BCP Investment Corp (BCIC) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Kohlberg Capital Corporation 2008 earnings conference call. An earnings press release was distributed this morning. If you did not receive a copy, the release is available on the Company's website at www.kohlbergcapital.com in the Investor Relations section. (Operator Instructions). As a reminder, this conference is being recorded today, Monday, March 16, 2009. This call is also being hosted on a live broadcast, which can be accessed at our Company's website, www.kohlbergcapital.com in the Investor Relations section under Events.

In addition, if you would like to be added to the Company's distribution list for news events, including earnings releases, please contact Denise Rodriguez at 212-455-8300.

At this time management would like to inform you that certain statements made during this conference call which are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Kohlberg Capital Corporation believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks such as those described in the Risk Factor section of our 10-K and sections of our Forms 10-Q and other SEC documents filed during the course of the year could cause actual results to differ materially from expectations.

Now at this time for opening remarks, I would like to introduce Chris Lacovara, Chairman. Chris, please go ahead.

Thank you and thank you all for joining Kohlberg Capital for a review of our year-end 2008 financial results. I will open the call with some general comments about the financial performance of our middle market lending and asset management businesses. I will then turn the call over to Dayl Pearson, our Chief Executive Officer, who will discuss our investment portfolio in more detail. After that, our Chief Financial Officer Mike Wirth will provide a recap of our fourth-quarter and annual financial results and performance. We will then open the line up for your questions at the end of the call.

For the Company's fourth fiscal quarter ended December 31, 2008, net investment income per common share was $0.32 versus $0.35 per share for the third quarter. Kohlberg Capital declared and paid in cash a dividend for the fourth quarter of $0.27 per share compared to our third-quarter dividend of $0.35 per share. Net asset value per share was $11.68 at year-end as compared to $12.97 as of September 30. Net investment income and dividends per share for the full year of 2008 were $1.51 and $1.44 per share respectively.

As these figures indicate, we continue to maintain our core strategy of funding 100% of our dividend with net investment income without a return of capital. Also, it is important to note that our net investment income is primarily net interest spread income which we receive quarterly in cash and that we do not rely on pick interest or on capital gains to pay our quarterly dividend.

The decrease in our fourth-quarter dividend as compared to the prior quarter is indicative of the continuation of several challenges facing our Company and the BDC sector in general as a result of current market conditions. First, with our stock currently trading at a substantial discount to our net asset value, it is not possible or advisable to raise new capital which we could otherwise invest at what are currently very attractive interest spreads to grow our dividend.

Second, while the credit performance of our loan portfolio remains relatively strong and we have not experienced any realized credit losses to date, the economic recession currently underway poses challenges to the continued performance of some of our investments. Approximately 1% of our loan portfolio went on nonaccrual status in 2008, resulting in a modest decrease in interest income in the second half of the year, and some of our portfolio companies faced increased default risk in the current fiscal year.

Third, some of our portfolio investments in the subordinated debt and preferred stock of collateralized loan obligation, or CLO funds, continue to face some challenges. These challenges relate primarily to investments in CLO funds raised and invested prior to the onset of the credit crisis in late 2007. These investments represent approximately one-third of our total CLO investment portfolio and less than 4% of our total assets.

One issue has been the volatility of LIBOR which in Q3 and Q4 of 2008 had a negative impact on some of our CLO investment income due to timing differences in interest resets on the liabilities and assets of the funds.

In addition, although the CLO funds in which we invested continue to experience management default rates -- manageable default rates and strong interest cash flows, we are seeing more rating downgrades in the underlying loan assets, particularly in the older CLO funds. Increased rating downgrades in some CLO funds may cause these funds to temporarily suspend distributions to junior securities and divert payments to the higher rated bond classes in order to delever the CLO fund. In such cases this delevering of the CLO temporarily reduces the current income for KCAP as equity payments are reduced or suspended. However, providing that actual defaults remain reasonably low and that the underlying assets continue to amortize or pay off at par, cash distributions to the junior securities of these funds should resume at some point in the future, and the effected CLO investments will still generate an attractive overall return.

