Barings BDC Inc (BBDC) 2017 Q3 法說會逐字稿

At this time, I would now like to welcome everyone to Triangle Capital Corporation's Conference Call for the Quarter Ending September 30, 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 hosts 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, Keyana, 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 forward-looking statements.

These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the sections titled Risk Factors in 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 September 30, 2017. Each is 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. Good morning, everyone. We will cover several items on this call in the following order -- a brief summary of our results for the quarter, what factors have contributed to produce our recent underperformance, where we stand with regard to continuing our transition of the investment portfolio into more up balance sheet investments, some color behind our dividend adjustment, and some detailed thoughts around our Board of Directors’ desire to evaluate strategic alternatives. With each of these topics, my goal is to be succinct, and transparent. After my comments, Steven and I will open the call for questions. With that lead in, let me begin.

First, our quarterly results. Our results for the quarter included revenue of $29.9 million and net investment income of $17.2 million. Our per share net investment income was $0.36. During the quarter, we remained active from an origination standpoint as we originated approximately $140.5 million in new and add-on investments and we experienced approximately $143 million of repayments and equity sales, resulting in a modest net portfolio contraction in the amount of $2.5 million. We also experienced meaningful write-downs of certain debt investments which previously have been carried below cost.

The reasons for the write-downs are specific to each portfolio company and the various struggles each one is having as they try to navigate the current later stage economic cycle which is increasingly characterized by hard to come by revenue growth coupled with declining margins, changing dynamics in their respective industries and unforeseen challenges in certain instances with key customers and suppliers. In addition, certain companies in our portfolio were negatively affected by the hurricanes in Texas and Florida. And for one company in particular, Eckler's, the effects were acute.

In total, our current investment portfolio declined in value during the quarter primarily as a result of pretax net unrealized losses of $73.4 million. It should be noted that approximately 70% of our investment portfolio's decline in the quarter relates to investments made during 2014 and 2015 which I will discuss in greater detail shortly. During the quarter we experienced 7 new non-accruals which impacted NII by approximately 0.055. Our NAV on a per share basis declined from $14.83 as of June 30 to $13.20 as of September 30 and this decline was largely attributable to the decline in our investment portfolio's fair value.

On our second quarter earnings call we mentioned that our annual run rate NII per share was approximately $1.60. Our revised annual run rate NII per share is approximately $1.35 which is one of the reasons we determined our dividend should be adjusted to $1.20 per share on an annualized basis. The primary reason for the $0.25 decline in our annualized run rate NII relates to credit quality as we lost $0.22 per share annually from new non-accruals. In addition we lost $0.03 per share annually due to a decrease in yield across our investment portfolio driven by repayments from higher yielding investments coupled with reinvestments in lower yielding, senior oriented securities.

Second, the factors that have contributed to our recent underperformance. During the period from early 2013 through the end of 2015, as large amounts of capital poured into the direct lending space, investment structures and pricing in the lower middle market and broader middle market changed rapidly. Perhaps most notably by unitranche debt becoming the security of choice by financial sponsors. In addition, leverage levels began moving up in a meaningful way. The combination of these factors resulted in a rapid decline in pricing as interest rate compression began affecting the leverage lending world. Our investment professionals were aware of these changes and recommended to our former CEO to begin moving away from mezzanine structures and into lower yielding but more secure second lien, unitranche and senior structures. Their reasoning was simple. Companies in our target market were gaining access to additional forms of capital on terms more favorable than what they could have achieved in the past and as a result the traditional risk-reward equation for mezzanine debt did not appear as attractive as it previously had. Unfortunately the strategic decision was made not to move up balance sheet in a meaningful way and TCAP continued to lead with a yield focused mezzanine strategy. In the process of doing so we added incremental exposure to a number of riskier credits, many of which are now underperforming. It is important to note that not all mezzanine investments made during this time and certainly over the years have underperformed. In fact, we have many that have and continue to perform quite well. However, the adherence to a majority focused mezzanine investment strategy when during a period of massive change in the market, other investment strategies were available which provided a better risk-reward equation was the wrong strategic call. We are continuing to act decisively and aggressively with the goal of moving through our underperforming investments as quickly as possible but at this point we acknowledge that as a firm we are being held back primarily by our 2014 and 2015 investment vintages.

