ryan, as you know, refinancings are impossible to predict and it has been an ongoing debate and topic on not only our earnings call, but other earnings calls as well of other BDCs. The reality is if factually you look back over the latest 12 months, second quarter of 2016 we had $65 million, third quarter of 2016 $62 million, fourth quarter of 2016 $54 million and the first quarter of this year $54 million. So it's hard to predict. It would just say based on the latest 12 months data that $50 million, $60 million number seems to be kind of a normalized rate of what we would experience. You are right, in general buyout activity has been a little bit overall, which has been an influence on refinancings. So you could argue that some of the lower buyout M&A activity is influencing a higher level of refinancings. But in terms of our ability to predict going forward, it's pretty tough. But I would say that our data has been pretty consistent certainly for the latest 12 months.

Let me add one quick thing what Ashton said. I do think our portfolio experienced a meaningful amount of turnover that is higher repayments in the 2013, 2104 time frame and we had hoped at that time frame and have talked on earnings calls that this level of elevated refinancings would get back to a more normalized level. And what Ashton just went through, the great data there of the last trailing 12 months on a quarterly basis I think illustrates that we're now running at closer to 20%, 23% depending on how one measures it sort of repayment rate on an annual basis, which is much more than a normalized zone for us. So we're glad it's back to this level. Obviously, as Ashton started with his comments, it's impossible to predict, but we all try to do our best.

Sure. I appreciate that color. And then just one last one maybe for you, Steven. Were there any one-time fees associated with the amendment of the credit facility that are going to hit in the second quarter?

There, Ryan, were some, as you would expect, some modest fees that we paid for the amendment, but it's not large enough to call out anything major for the second quarter.

Our next question comes from John Hecht of Jefferies.

So you talked about your pre-payments in the last question and moving to pipeline and asset generation deployment, 2 strong quarters of deployment. Do you think -- looking at your pipeline now and the opportunities you've got, do you think that would persist for the next couple of quarters?

You are right, we've had actually 2 sequential very, very strong quarters of origination, where new deals in the fourth quarter were 10, new deals in the first quarter were 9. I'd say that despite overall lower M&A and buyout activity, our pipeline remains at consistent levels that we would have seen in the past and certainly I think most importantly our flow remains at equal or above levels that we have seen in the past. So as you know, having a good flow is critical to origination and we track our flow daily and understand the number of deals that are getting logged into the system. I'd say that it's trending towards kind of equal to a little bit stronger flow. And importantly for not only us but for the entire sector, the healthiness of the pipeline, meaning the quality of the opportunities we see or are seeing, seems to be improving, which we're really glad to see. The one thing I would add too is that pursuant to my comments during the prepared portion of the call about expanding our product mix, that certainly adds to our pipeline as well. So whereas traditionally going back several years ago when it was much more purely mezzanine focus, it was more defined now with an expanded focus on unitranche, second lien and mezz, and in some cases first lien senior, than the range of opportunities expands for us.

I'd be remiss if I didn't jump in as any CFO should at this point in the conversation to say temper your model, don't hear Ashton's comments and elevate your origination expectations beyond what might be reasonable for the next few quarters. And for anyone else on the call, please perceive that as well.

Yes. No, I think that's a -- it's a good point. I think the main point, John, I would say is that our flow statistics have not changed materially to the negative or the positive. I'd say that they are in very much healthy ranges. Certainly from a conversion perspective and conversion percentages, over the last 2 quarters we've probably had a conversion rate higher than our historic norm. Whether or not those conversion rates continue going forward remains to be seen.

No, I appreciate the color. And Steven, I appreciate your conservatism as well. And then on that, you did mention a 10.4% new weighted average yield. Where would that trend as you move to the current pipeline? Is that a fairly consistent level or is there more pressure on that because you're moving a little bit up-market in the competitive environment? How should we think about that?

John, my personal opinion is I think we've seen a little bit of a bottoming out on pricing. I would think going forward you should see plus or minus 10% for newly originated transactions for us.