As a result of these potential reductions in interest and other investment income, in the third quarter of 2008, we took steps to reduce operating expenses. Specifically we reduced headcount and other personnel-related expenses both at Kohlberg Capital and at our wholly-owned Asset Management Company, Katonah Debt Advisors or KDA for combined annual savings of approximately $3 million.

Turning to KDA, as of December 31, 2008, KDA had $2.1 billion of assets under management, down from $2.3 billion in the third quarter, primarily as a result of the sale of certain warehoused assets following the agreement reached in December with JPMorgan/Bear Stearns to terminate their warehouse credit facilities but offset by strong asset growth at the Katonah Scott's Cove credit fund. Our 100% ownership of KDA was valued at $54.7 million based on its assets under management and prospective cash flows, down from $64.1 million in the third quarter, primarily due to the reduction in assets under management. KDA produced a net loss for fiscal 2008 of approximately $765,000 after a $6 million charge for the JPMorgan/Bear Stearns settlement. KDA made no distributions to KCAP during the fourth quarter of 2008.

Moving on to the balance sheet, at year-end we had debt outstanding of approximately $262 million under our secured credit facility at an interest rate of 85 basis points over commercial paper rates. Since year-end, the facility has amortized down to approximately $245 million.

The credit facility is nonrecourse to KCAP and is secured by approximately $315 million of assets at current estimated fair value, consisting primarily of senior secured loans. The remaining $200 million of our investment assets are unpledged and outside of the credit facility.

In late September 2008, the Company was notified by its lenders that the liquidity banks providing the underlying funding for the facility did not intend to renew their liquidity facility to the lenders. As a result, the facility entered a two-year amortization period during which all principal and net interest collected from the loans pledged as collateral for the facility are used to amortize the facility through a termination date of September 29, 2010. There are no fixed required amortization payments during this two-year amortization period.

However, the Company is required to comply with a maximum leverage covenant. The Company was in compliance with this covenant at year-end 2008 and continues to be in compliance to date in 2009. Because our debt balance will continue to amortize in future quarters through principal and net interest collections on pledged loans, we expect our leverage ratio to continue to improve.

We continue to discuss with our lenders options to restore the revolving credit feature of our loan and extend the maturity beyond September 2010, and we're also monitoring the credit markets for opportunities to refinance the facility.

And with that, I would like to turn the call over to Dayl, our President and Chief Executive Officer. Dayl?

Thank you, Chris. I will start with some highlights of the quarter and then review our portfolio of middle market corporate loans and equity. At year-end our net asset value on a dollar basis was approximately $250 million or $11.68 per share, down from $277 million or $12.97 per share at the end of the third quarter. Compared to year-end 2007, net asset value on a dollar basis is approximately $9 million lower, primarily due to unrealized mark-to-market losses of approximately $40 million, offset in part by our rights offering in May, which raised approximately $27 million.

As with most BDCs and other financial sector stocks, our stockprice continues to trade at a significant discount to our NAV. These relatively low valuations represent an overall concern about credit quality in the current recession. Our policy of being the most diversified BDC by both issuer and industry was designed with the recession in mind, and we continue to maintain this policy. We believe diversity and focusing on less cyclical industries will benefit us relatively in the current environment.

We ended the quarter with total assets of $523 million, a decrease of approximately $10 million relative to the year-end 2007. The decrease is attributed to lower asset valuations and the fact that we're in the process of deleveraging our balance sheet and paying down our credit facility as Chris mentioned earlier. Total investments at year-end were $514 million, a slight decrease from $520 million at the prior year-end. Net unrealized losses increased by approximately $28 million during the fourth quarter.

Unrealized losses on corporate securities and equities approximated $12 million during the fourth quarter, despite the fact that portfolio companies continue to amortize or prepay their loans at par, and most of our portfolio is performing. In the fourth quarter, we also recognized a $12 million net decrease in the fair value of Katonah Debt Advisors, which Mike will discuss in detail in a moment.