Third, where we stand in terms of transitioning our investment portfolio into more up balance sheet investments. When I reorganized the senior leadership of the company in the fall of 2016 shortly after becoming CEO, TCAP actively began a transition of moving up balance sheet and into more secure lending and investing structures. It was this reorganization of both our personnel and our investment process that we now refer to as TCAP2.0. The implementation of the more up balance sheet strategy has resulted in a meaningful shift in the composition of our investment portfolio. As we stand today, approximately 46% of our debt portfolio at cost consists of senior, unitranche and second lien debt up from approximately 22% when I became CEO less than 2 years ago.

Additionally, approximately 45% of our investment portfolio at cost, or $563 million is comprised of investments made under the improved screen, underwriting, and credit monitoring processes implemented in 2016. Importantly these TCAP2.0 investments also contain $25 million in equity positions, thereby continuing our historic strategy of maintaining investment upside for our shareholders through equity co-investments. As we continue the implementation of our TCAP2.0 investing strategy, we will do so with the primary goal of becoming the premier provider of capital to companies operating in the lower middle market.

To achieve this goal we will continue to leverage our existing investment platform to provide more consistent touchpoints with existing and new financial sponsor relationships and we will remain vigilant in applying the stricter investment approval processes that have accompanied TCAP2.0. Going forward our investment activity will be focused intently on senior, unitranche, and second lien securities.

Fourth, the color behind our dividend adjustment, based on continued yield compression, our continued transition into more secure senior oriented securities and credit underperformance, our board has decided it is in the best interest of the company and our stakeholders to adjust the quarterly dividend to $0.30 per share or $1.20 per share on an annualized basis, a level that is currently supported by our core NII and our investment portfolio composition. Our board believes this dividend level will provide the company with the ability to operate a greater degree of financial flexibility during this period of transition.

Fifth, thoughts related to our desire to explore strategic alternatives. Over the past 5 years, the private credit market in general and the BDC industry in particular have experienced phenomenal growth and in the process solidified an important role in the provision of capital to private companies operating in the US. As with any developing industry which offers ample white space and attractive returns for investors, new entrants, new products, and differentiated business models always emerge. As TCAP undergoes its transition to a more secure up balance sheet lender, targeting the lower middle market, we recognize that there might be a long-term partner with whom we might align that could accelerate our transition and in the process provide additional value to our shareholders.

TCAP has a valuable franchise and a group of talented individuals on all sides of our business. Given the rapid change occurring in the industry, our board believes it would be short sighted of us to blindly forge ahead without going up periscope to see if other options to maximize value on behalf of our shareholders exist. Such options could include for example a potential sale of certain investments, a joint venture or partnership, or a merger or strategic combination. As a result the board has authorized a formal review of strategic alternatives and expects to announce the engagement of an advisor in the near future. As a final point, Triangle fortunately operates with meaningful liquidity totaling approximately $450 million. As we evaluate available strategic alternatives, we will remain open minded and committed to doing what is in the best interest of our shareholders, whether stand alone or in partnership with another industry participant.

Triangle's history has been strong and our difficult 2014 and 2015 investment vintages relate directly to a missed strategic call in the market some years ago. Where hindsight indicates clearly we should have moved in a specific direction at a specific time and we did not. With this strategic review our goal will be to look for opportunities which could lead to greater value creation for our shareholders in a shorter period of time.

With that, operator, we will open the call to questions.

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

You guys talk about obviously the cohort where the nonaccruals are emerging comes from the '14 and '15 vintages. Is there anything else that you characterize within these assets now that's worth noting, that may give some correlation to why they're problematic? Is it industry focused? Is it structural? Anything you can point to there?

I think as I stated in my prepared remarks and I'll provide some additional color, I think just general observations on the portfolio's decline is we could not ascertain any systemic issues and they were rather facts and circumstances specific to each company. Most of the write-downs were driven really by financial performance, either coming from major misses within the quarter or midyear assessments by management which resulted in subsequent reforecastings for the second half of the year. And in the case of the hurricanes, also the one-time impacts from the catastrophic events, as I mentioned, really for the hurricanes in Texas and Florida. So most of the write-downs were driven by financial performance, major misses, midyear reassessments, reforecasting, and liquidity issues. In the majority of these situations we were in sub debt which as you know offers inferior structures and less protection and as the fulcrum security we thus absorbed the largest decline on a percentage basis.

Our next question comes from Jonathan Bock from Wells Fargo Securities.

Joe Mazzoli filling in for Jonathan Bock. Can you explain why you have not clawed back Brent Burgess or Garland Tucker compensation?