Okay, that's helpful. And last question is -- Ashton, you're talking a little bit more about footprint expansion to use the strengths and the advantages you guys have created and build out the platform a little bit. You mentioned 5 new hires. Maybe a little bit more color on that would be helpful. Are you putting new offices up elsewhere? Should this influence kind of your efficiency ratios for a period of time? Or how should we consider those developments?

John, great question. We continue to focus on building out both the origination and the portfolio management team and -- as well on a corporate and shared services side as well. So it's a holistic perspective when we talk about hires. At this point, we have no plans for new offices. So it doesn't mean that that wouldn't change in the future, but certainly right now the new hires would be coming right into our office here in Raleigh. As far as material changes in efficiency ratio, again I wouldn't suggest we would see any material moves around the previous guidance that we have always given to you all, which is plus or minus 20%.

Our next question comes from Jonathan Bock of Wells Fargo.

Ashton, as we were talking -- and I think you mentioned maybe a few of the trouble investments. You mentioned something, one word, legacy or potential legacy investments and perhaps it was just a slip. But could you refer -- maybe expound on what you would define as a legacy investment?

Jon, sure. Legacy investments were -- I guess broadly define those that were made probably longer than 3 or 4 years ago. The Gerli one, for example, was made around I believe 2006 time frame and has been around for quite a while. So that's probably the most extreme example of a legacy investment that would have been written-off this quarter.

Okay. And I guess just was curious if that had anything to do with kind of a newfound kind of credit approach given Brent Burgess departure. Would you refer to that as a line of demarcation for legacy investments or not?

John, I don't think there's any insinuation or line of demarcation associated with Brent. That's a totally different perspective. I'd say that what we are very focused on now is the new processes and procedures that we have put in place in conjunction with the reorg that we announced at the beginning of October of last year. And we reviewed these with you all before in terms of the various veto points that are in place with certain officers in the firm and how we approach the filtering and how different from the past. And I think we are now obviously measuring ourselves going forward on the efficacy of those processes and how they will play out in terms of investment results. But certainly we would never -- and there's no insinuation on Brent's departure. Brent's a very…

No, I appreciate that. That only just comes in the context of this question because, Ashton, there's always been mention in a pitch book or a client discussion that the lower middle market offers both improved returns and lower risk profiles, attachment points, et cetera. But we were looking at TCAP's kind of credit performance since late 2014. If you just look at portfolio losses as a percentage of your equity base, all right -- let's forget the positive impact that comes with raising capital because that's not really an investment activity -- right, you're averaging about a 2% loss rate on your portfolio per quarter. And if we're seeing TCAP credit degradation today in what some folks would call a relatively low loss environment, what does that really tell us about forward credit performance in the event default -- in the event defaults broadly start to increase?

Jon, it's Steven. Let me jump in too. I think one of the things when we mention legacy investments, that term, as Ashton said, is -- yes, it's not specifically defined. It's more broadly defined. But I think there is -- as you guys know, a company like Gerli has been on our books for more than a decade and it has been a nonaccrual for that period of time as well. And at some point, it's time to clean things up and move on. Your point about credit losses is one that certainly we analyze here as well and we have been acutely aware of. And I think there was a period of time in the market that if we had to look back to in 2012, the end of '12, second half of '12 and much of -- maybe call it 2013, where yields began contracting in the market fairly meaningfully. And we talked about this, as you may recall, in our Investor Day last year. And the weighted average yield in our portfolio went from north of 15% -- 15.1% down to 12.3% as of a year ago this time. And so it moved by, call it 300 basis points, but much of that move occurred in 2013 and 2014. And if you look at that period of time and look at the fair value within our book today, I think you would reasonably conclude that there was a period were Triangle was facing yield more than it should have and we discussed this again openly in our Investor Day. And for those folks who maybe on the call who were not at our Investor Day last year, that presentation is on our website for your perusal. And a lot of this is discussed there fairly openly. And so I think that was a period that you would look back to say we didn't lead with as much credit as perhaps we wish we had now as an organization. And as Ashton talks about what the process has put in place last year and the reorganization of the company, then there is certainly that focus of leading in all instances, first with credit, and second with pricing. I think we used that exact expression on last quarter's call and I am sure you would have in your notes. So anyway, I hope that gives you some color as to how we are thinking about things, but also trying to hit squarely on the head that which has happened historically.