Looking at the composition of our investment portfolio, our portfolio of quality continues to hold up well. At the end of the fourth quarter, our debt securities totaled approximately $384 million, representing about 75% of our investment portfolio. As in the past, first-lien loans represent the largest percentage of our debt securities portfolio at 57%, little changed from the end of the third quarter. Second-lien loans represented 33% of the portfolio, which was unchanged from the third quarter, which means that similar to the last quarter, the secured debt portion of our portfolio accounted for approximately 90% of our loan portfolio.

By industry our middle market portfolio remains very diversified across 26 industries with very little exposure to real estate, retail or finance. The debt securities comprise 93 issuers with an average loan exposure per entity of approximately $4.1 million.

Our 10 largest portfolio companies account for approximately 31% of portfolio fair value, slightly down from approximately 32% at the end of the third quarter. We believe this makes us if not the most, one of the most diversified BDCs.

Excluding our investments in Katonah Debt Advisors and CLOs, our 10 largest portfolio companies represent approximately 16% of portfolio fair value. As a reminder, by design we avoid concentrations in any one industry or issuer, and we have a very active portfolio monitoring program, which is especially critical in the current credit environment.

At December 31, 2008, the weighted average yield on our loan and bond portfolio was approximately 7%. Approximately 8% of our debt securities are fixed-rate and with an approximate average fixed-rate of 11.9%.

As we noted earlier, credit quality remains good. As of year-end, our hard watchlist increased from six to seven issuers or approximately 3.6% of assets. As of December 31, 2008, two of these issuers representing less than 1% of total assets were behind on their debt service obligations and were on nonaccrual status. Subsequently two additional issuers were put on nonaccrual, and both credits are related to the ethanol industry. These represented very small positions and kept our total nonaccruals at less than 1% of assets.

We continue to see prepayments at or above par which support our contention that the unrealized losses on the portfolio do not reflect the economic reality of our portfolio. During 2008 we received over $39 million in prepayments with nearly $6 million received in the fourth quarter alone. This has continued in the first quarter of 2009 with prepayments of well over $5 million so far.

Currently there is very little activity in the primary market as our private equity partners are facing their own constraints and accessing capital, and secondary marketing investments are offering attractive returns.

And now I will ask Mike to walk you through the details of our fourth-quarter and full-year performance. Mike?

Thank you, Dayl. Good morning, everyone. Starting with our income statement, in 2008 we reported total investment income of $49.2 million compared to $38.5 million in 2007. This increase in total investment income for 2008 is primarily attributed to a $3.8 million increase in interest income from debt securities investments as a result of increased purchases of such investments due to our spring 2008 rights offering and increased dividends during the year from our CLO equity investments of approximately $5.5 million.

Higher total investment income and lower G&A expenses offset by higher interest expense resulted in an increase in net investment income for 2008 of $30.7 million or $1.51 per share as compared to $22.8 million or $1.27 per share in 2007.

Isolating for just the fourth quarter of 2008, total investment income was approximately $11.3 million as compared to $12.9 million in the fourth quarter of 2007 and relatively unchanged from the $11.3 million from the prior third quarter of 2008. The year-over-year fourth-quarter decline is primarily a result of decreased spreads on investments and the loss of net interest spread on warehoused assets that were earned in 2007 on assets that were accumulated for CLO.

Quantitatively in the fourth quarter, our CLO fund investments earned approximately $2.7 million as compared to $2.2 million in the third quarter of 2008 as a result of accruing for the first dividend distribution for the Katonah 2007-1 CLO. Also less LIBOR volatility and the timing of rate resets between the underlying CLO assets and the CLO bond liabilities during the quarter contributed to that increase.

Total expenses for the three months ended and the year ended December 31, 2008 were $4.5 million and $18.5 million respectively. Relative to the comparable period last year, expenses in this year's fourth quarter included a $486,000 decline in compensation as we scaled back and adjusted year-end bonus accruals.