This is Steven. I'll give a quick summary of that. If you look at the bylaws of our company, they do not provide for that type of activity on the part of the board. And given the fact that the bylaws originally did not contain that provision back in 2006 and 2007 when they were drafted, then the process one would go through to do that would be one of effectively the board suing a prior employee for the amount in question. In the instance of both the individuals that you named, a meaningful percentage of what was granted to them was restricted stock that had been granted for prior service. The terms of that, Joe, would've indicated that it would have vested anyway over time. And so there wasn't anything to claw back there. As it would relate to the prior CEO, there was a payment that was made to that individual by the board upon his retirement in the amount of $2.5 million. To date it has been the board's assessment that it is not a productive use of shareholder resources from this point forward to go after an amount that in the grand scheme of things and in the situation that the company finds itself with you might say bigger fish to fry is a productive and wise use of time and resources. I want to be clear to say that by telling you and in response to your question what has happened historically and the conversation around that point does not in any way seek to obligate our board for what it might determine its future actions should be. I hope that gives you some color.

Our next question comes from Bruce Zessar from Advisory Research.

Two questions. First, this was a big, bad quarter, and I'd kind of like to understand is this a kitchen sink quarter or could we see more quarters where you drop more than $1 in NAV. What do you think going forward?

It's Steven again. Fair value is fair value. That's the starting point you would come to for any quarter. Obviously as we value level 3 assets in the book they are difficult and sensitive to value at any point in time. One of the things, as Ashton mentioned in his comments, that affected us this quarter with these specific companies is as companies move through a year to use an easy mythical example, if a company tell you it's going to have $100 of cash flow for the year, and after the first quarter is lagging plan just a little bit and tells you they're going to make it up in the next 3 quarters and the second quarter it's maybe a bit lower. And they tell you they've got things in the pipeline, et cetera, et cetera. And then they come to you late in the third quarter, early in the fourth and from a timing standpoint say, you know what? We told you cash flow would actually maybe be $95 to $98 instead of $100 and now it looks like it's going to be $80 or $85 and next year's forecast was going to be $110 and now it looks like it will be more like $100. It's that point in the process with any specific company where if you're invested where these legacy investments were, admittedly when you look at these investments of the new nonaccruals, all 7 of these investments were frankly sub debt or what we'd call sub debt-like structures. In 2 companies actually there was a senior structure but it was structured that way specifically in the sense that it was a complicated capital structure. It wasn't -- think of it as a true senior loan in a normal operating company. So all of these securities that went down in the quarter in terms of the new nonaccruals had these elements of specificity attached to them from a structure standpoint and as Ashton had mentioned in prepared remarks of performance. Again, fair value is fair value and so we would stand by that at any quarter. All of these investments of course were reviewed by third party valuation firms frankly in both quarters. The other piece I would say on this question because it's a good one, is this is part and parcel I think to our recommendation to the board and the board's unanimous adoption of that recommendation that the company pursue certain strategic alternatives. I think the best way to help the market gain some knowledge if you will of where is Triangle in this, what we might call a V-shaped transition with these primarily 2 difficult vintages is to allow other professional investors to look at debt and equity securities in level 3 companies who do this for a living the same way all BDCs and other multiclass asset managers do to have an opportunity to engage in discussions with Triangle in various ways. Assuming they sign NDAs they'll have a chance to look at the books, so to speak, and come to their own conclusions and their own opinions of, we would hope the quality process that we go through. But obviously a process is only as good as the information that is contained from a specific company at a specific time and future information always changes the landscape there. Those 2 things are linked in the sense of trying to get through this period as quickly as we can on behalf of shareholders. I hope that gives you some color and what you were looking for.

It actually does not. Let me come back to my question. Do you have conviction that over the next couple quarters you'll not have another quarter where you have a NAV decrease of more than $1 a share?

Let me be as precise with you as you're trying to be with me. The next time I'm able to predict the future, I'll call you first. We'll go to the next question please, Operator.

I have one more question. And that is…

Our next question comes from Christopher Testa from National Securities.

I appreciate the new valuation process you guys have implemented in 2016 but we still see a confluence of investments where -- it went from peak to chasm. It was then written down significantly more after already being a nonaccrual. My question is, are you guys relooking at the process of valuation perhaps again to try to get the marks more accurate?