Yes, I appreciate that. And then maybe just building up with one last follow-up. If I’m looking at 14 -- 13, 14 deals just as a size of the overall pool or asset book, I’m looking at roughly I mean at least 33, if not maybe 39, depending on how you define it, percent exposure to what you would refer to as investments originated at a time when you folks perhaps shouldn't be or were inappropriately pricing risk. So what does that say about forward credit quality, Steve? Understand that you’ve got it right this time, but there's still a number of those assets on the books and they’re going to generate at least 1/3 of the return.

Well, Jon, to be specific -- and I think it's important to focus on clarity here. I don't think we said we were mispricing risk. I think the expression that we used was there were times where we were chasing yield as a company. And so I want to be sure that we are precise on that. It does not mean that every transaction was like that during that time period. Those were active years I think for many platforms in the debt financing arena, certainly not unique to Triangle. But I think if you were to look at where things are marked -- and we I think had a very successful history of marking things appropriately in our investment role and we would certainly expect given that we haven't changed that part of our process that, that would continue to be accurate. So I think as you look at -- every credit is unique, every investment is unique, so it's dangerous to draw conclusions one way or the other about an entire vintage or an entire book. As you look back over Triangle, one of our most successful vintages was I think our 2007 vintage. We had some really nice gains in that. Whereas, I think if you compare to many organizations, they might say 2007 was maybe not their most successful vintage. Here again, it's sweeping statements, sometimes don't catch all the details. So I just want to be sure we’re working in fact. But thank you for your question on it because it's one that again we've talked openly with our board with, we've talked openly with investors with and want to be sure that we’re accurately discuss them historically and then obviously being sure that we think appropriately about the future as well.

Our next question comes from Andy Stapp, Hilliard.

Most of my questions have been asked, but I do have a follow-up question on new investment activity. Production historically has been heavily skewed toward the back half of the year. Just wondering to what extent this theme will play out in 2017 and in particular was there any acceleration of production from future quarters into Q1?

Andy, this is Ashton. Thanks for your question. You are right, your observations, historically where we have had traditionally more activity in the latter half certainly has been changed with certainly the last 2 quarters -- well, certainly Q4 was active and obviously this quarter is a little bit of an anomaly. Very difficult to predict how quarter-by-quarter activity will unfold. First of all, we don't have targets. We don't put targets on our origination teams to meet. So we’ve always said that we’re going to be patient, we’re going to be disciplined and when we find the right opportunities we will go after them. As you know, on the directly originated side, those transactions generally from start to finish take 3 to 4 months from a gestation period perspective. So often those that are originated in Q4 are really started in Q3 or even before. Those originated in Q1 -- you can work your way backwards. I would say that as we continue to expand our lens of mezzanine, unitranche, second lien and in certain cases senior first lien across both lower middle market and middle market, there are times where the acceleration of origination can occur versus what would be some directly originated ones that take 3 to 4 months. So you could see points at where we do have increased activity that may have departed from some of the historic norms. But very difficult to predict. But your observations of backend-loaded origination activity is certainly accurate. We also are experiencing a little bit of a deviation of the norm here with our Q1 result.

Our next question comes from Robert Dodd of Raymond James.

If I can shift in a kind of discussion of your sponsor underwriting rather than the credit underwriting and to your point, Steven -- I mean, your 2007 vintage I think was 75% fund less sponsors or unsponsored transactions, which clearly isn't the strategy now. So on the larger sponsors and the small sponsors even, what's the approach to underwriting them because obviously a couple of years back you had a couple of problem assets from one sponsor in particular, so there’s a concentration issue there? And given the move towards somewhat larger transactions, larger sponsors, a bit more unitranche than historic, which risk/reward can be very attractive there. But are you changing the sponsors you're working with? How are you underwriting them? Any new ones? Or the existing ones you are reunderwriting from that perspective given mezzanine, for example, has different criteria you might look for in a sponsors than say somebody who is underwriting -- who’s looking at a unitranche piece?