If you recall, during the third quarter of 2008, we evaluated the ongoing impact of the current economic environment and credit crunch relative to our operations and made some difficult cost-cutting decisions, mostly in the personnel levels at both KCAP and KDA.

Net investment income and net realized gains and losses for the year were $30.1 million or $1.49 per share, and we paid dividends equal to $1.44 per share. In the fourth quarter, we declared a $0.27 dividend, which was paid in cash on January 29, 2009 to holders of record as of December 31, 2008. This fourth-quarter dividend of $0.27 was covered by the Company's net investment income per common share for the period of $0.32.

This quarter once again we held our policy of distributing net investment income without returning capital to fund the dividend.

Net unrealized losses for the fourth quarter were approximately $27.9 million or $1.30 per share. This consists of approximately $12.1 million in the decreased fair value of our corporate securities and equities, reflecting market conditions and a decrease in the fair value of our CLO equity investment of approximately $3.4 million. In the fourth quarter, we recognized a $12.4 million net decrease in the fair value of Katonah Debt Advisors as a result of a settlement with JPMorgan/Bear and the resulting sale of those warehoused assets.

Inclusive of net unrealized gains and losses, for the 2008 fiscal year, we had $9.6 million increase in stockholder equity or -- I'm sorry, decrease in stockholder equity or a loss of $0.47 per share based on 20.3 million weighted average shares outstanding.

Moving on to the balance sheet, at year-end we had debt outstanding of $261.7 million under our secured credit facility at an interest rate of 85 BPS over commercial paper. Weighted average interest rate on weighted average outstanding borrowings was approximately 2.9% in the 2008 fourth quarter compared to 5.3% last year and relatively unchanged from the third quarter of 2008.

In late September 2008, the Company was notified by the lenders that the liquidity banks providing the underlying funding for the facility do not intend to renew their liquidity facility to the lenders. And, as a result, facility entered into a two-year amortization period during which all principal net interest collected from the loans pledged as collateral for the facility are being used to amortize the facility through a termination date of September 29, 2010.

As Chris had mentioned earlier, during this amortization period, the interest rate will continue to be based on prevailing commercial paper rates plus 85 basis points, or if the commercial paper market is at any time unavailable, prevailing LIBOR rates plus an applicable spread. This committed rate is well less than current market rates or a new rate that we would be able to renegotiate our facility at.

For example, our all-in interest rate last month was less than 1.75%, and as a result, net spread income as a result of lower interest costs for the period is quite favorable. Between cash on hand, liquid investments and net income on assets not secured by a facility, we anticipate that we have sufficient cash and liquid assets to fund normal operations and dividend distributions in the near future.

Since year-end the facility has amortized down to approximately $245 million. Total assets at year-end were $522.9 million if stockholder's equity was $250.3 million. As a percent of total assets, debt and liabilities outstanding are approximately 52% of total assets or equal to an asset coverage ratio of 196%. This asset coverage ratio is slightly less than the minimum asset coverage level required by the 1940 Act, primarily as a result of unrealized fair value losses on our investments at year-end.

Until the minimum asset coverage level of 200% is met, we will be unable to incur additional debt or issue securities senior to our common stock. However, because KCAP has no public debt outstanding or preferred stock outstanding, failure to maintain asset coverage of at least 200% will not limit our ability under the 1940 Act to pay dividends from our net investment income.

For determining covenant compliance on our facility, a leverage ratio covenant of at least one to one must be maintained based on the ratio of facility, outstanding balance and the most recent GAAP stockholder's equity balance, which is determined quarterly in conjunction with the Company's financial reporting filings with the SEC as filed and as of the facility outstanding balance determination date.

At year-end our leverage ratio covenant was met using the December 31 facility balance and the latest filed quarterly stockholder's equity balance, which at that time was as of September 30, 2008. The Company continues to be in compliance with the leverage covenant ratio based on the March 12, 2009 facility balance and the GAAP stockholder's equity balance as of December 2008 as we have just now filed our 10-K.