Chris, it's Steven. To be clear on your question I think you mentioned the new valuation process that was put in place in 2016. That was -- the process was origination. The change there was origination and underwriting. The valuation aspect frankly has, in terms of the process, has not been tweaked. We had one of our valuation providers meet with our full board yesterday in the normal course and continued to make the comments that they have made earlier to our board over the years to say that at least in their opinion as a third party they perceive that the process that we follow is the highest quality process that they see of their clients. We're appreciative of that. I think the issue that you run into sometimes with level 3 assets or private companies is the process can only be as good as the information that is made available to you to work with and there are certain companies where you have more information, there're certain companies where you have less information and circumstances do change with these companies as they do with any operating entity. So it's difficult to, as I said earlier, you can't predict the future on these companies. So the best thing you can do is to structure securities in our opinion that give you more legal rights if the company has a hiccup. And mezzanine investing is a cyclical type of instrument and again a prior decision at Triangle, there was a view that it was not a cyclical investment instrument. And it just so much is. As we move up balance sheet now and contain those lender rights, we think that will materially help performance when companies have blips. I mean, it's a tough economy for a lot of companies. The earnings call that we're involved in clearly is difficult for Triangle but it's the same way that General Electric's earnings call is difficult right now. You can't pick a larger, more well-known American company. And frankly there are many parallels here. And they're having a very difficult time for different reasons of course. But it's a -- we're going through a difficult time and we're trying to get through it as quickly as we can. But the process that we've gone through there is not the issue at all. It's the securities that we had chosen to invest in as a firm at a time in the cycle when it wasn't the right time to make those types of investments.

Okay. Is there any 2016 or 2017 originations that are currently on your watch list?

The TCAP2.0 portfolio as we refer to from 2016 and 2017, as I mentioned in my remarks, is about $563 million in total in terms of cost. It's about 2/3 unitranche and senior as well as second lien and call it a third mezz and equity and has consistently migrated more towards the senior route. In fact in 2017 it's about 76% unitranche and senior and second lien. So as I mentioned, we've been absolutely migrating over since I became CEO. The one investment from those 2 vintages that was marked down slightly this quarter was Passport Food Group. Passport, as you may or may not know, they manufacture Asian and other ethnic food products and they sell primarily through the food service and retail and club channels. This is an investment we made. We are structurally senior on this investment. There was an unexpected loss in Q3 on the company's product line which resulted lower sales and an overall performance decline. Interestingly we had actually taken this possibility into account in our underwriting as part of our difficult scenarios that we construct and right now the company is performing above that scenario. There is a robust pipeline for new customers and products that's going to replace that lost product line. But having said that, in the near-term the company has underperformed and it was appropriate obviously to write it down. So as of now, as of Q3, that's the one investment out of $563 million that we've invested and I think we wrote it down approximately $2 million.

Great. Last one from me and then I'll hop back in the queue. Just given more of the stocks trading and likely to trade below NAV kind of takes away your ability to issue equity as you've done. I'm just curious what types of leverage levels on the balance sheet you guys are targeting now.

From a liquidity standpoint we have obviously the cash on the balance sheet, $81 million. We have meaningful availability under our credit facility and then we have the SBA, what we call fund 3 that has nothing drawn on that now. It's $100 million ultimately in terms of availability. And that's how we build up to the $450 million. Given that the SBA leverage doesn't count as regulatory capital I think we feel historically we felt comfortable that we'd operate in a kind of somewhere between on a target basis of 250% asset coverage ratio plus or minus and you could get a little lower than that. But here again as we're transitioning the portfolio you want to be sure you leave yourself obviously some cushion on that key 40 act covenant.

Our next question David Miyazaki from Confluence Investment Management.

Just a few questions. Quickly on the leverage, Steven, you said that you were looking at or maybe a little bit below where you had been historically. It seems that if you're going up balance sheet and going to be doing more secured or senior oriented loans, wouldn't it make sense to be increasing your leverage?

Thanks for the clarifying question. The short answer there is yes. What I was trying to allow for in my answer to the prior question was in this period of transition I think we want to be sure that we leave ourselves a little bit of cushion there on that key covenant. But over time I think it would make sense that we might get to call it something between 250 and 225 in terms of cushion there. But again we want to be sure that during this transition that we don't have any negative surprises from that standpoint.