It's Ashton. Thanks for your message. It's a really good question and one that gets to the heart of really making sausage of how you run a BDC and how your origination function works. Our origination efforts, as you know, is headed by Cary Nordan. And Cary and I have been working quite closely on that broader question that you’re answering, which is a go-to-market strategy. And as you know, historically roughly 75% of our transactions have been sourced through the financial sponsor network. I’m not sure if that percentage will dramatically change going forward. I think the key question is with whom will we be transacting. And I’ve really challenged Cary and the origination team to step back and look at our relationships and confirm those sponsors with whom we would like to transact and also identify those new ones with whom we haven't transacted in the past and to go after the development of those relationships. That actually has resulted in what I would call progress with the expansion of our footprint. And the 5 of the 9 platform transactions that we made in the first quarter were first-time transactions with the respective sponsors. So in Q4, 5 of the platform investments were also first-time transactions. So that gives you a sense of the expansion of our footprint and relationships. I think that supports what we’ve been trying to think through and implement and certainly hopefully addresses your question.

And our next question comes from Bryce Rowe of Baird.

I wanted to maybe follow-up on Robert's question there along the line of maybe a slightly, not necessarily, a different approach, but the more sponsor heavy investments and curious if we’ll see the equity co-invest opportunities start to I guess be more minimal or more limited as you work with larger transactions going forward?

Bryce, thanks for your questions. It's a good one. I’d say that the answer to your question will be heavily dependent on the mix of securities in which we invest going forward. I'd say from a ranking order of highest equity content to lowest, you can just literally go down the ladder. Typically on the mezzanine side, we will get what we would historically view as kind of our full allocation of equity co-invest strategy, which I think we've always been very consistent in saying that for every $10 of debt that we invest, we like to equity co-invest $1 to $2. So the 10% to 20% range I think would be very consistent on the mezzanine side. As you continue to go up balance sheet, unitranche it's not available every time, but we've actually been pretty successful in getting equity in the unitranche investments that we have made. In fact in 2 of the unitranche investments we made in Q1, we were able to get equity. As you continue to go up balance sheet, it becomes a little bit more difficult. So overall I think you're instinct is right. As you go up balance sheet, it is a little bit more difficult to get equity. But from an overall holistic perspective, I think our portfolio today is still 14%-ish equity and we would strive to continue to keep that 10% to 20% range that we've always had.

That's helpful, Ashton. I wanted to ask kind of a different type of question now. In the press release about the expanded credit facility, you note wanting to optimize the balance sheet. And if you look at I guess the gap, debt to equity ratio has come down pretty dramatically over the last year as you've raised capital a couple of times. And so I was curious, should we think about a -- maybe a different target or some targeted level for that gap, debt-to-equity ratio as we move forward and are you -- you guys -- I guess it has been about a year or 2 that you've talked about a potential ratings agency officially rating the securities. If you're still moving down that path over the next year or so?