Before turning the call over for questions, I would like to touch on the $5 million stock repurchase plan we announced in October. Under this plan we can repurchase up to $5 million of our common stock from time to time at the discretion of senior management. No repurchases were made during the fourth quarter, in part due to technical reasons, as well as the desire to preserve capital.

In the future and keeping in mind that capital is precious in the current environment and our limited access to new capital, management will judiciously consider the need to preserve financial flexibility in sizing any share repurchases. The aforementioned discussions in the fourth quarter and annual results are also discussed in our 10-K that was filed earlier today. Our past quarterly 2008 10-Qs and our 2008 annual 10-K are available at our website at www.kohlbergcapital.com or at www.sec.gov.

And with that, we would turn over the call to the operator to start the question and answer session. Operator?

(Operator Instructions). Greg Mason, Stifel Nicolaus.

I wanted to dig into your cash position and cash flow. You talk about you are fine from the dividend and operations standpoint. But, as I understand it, your trapping all principal amortization and interest to the assets pledged to the facility. You had $12 million in time deposits at the end of the quarter, and you're paying a $6 million dividend. It would seem like you would have cash on hand to pay the next two quarters' worth of dividends and not a whole lot of cash flow coming off the remaining $200 million in assets to keep those dividend payments. Can you walk me through the cash flow numbers on how those work out, where you are comfortable with the dividend?

Yes, most of the unencumbered assets are actually our higher yielding assets. So we do get substantial cash flows from them relative to those that are secured within the facility. Also, if needed, we do have some liquid assets or those that are unencumbered that we could sell if we needed to to make the dividend.

So if I look at you paid down $15 million on the facility since the end of the quarter. You said you had $5 million in prepayments. Where did the other $10 million come from? Was that from your time deposits on the balance sheet, or did you sell assets?

We did sell some assets in the first couple of months of this year.

We also had a fair amount of again net interest spread. That number at 12/31 does not include the 12/31 payments because those actually don't get applied until after year-end. So there was probably 5 or 6 or 7 million of amortization and interest spread payments in January, and there continue to be more at the end of January, at the end of February, and we did have some small asset sales as well. Actually I think the prepayment number was more like $7 million in the first two months.

So could you give me what your -- the $200 million in unpledged assets, how much of your revenues come from those versus the $315 million that is pledged like on a percentage basis?

I don't know the numbers off the top of my head, but you can go off to some degree off the P&L because the unpledged assets would include Katonah Debt Advisors, the CLO fund securities, and then if you go to the scheduled investments, most of the mezzanine and the bond portfolio are also not in that facility.

And there is also about $25 million of first-lien loans that are not --

Not in that facility, yes.

We do not have that number right at hand, but I guess we could figure it out if you wanted us to.

I think another way to think about it, and we can calculate that for you, is you have basically 3/5 of the assets are in the facility and 2/5 are outside. But that 2/5 probably has a higher overall spread of 500 basis points. So it is going to be probably at least half if not more than half the revenue is actually outside the facility. And, of course, the facility -- what you would have would be the net because the facility also is responsible for paying its own interest. So the cash flow outside the facility is available to us on a gross basis.

Okay. So ultimately what is the longer-term plan here? Because if it takes some liquidation of assets, I'm looking at your net operating income this quarter of $6.8 million. Obviously some of that was pushed to the facility and had to be used to pay down. So you're not generating complete cash flow to pay the $6 million quarterly payment, and you're doing that from selling liquid assets. That cannot go on forever. So what is the endgame here?

Well, I think the endgame again is we would like to amend our facility or refinance, and as I mentioned, we continue those discussions with our lenders. But it has to be done on terms that make sense, and as Mike said, we don't feel that there's any pressure in the next few quarters to have to make these decisions.

Okay. Can you talk to us about what happens at the end of the amortization period if we're sitting here September of 2010? What happens at that time if we have not refinanced the facility?