That helps. I guess that dovetails with my next question and that is looking at what you originated this quarter there's a fair amount of second lien positioning in the portfolio and one of the hard things as investors and BDCs for us to discern is just how safe that second lien loan is. We hear oftentimes that second lien loans are nothing more than just subordinated loans and other people tell us that second lien loans are not all made the same. My concern is that if you're putting a lot of second lien loans on the books now as part of 2.0 that -- is that going to be a robust enough position in the capital stack to weather through where we may be in the economic and credit cycle?

David, it's Ashton. Thanks for the question. It's a good one. We have focused in the last quarter, the investments we've made, just to be clear, in all those cases the second lien is a true second lien. So our ability to be blocked is only influenced when there's a payment default. That's helpful from our perspective. The other thing I would say is that many of those second lien investments are in what we would call larger companies and so as we've tried to balance larger companies having the ability to weather economic cycles and the storms a little bit better, the combination of the true second lien nature of the security, the targeting intentionally of some more non-cyclical names that we chose to invest in and the fact that they're a little bit larger than some of the traditional lower middle market companies gave us comfort of those particular investments. So there's always typically a rationale, a strategy and a targeting for the second lien investments that we're making and that was consistent in the quarter.

Okay. That's helpful. Then the last question is has the board had conversations around share repurchases with this deep discount that you're trading at? This morning even after the adjustments you're still well below NAV in your valuations. So where does the board sit with repurchasing stock?

David, it's Steven. Thank you for your question. Just I'll give a little bit of context on the process there, the timeline I might say. We originally, as we were moving through the quarter and given where the stock had been trading, that was a logical conclusion that we were coming to that if we were to adjust the dividend and the stock, might potentially trade below NAV for a period of time, that would make sense. Our board as we then more recently had recommended to the board and they agreed that evaluating certain strategic alternatives would be in the best interest of shareholders. That obviously put the share repurchase on I guess I'd call it second priority. From that standpoint, because we did not believe it appropriate to be in the market buying our own stock at the same time going through this process. So obviously this process will have a finite period to it and depending upon the resulting outcome there then that well may be a possibility in the near-intermediate term, again depending on timing of the process.

Okay. That's helpful. I would reiterate that shareholders that are working through a rather unpleasant episode this morning, I think it would've been helpful for you to announce a plan anticipating the weakness in the stock. It's pretty apparent after reading your press release yesterday afternoon that it wasn't going to be a very good day in your stock. And I think the absence of having that in place is creating a pretty high burden on shareholders right now. And so to the extent that you have strategic initiatives you're working on, I would really encourage a quick resolution to those conversations. Because having this as an issue on the backburner isn't helpful.

I understand certainly your view there and appreciate it. It was really no more complicated within our board room of discussion that the strategic process would have the potential to be much more meaningful in a positive way to shareholders. When we did look at the data, I'll just share with you, obviously not necessarily would be our situation in this but as we've analyzed various stock buyback plans that had been exercised in the BDC arena, the mean and the median of those over the last several years was that those BDCs continued to underperform the index. And again we don't know what our situation would've been. It was just a data point. But the board felt unanimously that this process would lead to potentially more value creation for shareholders in a shorter period of time than nibbling at the edges with the stock buyback so to speak.

I can understand that. I don't think anyone would suggest to an underperforming BDC that repurchasing stock is going to be a magic elixir that will suddenly catapult somebody into the top tier of performers. But not having one in place makes a bad situation worse and that's kind of the point I'm trying to make here.

Again, I do appreciate it. And the overriding issue with again the board looking at both of these as options is the potential conflict there of going and having strategic conversations with various parties while at the same time doing something that is a bit of call it a little bit of what it is, the financial engineering on your stock at the same time as opposed to having the direct conversations and as you can imagine legal counsel has had some thoughts and views on the same subject. At any rate, that's the color and the rationale and how we came to it and hope that's helpful to you in terms of how we got where we are.

Our next question comes from Robert Dodd from Raymond James.

Just one question, a quick comment. I'm agreeing with Dave I think, a buyback here and obviously I understand the board's concerns and issues about strategic review but even an announcement of plans to consider it I think could've been helpful to your stock and your shareholders this morning. But anyway, secondly, has -- to the point of the valuation process which as you addressed it has not changed, it's been consistent over a long period of time. But has the board or management considered recommending that during this period of transition the whole portfolio be reviewed by a third party every quarter? Because obviously right now in the Q it was 25% at fair value this quarter. It's a bit of a consideration to maybe consider changing the process a little bit and involving third parties more extensively at least during the transition phase.