Thank you for the question. In terms of optimizing the balance sheet, I think what we really mean there is we've been fortunate to raise some growth capital back in July of last year and February of this year. And when we package with those 2 tranches of growth capital the new SBA commitment of the $100 million commitment for fund 3 and then you look at the $435 million credit facility today, then you think about the incremental cost of funds for Triangle as we again just pick up -- or frankly call it conservative approach and say we use $300 million of the $500 million plus that's available to us. And just assume you get a 5% spread, so to speak, to be very conservative about all of it, then you -- I think you crank in the way the numbers would work, north of $0.30 a share of additional net investment income on an annual basis. So as we think about utilizing these proceeds, the SBA and the incremental cost of that and the bank facilities, very attractive to us. And so I think we would look at moving that way from a total debt to equity perspective. I guess we're at 70% today as we sit. Clearly, the $100 million from the SBA does not count toward the regulatory ratio. So we want to be sure that we operate as we have historically and "appropriately". We like to always believe that we have ample liquidity available to us both on the equity and the debt side of the equation. So I prefer not to give you a precise ratio because we don't really think of the business that way. We just want to be sure, as you know from knowing us a long time, that we have operational and financial flexibility. And we think that message historically has resonated well with shareholders too. From a standpoint of S&P and Fitch and the folks who rate in the space, I think we still actively are looking at that. Quite frankly, it's a question of cost. And if you run the historical analysis within our balance sheet besides that it has been historically, it frankly has not been an appropriate use of shareholder money to gain the rating in terms of how -- I guess I'd say efficiently. Thankfully for us we've been able to raise capital versus where we believe we would price out were we to be rated. And then the annual cost to get there coupled with the initial cost to get there. Meaning no disservice to both Fitch and S&P in terms of what it costs to be rated, but it is something that based on size of company one we think should consider prudently before going down that path. As our -- again, as the company grows and as our -- as Ashton says, our footprint continues to expand, it is a natural step for us to take at some time. But I wouldn't necessarily hold your breath that it's going to be this quarter or perhaps even next quarter given the way the balance sheet is constructed today. We're so fortunate to have, as you say, a low debt to equity ratio and very attractive incremental capital available to us. So we feel we're just in a great position right now to continue to grow the business.

The last question comes from Christopher Testa, National Securities.

Just kind of sticking with the theme on balance sheet leverage, just curious how we should think about that going forward assuming that unitranche and first lien continues to comprise a greater portion of your total debt investment. So should we expect you to be more comfortable utilizing higher balance sheet leverage or do you feel at this point in the cycle that is warranted to keep this lower?

I think where we have operated historically and where we are today with obviously meaningful capacity, I think we're quite comfortable utilizing fully the SBA capital that is available to us and meaningfully utilizing our bank line and will obviously have a portfolio of company repayments that will occur, which frees up again additional cash. BDC is an asset class are so lowly levered that discussions of: "Is somebody 0.7 to 1, 0.8 to 1 or 0.9 to 1." I think from our standpoint, it's really the structure of the balance sheet. When you look at the fact that our balance sheet has around -- using round numbers here -- $165 million of fixed rate debt in it and then today has $250 million of SBA debentures. All of that is fixed rate debt, very long-term in nature. So then putting on top of that, $725 million of equity, so to speak, it just really lends itself to being a very solid balance sheet. So from our standpoint, we're very comfortable thinking of the facility as one that is there to be utilized and there to help finance the business in an appropriate way. The only balancing comment I'll make to that, Chris, is just to say that I don't think we would ever want a bank facility, a senior credit facility to become a dominant part of our balance sheet. And as you look at the size of our credit facility today versus the size of our balance sheet, I think that if you look at, it's basically 25%, plus or minus 26%, 27% of the total committed balance sheet. And that's a good place for us. We would not want senior credit facility to be 50% or 60% of our balance sheet. Not to impugn anyone whose strategy is to have that, but it's just not the way we finance our business given, really to your point, the type of financing commitments we're making on the left of our balance sheet.

And just looking at -- obviously, the first quarter is heavily refinance across the board. Just curious what you have seen in second quarter to-date and what you see in the pipeline for possibly 3Q on the uses of capital for your portfolio of companies?

I would say that, again, very difficult to predict. I would say historically, though, if you looked at data around flow in our system, you would see typically acquisitions and buyouts comprised somewhere between 70% to 80% of the flow and refinancings would be in the 10% to 20% of the flow. And so that's again from a deal log perspective. How that ultimately materializes and plays out in terms of conversion is always again very difficult see. But just the facts would suggest kind of 2/3 buyouts and acquisitions and maybe a little south of a third in terms of refinancings. Obviously, dividend recaps would be another category that we often and obviously track. So hope that gives you a sense of generally the kind of the makeup of the flow. And again, how that ultimately materializes is very difficult to predict.

And I'm showing no further questions, so I would like to turn the call back over to Ashton Poole for closing remarks.

Great. Thank you, Tanya, and thanks everyone on the call for joining us for this Q1 earnings call today and for your questions. We are obviously always available to answer additional questions that you may have and we just very much appreciate your continued interest in TCAP.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.