Well, I mean, the facility is technically doing payable. I think we have had discussions with our lenders about potential to extend the facility beyond that date. We have no commitment in place to do that now. But again, I don't think our lenders are interested in liquidating the facility at September 29, 2010, although we don't know what the world is going to look like at that point either. But our intention is obviously not to get to that point, and we're working on other alternatives so we're not sitting here anywhere near September 29, 2010 with that potential in mind.

And the facility is recoursed only to the encumbered assets within the facility.

This is the point we were trying to make, and it's obviously an important question for all of us. If you used today's numbers and you used a worst-case scenario, you would end up having to sell a good portion of the encumbered assets to pay the loan off, and it is hard to forecast what the loan balance will be. It should continue to amortize during that period. And then what you would have would be a completely unlevered BDC with a couple hundred million dollars of higher returning assets. That is the part that is outside the facility and, as we mentioned, generates probably more than 50% of our cash flow and some portion presumably of the encumbered assets that you would not need to sell since the loan balance is so much lower than the pledged amount. So you would have a business that in worst case if the lenders said we want to be paid down to zero, you would have an unlevered Company with $200 million plus some portion of the pledged assets in assets outside and no debt.

And then one last question and I will hop back in the queue. If that is the case, how does that work on the remaining assets? Because I believe you are limited to 30% of your assets in CLO and your equity in Katonah, and obviously that would look more like 50%. How does that get cured?

Well, I mean, let's not mix the numbers up. The CLO is a bad asset for ROIC purposes. But if you do that math, again just using today's number, our CLO investments are $60 million on a base of 200 plus. Because again, you would have some assets out of the facility that would come back to the balance sheet. So you would be in compliance on that. And then the Katonah valuation would be, it is roughly $50 million today. So you would be right around the diversification limit.

Katonah is a good asset.

And Katonah is a good asset because it's an investment in the USC Corp. So you would actually be in compliance even doing that math.

(Operator Instructions). John Hecht, JMP Securities.

Some of this was touched on in the last set of questions, but I am wondering if you can give us what maybe your normalize net income or cash flows from KDA might be? And in that discussion, Chris, you mentioned there were some expectations for some of the CLOs to maybe cash [trap] for awhile what percentage of the overall mix might cash trap at various times?

KDA at this point we did settle with JPMorgan/Bear. So there is some outstanding, not liability as much as future payment that will be made during the course of 2009. So KDA will probably be somewhere around I'm guessing around breakeven or maybe slightly better depending on how its future operations hold up.

And then with regard to the CLOs, as I mentioned in my comments, the ones that we are concerned about diversion are some of the older, smaller investments such as Katonah's 7 and 8. I don't know what the combined balance of those is, but I think it's $5 million or $6 million across those two. So it is a relatively small number.

And, as I mentioned in my comments, there is a vintage thing at work here because CLOs raised during the sort of '05, '06, '07 period are probably going to be the peak vintages for both rating downgrades and defaults just because they participated in a lot of the primary issuance that as a result of the recession is now having some problems.

The good news is that two-thirds of our portfolio, essentially the $10 million odd investment in Katonah 10, and most importantly the $29 million investment in Katonah 2007-1, which was really raised and invested in early 2008, missed that whole vintage and, in fact, had the benefit not only of good funding costs but extremely low defaults because they purchased primarily in the secondary market seasoned credits, and most importantly, they are getting the benefit of a very low average purchase price because they were purchasing in the market when loans were no longer trading at par.

So again, we don't make projections fund by fund, but the bulk of our investments actually have the benefit of the better vintage at some smaller, older investments that are at some risk of interest diversion.

Okay. You mentioned the most recent CLOs now cash flowing. What is the quarterly level of that?

It is probably -- I mean it depends on the LIBOR resets, but I think it's going to be somewhere in the neighborhood of around $1 million per quarter. And I mean in very rough terms that should offset a good portion of any of the smaller investments that get shut off. We will not be able to grow the income from that portfolio, but we should be able to maintain it, again because of the concentration of investment in these one or two later funds that have a better vintage.