Ours is one of the more I guess I would say involved processes I think in the industry in the sense that we have not one but 2/3 parties that value assets for us. We also have a third third-party that values assets that are contained in our bank borrowing base and then obviously E&Y is our third party auditing firm. They do their own valuation work in addition to those other 3 parties. We share our internal valuation run if you will in terms of both up and down in the quarter in terms of change from the prior quarter and the standard is that we value 100% of the portfolio on a rolling 12 month basis with a few caveats. You may remember this from prior years, the caveats are if there's a major move up or down then that major mover is valued regardless of whether it was valued in the prior quarter or the prior 2 quarters or even the prior 3 quarters. And over our lifecycle we've had investments both ways. They've been valued because they're moving up and they've been valued because they're moving down. So it's a protect thyself from thyself process in the sense that they have all the information of our major movers and they could challenge us if need be. They’ve never had to because we've given them all of the major movers every quarter. It has sort of frankly worked out statistically that you would see that major movers tend to be somewhere -- you look back in historic Qs, you'd see that some quarters we'd valued 18% or 19% of the fair value and this quarter it's as you say at 25%. So it always contains those major movers and we did a number of the investments we valued or had third parties value this quarter were valued last quarter as well as I mentioned earlier on the call. So what we hear from the valuation parties themselves, what we hear from E&Y, what we hear from industry participants with whom we speak is it's a really fulsome quality process. Again, the struggle that we have and we spend time talking about it clearly internally here, is there something that could be tweaked, is there something that's not performing as well as we would like it to? And the 2 pieces into which you break the discussion are the process itself and then the information that goes into making the decision during the process and it's the information going in, we clearly are, as Ashton said in his comments, continuing to challenge our investment groups to be sure that they're asking and probing and being what you might call an investigative reporter as opposed to just a reporter of the news, you're investigating the news and not taking sponsors at face value and not taking management teams at face values and comments that things will get better next quarter. And I think that has helped Jeff and his team from the portfolio management standpoint have more tentacles into some of these companies on an earlier basis. Obviously in a public setting like this you guys see the negative and the negative is concentrated in the types of securities and in the types of vintages that we talked about primarily. It's -- you don't see the positives, right? So the accounts that are performing or some of the sales in the portfolio that may have occurred in positions that we've moved out of, you're not able to see the fact that those were really good quality business decisions that were made with a quality process behind it, with quality information going into that good process. So I just wanted to allow for that because I think there are a lot of people here trying to do good work. It is incredibly difficult to have to talk about the vintages that we are and things that frankly could have been avoided if we had gone in a different direction at a different time and it is -- that's challenging and it's emotional and it's difficult for everybody here. But just I hope that's helpful. It's longer than I anticipated being but I hope it helps give you a little background on how we came to this as we did.

It does. And one tiny nuanced question on the cash on your balance sheet, the $81 million, how much of that is stuck, so to speak, at the SBICs versus at the parent?

Robert, bear with us. We're trying to pull that quickly. Just gives us one second. Robert, about $50 million of it is at the various funds versus the holding company.

Our next question comes from Ryan Lynch at KBW.

I just had a question and comment about your discussion around moving up the capital structure in 2013 through 2015 and the strategic decision not to move up the capital structure during that time period when you mentioned that mezzanine loans were maybe not having the best risk adjusted returns. We've seen other BDCs that are primarily mezzanine investors in the lower middle market invest over -- in those 2013 to 2015 vintages and credit quality, several of these guys have played out really well. Conversely we've seen BDCs that are primarily senior secured lenders in these 2013 to 2015 vintages have really poor credit performance over that time period. And so we've seen BDCs who mezzanine in the lower middle market and have success and BDCs investing higher in the capital structure and not have success. So I don't know if -- I guess what concerns me, it seems like there's something else going on with the credit underwriting process and not just if you were up the capital structure everything would've been fine. It seems that something else is going on and the credit process is resulting in these big credit hiccups versus where you were in the capital structure. I wonder if you can address that.

Ryan, it's Ashton. Let me try to address your question. I have a lot of thoughts for you so bear with me as I go through this. I think you have to step back and when the decision was made to maintain the majority mezzanine focused investment strategy, I think you have to think through how the trickle effects of that go through the origination side first. And so let me give you a hypothetical example of where at that time when there were clearly other opportunities out there for unitranche and more senior oriented investment opportunities, if our originators were going to see financial sponsor ABC and in those discussions the financial sponsor had let's say 3 active opportunities, 2 of which were unitranche in nature and one of which was mezzanine in nature by definition of the strategic directive, the origination teams were being directed to focus on the mezzanine opportunities. So in some respects the self-selection at that point was an embedded credit decision. So then you have to step back from that and say, okay, what did the mezzanine opportunity look like that our teams were considering. And in some cases you might find a dividend recap for example where the financial sponsors were taking all of their money off the table. The call to the environment and influx of capital into the space, more leverage was being accommodated across the system. So therefore increased leverage levels with a dividend recap with the financial sponsors taking all of their money off the table and by the way the opportunity being out of a prior fund that no longer has any incremental firepower to support the business going forward. That is just an example type setup of the trickledown effect of the intent to stay majority focused on mezzanine as it affected the origination side. You translate that into the deal comes in the system and how did deals during those time periods get processed and approved and that was under a different investment committee structure and a different approval process that I changed when I implemented TCAP2.0. Your question's a really good one. There are others out there that have done well with their mezz investments during the same time period. I would say as a general statement the majority of those were smaller companies than TCAP and have had a much lower volume of sub debt investments that we did. So in some respects I think we got caught by the volume of the investments which had somewhat of a self-selection credit decision made upfront in the origination process but then coupled with an approval process that I deemed needed reorganization and restructuring when I became CEO. I think we're, in my stepping back as we think through it, I think those were perhaps some of the major influences of some of the credit issues we're experiencing right now in those 2 vintages. Does that help?

Yes. That's helpful. Maybe one more for you, Steven. I believe, I know you guys have received approval for the third SBIC license. I don't believe you've actually drawn any debentures yet. Do you believe that with the most recent credit issues over the last several quarters that that's going to inhibit your ability to actually draw down additional debentures in your third SBIC license?

Ryan, we do not believe there's any negative issue with the SBA as you well know and they individually are our single largest creditor. We, as you might expect, are keeping them informed of where things are with each of their funds. And so we're in constant communication with them but we've not had anything from a negative standpoint with the SBA. I can assure you we'll continue to take all steps that are appropriate and necessary and if there any to be sure that they are satisfied under the legalities of our agreement with them and they with us.

The next question comes from Chris York from JMP Securities.

There's been a lot discussed this morning and my primary question on the claw back and share repurchases have been asked and answered. But I do have a question about seasonality for your borrowers and then any risk in valuations because the fourth quarter can be a big quarter for some lower middle market companies in terms of sales given the seasonality associated with the holiday season and retail sales. So as you review the portfolio are there any portfolio companies that are more sensitive to an enterprise value impairment in the event that the fourth quarter sales comes in lighter than what they are projecting.

Chris, thank you for your message. Jeff Dombcik is here with us in the room. I'm going to ask Jeff to provide some commentary around your question. It's a good one and certainly with 95 portfolio companies we do have a lot of different companies with a lot of different financial trends over the years. But I'll ask Jeff maybe to chime in with a few comments from his perspective.

Sure. Thanks, Ashton. Hi, Chris. The short answer is yes, we do have companies that have seasonality throughout the year. When we evaluate those companies we evaluate the order book, where we are now, and the end of the year and how much of those orders are firm from the customers. Is there ability for, for example, in a retail setting, a retailer to return those goods to the company and we avoid those situations. And last we look at liquidity and make sure that there's ample liquidity to get through the working capital buildup for that seasonality. Does that give you a sense of some of the criteria we use to evaluate the situation?

Yes. It does. I'm just trying to assess I guess the analysis as I look at your portfolio and some of the retail names, where or not there's larger variability to a quarter over quarter decline if that comes up later than expected and I'm not necessarily looking for an answer. I'm just trying to think about your thought process on the variability there.

I'm happy to follow-up later with you on some more specifics. I would say in general our portfolio does not have an overweighting towards companies with heavy seasonality.

That's helpful, Jeff. And then maybe Steven or Ashton, what was the FTE at quarter end, so full-time employees at quarter end?

We're at 27 FTEs.

27? I think -- is that up one maybe quarter over quarter?

I don't think so. No. We're flat to where we were.

Okay. And then you do have a very cohesive and close-knit team at Triangle so I'm curious if you expect any disruptions in your workforce from the stock performance and then maybe the board's pursuit of a strategic alternative?