Okay. And then a little bit more on the Asset Management arm. You did mentioned Scott's Cove was successful in raising some assets. Can you talk about whatever asset classes you have that could gather assets this year and what your hopes and intentions are in that regard?

For that I'm going to call on E.A Kratzman, who is the President of Katonah Debt Advisors, to comment.

The Scott's Cove credit fund has actually doubled its AUM on a year-to-year basis, and they returned about 13% last year to their investors. So we have been very happy with that, and they appear to be a successful path to continue to raise AUM this year.

And I think it's fair to say most of that is from existing investors who have been pleased with the performance and increased their allocations.

That is correct.

Most likely shifting it from other less successful funds.

Correct.

Okay. And then the last question I have, can you talk about what were the terms that your lenders came to you with, what was specifically uneconomical about those terms, and are you having ongoing discussions with them, or is there something you will wait a year before you revisit the extension of the facility, or are you continually having ongoing discussions and this is something that could be fixed quickly?

Well, I mean, there were a lot of discussions of terms. So obviously key terms that would be under discussion would be interest rates and upfront fees. But the major issue that we have and the major point of disagreement is getting a real restoration of the 2012 maturity. I think the difference of opinion is that just raising the rates was not going to be sufficient to get that -- to really fix the pending maturity issue. And what they would like to see is an absolute reduction in the amount outstanding. And to do -- to get a substantial reduction since we don't have cash on the balance sheet and we don't have the ability to raise equity would simply cause us to take a very, very large immediate realized loss since our portfolio, like everybody's portfolio, has been marked way down as a result of market pressure.

So the real disagreement was not over interest rates but over what level of paydown was necessary to get a meaningful extension of the duration. To simply throw some more rate on the table and still have a facility that matures in 2010 or one proposal could actually be called even sooner does not make any sense for the shareholders.

Yes, and I would say we continue to have those discussions. I don't know that we're going to have a resolution immediately or in the short-term. I think clearly as we continue to get prepayments and can paydown the facility, we have several situations where we are expecting some prepayments over the course of the next 60 to 90 days. You know, obviously the lower we can get the outstanding balance, the easier it is to have those discussions because I think one of the things most lenders want right now is to get their exposures reduced in gross terms.

And I think coming back to the questions that were asked before, what we hope investors understand is we take the pending maturity very seriously. But we have 18 months until we confront that, and we do have substantial assets and cash flows outside the facility that will allow us to operate in the interim. And so what we're trying to do is balance any detriments such as having to sell assets to pay down the facility at a loss or having to take a greatly increased interest spread against what is clearly putting pressure on the stock on the Company, which is this maturity issue. We are not going to wait until the last minute to address this. We're just trying to find what is the best deal for our Company and our shareholders and one that is acceptable to the lenders.

Greg Mason, Stifel Nicolaus.

I believe FASB came out with some information today about clarifying some mark-to-market guidelines. I was just curious if you had a chance to see that and what were your thoughts? Does it help out the BDCs at all?

Was that the FASB, or was that the ABA?

Well, I believe the ABA was reporting on what FASB has done. This is the e-mail that I have. The Financial Accounting Standard Board agreed today to propose alternatives for improving mark-to-market accounting for illiquid markets.

I have not had an actual chance to look at it. The last one that I really noted was one that came out that the SEC and FASB came out with in the fourth quarter, which for the most part said that, if you don't really have a liquid trading market, that you probably have a Level 3 asset, which you would have to value through alternative means other than a quoted mark since those quoted marks are either non-existent, stale dated or possibly a distressed trade.

Or not a trade at all. Just a mark that someone is willing to buy a particular asset at, but there are no sellers at that price, which we see a lot of.

Yes.

I think this is really just clarification of (multiple speakers) what the SEC was saying in December.

Thank you. Could you talk about at KDA, the equity investment that you have there, how long will it take to rebuild the cash reserves after the $6 million settlement before you would have cash available to dividend back up to KCAP?

Well, the term of that agreement is for the remaining future payments to be finished through the course of 2009, so probably just 2009.

Okay. Can you talk -- I know you were kind of hedging your discussions on share repurchase given that capital is so important now. But when does the window open for stock repurchases after the quarter?

Sure. Our trading window is actually fairly narrow. Our trading window is for 15 business days, three days after we file a 10-K or a 10-Q. So we have, in other words, we are getting all the public information that needs to be out there available before our window opens. And it again is for 15 business days after a K or Q is filed.

Well, the board also has the right to close the window if there are other -- if there's other pending things -- (multiple speakers)

Just material, not public information. It is not so much the board as the board and management will close the window if there is something going on that is not public at this point as well.

And lastly, could you tell me what your non-accruals were on a cost basis versus fair value?

Sure. On a cost basis, the non-accruals were about 3.4% -- no, I'm sorry. On a cost basis, actually I have it on a par basis, which is probably fairly close to cost, the defaulted assets were about 2.7% of par.

And how does that compare to last quarter?

It is probably not that much --

Well, you did have -- we added two, so I guess it probably was around 2% last quarter, 2.2%.

(Operator Instructions). Adam Waldo.

There has been a lot of money obviously raised in the last nine to 12 months for distressed debt funds. I wonder if you can talk a little bit about the extent to which you might consider offers for part or all of your unencumbered assets portfolio from distressed debt funds versus potentially just continuing with your current strategy?

Well, I mean I think the question is what is the value. Our whole -- the answer to that question is whether we think that value represents or the offer represents a good value relative to where we can realize on the assets ourselves, and the whole BDC structure is really a buy and hold structure. And so we look to the assets as part of recoveries, and this was in Dayl's comments.

That said, if there was an offer for some assets at a good value, and then the cash from that was sufficient to get enough of a paydown to our lenders to get a facility extension, as we said before, we would definitely look at that. We have not been approached in that regard to date, but again to realize a substantial loss selling to a distressed fund or any other group at this point does not make a lot of sense to us. But obviously if the value was right, we would certainly look at that as a deleveraging tool.

Okay. And just to be clear, you define a loss as a significant loss to your cost or par value of the assets as opposed to thinking about it in terms of a material premium to the trading value of your stock, even if you might have a significant discount to your NAV?

I'm not sure I understood that calculation.

Well, your shares are trading at a huge discount to your NAV per share.

That is correct.

And so if the offer came in at a significant premium to your share price but at a significant discount effectively to the booked net asset value per share of the Company, how do you think about those types of offers?

Again, we would not compare to the booked net asset value but to what we think is the recoverable value.

Okay, okay.

So if somebody offered us what looked like a substantial premium and our stock is extremely depressed as you know, at a very low percentage of NAV, I think largely as a result of concerns about the credit facility and the --

Yes.

So for somebody to offer us a substantial premium over today's value, that could still be a substantial discount to the value that we can realize in cash for our shareholders. And so we really need to look at both of those data points in making any assessment.

And when you say the value that you can realize in your portfolio in cash for your shareholder, is that simply by holding the underlying assets to maturity?

Exactly. (multiple speakers)

Okay, I just wanted to make sure I understood your philosophy.

Make sure your repayments (multiple speakers). And then to add to that analysis, all of it does need to be looked through in the context of the situation with our credit facility. So to the extent that a sale of assets actually allowed us to get the extension, we might be more flexible as to the value. If it did not, then all we were doing was taking a big loss to the realizable value, and obviously we would look more skeptically at an offer like that (multiple speakers). We are triangulating between three points -- the stock price, the realizable value, and ameliorating the situation with the credit facility.

And with that, ladies and gentlemen, we have no further questions on our roster. Therefore, Chris, I will turn the conference back over to you for any closing remarks.

I guess in closing, Dayl and Mike and I would just thank you all for your participation in today's call and for your continuing support of Kohlberg Capital. Thank you all.

And, ladies and gentlemen, this does conclude the Kohlberg Capital Corporation 2008 earnings release conference call. We do appreciate your participation, and you may disconnect at this time.