Chris, good question. No. I think everyone here at Triangle and I actually held a full firm wide meeting yesterday prior to the release and had a very candid and constructive conversation with the entire team. I walked them through the announcement that hit the wires yesterday and walked them through the reasons behind the underperformance. I talked about the announcement of the board's intent to explore certain strategic alternatives and we discussed the importance of remaining focused on the job and the task at hand. We are all very proud of what we've accomplished in TCAP2.0. We have I think significantly improved the processes and procedures and the way we run this business, the way we originate, the way we underwrite and approve and monitor the businesses, our portfolio monitoring for example over the last year, Jeff's done a nice job of completely reorganizing the way we monitor. But I think that we had a very constructive meeting yesterday and everybody came out of it understanding where we are. We're in a V. We're going to work through the V and we're going to come out the other side a stronger company. We have a strategy. We have liquidity. We have a team in place. We have an excellent platform. We have a very robust deal flow and my view is we're going to continue with the business at hand and continue to work really hard on behalf of our shareholders to deliver value. We clearly are struggling with these 2 vintages but we're going to work through it. You've got a lot of people here working very hard to work our way out of it but also keep our eyes on the ball forward looking of making investments. And I've been very clear with the team. Whereas in the past it was a yield oriented approach, I have said very clearly that I want our teams to go find the best credit companies out there with the best structures and bring those to us for consideration and not be completely yield focused but focused more on the quality of the credit and the quality of the company. Everybody is on board with that mandate here. We have a good culture here, a good history. We're very proud of it. We've had 11 years as a public company. We have 2 vintages that are giving us some issues out of 11 years. But again we've invested $563 million as part of TCAP2.0 and we've had good results to date and we're going to continue to pursue it.

Our next question comes from [Jim Easel] from [Wasatch Advisors].

Actually I represent the (inaudible) partners. I am wondering from the 2014-2015 vintages, and also from the sub debt part we've been talking about here. How much of that was currently being carried or what was the valuation carrying value of those as of the end of 2016 and what is that value right now? Obviously what I'm trying to get at is if we were going to write both vintages completely off which is not going to happen, how much more downside are we looking at?

[Jim], it's Steven. It was hard to hear you on the question. If you would, I know it was rather specific as well, if you wouldn't mind just giving me extra time, we're going to have time for one more question. If you could just call us offline we'll be happy to go through the details you're talking about. But instead of asking you to repeat it and all that now, if you give us a call literally as we break from here in ten minutes, that would be great. Operator, we have time for one more question. If you would let us do that and then we'll let people about their day and we'll go about ours. We appreciate everybody's time obviously on this call.

Our final question comes from Bryce Rowe from Robert Baird.

I apologize for prolonging the call here, Ashton. I wanted to ask about I guess the capital structure this quarter. I understand you're not going to totally avoid subordinated investments here in the future but I'm curious what hurdles do you have to kind of jump over internally from an origination process to feel comfortable with sub debt investments here and going forward?

Just so -- I want to make sure I understand your question. Is your question if we should do mezzanine investments going forward what are the filters and the criteria that would allow us comfort to be able to do that?

Correct.

Thanks. I just wanted to clarify what you were asking. As you all saw in Q3, we had 7 transactions originated of new deals. We had one unitranche, 4 second lien, and 2 sub debt. On the sub debt deals there were, again, as I mentioned too, one was a refinancing of a company in which we've had a long exposure to over the years and have had a very good experience with the company over the years, know management, know the sponsor, and have intimate knowledge of the company. So it was one where again we had a lot of comfort making that investment. The other one related to a company called HemaSource. It's a company that, one, we know the sponsor quite well, we've had very good experiences with the sponsor. It was a company that we felt had credit characteristics that supported an investment in sub debt and frankly was requested by the sponsor but in general it was non-cyclical, it was out of the current fund, it had very positive financial trends and no concentrations. And so the combination of those factors and again a lot of due diligence, not only on our own but in conjunction with third parties as well as with the sponsor, gave us comfort on that. Again, going forward I'd say that a deep relationship with the sponsor and management is a must. An investment that comes out of a current fund is a must and extremely strong financial performance with no prior period adjustments to cash flow is very high on the list and all those combined had created a much, much tighter filter on anything we would consider on the subordinated debt side. I hope that helps.

Thank you. I would now like to turn the call back to Ashton Poole for any further remarks.

Great. Thank you, Keyana and thank you to all who have participated on today's call. We look forward to continue transparent and open dialogue as we transition strategically, operationally, and financially. As always, we appreciate your support.