BCP Investment Corp (BCIC) 2010 Q2 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Kohlberg Capital Corporation 2010 second quarter earnings conference call. An earnings press release was distributed earlier today. 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, August 10, 2010. This call is also being hosted on a live webcast 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 and events, including earnings releases, please contact Denise Rodriguez at 212-455-8300.

At this time Management would like me to inform you that certain statements made during this conference 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 that 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 Factors section of our 10K and sections of our Form 10Q 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. Sir, please go ahead.

Thank you and thank you all for joining Kohlberg Capital for a review of the company's financial results for the second quarter of 2010. I'm Chris Lacovara, Chairman of the company's Board of Directors. 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 second quarter financial results and performance. We will then open the line up for your questions at the end of the call.

Our June 30th, 2010 net asset value per share was $9.20. For the six months ended June 30th, 2010 net investment income was $0.13 per share compared to $0.56 per share for 2009. The company's net investment income includes the impact of higher interest costs on our credit facility being paid under protest due to a decision by our lenders to charge default interest from which we are currently seeking judicial relief. We have been paying this higher interest rate since June 2009 and we estimate that our net investment income would have been approximately $0.16 per share higher for the first six months of 2010 had the interest rate on our borrowing facility not reflected the higher default interest rate.

In addition, the company's net investment income includes the impact of increased legal accounting and valuation professional fees of approximately $3 million or $0.13 per share related to litigation and the recent restatement of our year-end 2008 and first and second quarter 2009 financial statements. The remainder of the reduction in net investment income in the first half of 2010 as compared to 2009 resulted primarily from the reduction of approximately 75 basis points in LIBOR for floating rate investments and a reduction in the size of our loan portfolio, as loans prepaid or were sold.

The company declared and paid in cash a dividend of $0.17 per share for the second quarter of 2010. Realized losses of approximately $7.7 million or $0.34 per share were recognized during the first half of 2010, of which approximately $5.5 million was recognized in the second quarter, primarily due to the settlement of certain assets below their original cost. These realized losses are primarily the result of the sale of defaulted or distressed loan assets at or above their prior quarter fair value marks.

With regard to our portfolio of investments in the subordinated debt and preferred stock of collateralized loan obligation or CLO funds, we faced some challenges in 2009 that are not beginning to moderate, which we believe validates Katonah Debt Advisors' strategy of managing its CLO funds through the downturn by managing underlying credit as opposed to rating downgrades. In 2009, rating downgrades of underlying assets in some of our older CLOs resulted in a temporary suspension of cash payments to the junior fund securities which KCAP holds, thus temporarily reducing KCAP's related investment income and reducing the fair value of some CLO fund investments.

In the first half of 2010, we have seen a substantial improvement in the performance of the CLOs that curtailed payments during 2009 and two of these funds have resumed distributions to their junior securities during 2010. This improvement is due in part to careful management of these funds by our wholly owned portfolio company, Katonah Debt Advisors or KDA, in particular, superior credit selection and the avoidance of asset sales at distressed prices during the financial crisis. We believe all funds which had suspended distributions will resume distributions by the end of 2010 or in early 2011, absent some dramatic downturn in the credit markets.

Our investments in the Katonah 10 and Katonah 2007-1 CLO funds, which represent 76% of our total CLO investment and 88% of KDA managed CLOs, fortunately experienced much less significant rating downgrades and never suspended their distribution. These funds continue to make cash distribution to KCAP on a quarterly basis. Overall, 89% of our equity in CLO investments are distributing cash with a weighted average annual return of 28% on fair market value.

Turning to our asset management business, as of June 30th, 2010 KDA had $2.1 billion of assets under management. Our 100% ownership of KDA was valued at $54 million based on its assets under management and prospective cash flows at June 30th, 2010. KDA has also been negatively impacted by the performance of its management CLOs, as three of its managed funds began to defer payments of a portion of their management fees during 2009 due to the ratings downgrades on underlying assets previously mentioned. During such time these unpaid management fees continued to accrue and remain payable to KDA as these funds come back into compliance with certain financial tests. Accrued fees receivable by KDA totaled more than $5 million as of March 31st of 2010.

Two of the three CLO funds which deferred paying their subordinated management fees in 2009 have regained compliance during the first half of 2010 and have repaid approximately $2 million of these past accrued subordinate management fees, along with their current payment of subordinate management fees to KDA since March 31st, 2010. Accrued fee income available for future payment to KDA and thus available to distribute to KCAP in the form of a distribution or a return of capital, was approximately $3 million at the end of the second quarter of 2010. We believe that all unpaid fees will be recovered over the balance of 2010 or by early 2011, absent a dramatic downturn in the credit markets. The company expects that KDA will distribute approximately $4 million to KCAP during 2010, offsetting the impact of the unusual legal, accounting and valuation professional fees occurred in the first half of 2010.

Moving on to our balance sheet leverage, at the end of the second quarter of 2010 we had debt outstanding of $145 million under our secured credit facility. This is a substantial reduction from our year-end 2009 debt balance of $218 million and represents significant de-leveraging of our balance sheet during the first half of the year. The credit facility is non-recourse to KCAP and is secured by approximately $212 million of assets at fair value, consisting primarily of senior secured loans. These secured assets represent approximately 60% of our total assets and approximately 45% of our gross investment income as of June 30th, 2010. The remaining $144 million of our assets representing 55% of our gross investment income are unpledged and outside of the credit facility.

In August 2008 the company was notified by the lenders that the liquidity banks providing the underlying funding for the facility did not intend to renew their liquidity facility to the lenders. The lenders accelerated the maturities of the facility from September 2012 to September 2010 and began to sweep all interest and principal collections on pledged assets in excess of interest due on the loan's balance. Because we have substantial earning assets not pledged as facility collateral, we believe that we have sufficient cash and liquid assets to fund normal operations and continuing dividend distribution through the accelerated maturity of the facility in September 2010.

After the company and the facility lenders failed to reach agreement on an amendment and restoration of the 2012 maturity, in June 2009 the facility lenders asserted that the company was in technical violation of certain terms of the facility. At that time the facility lenders unilaterally imposed an increase in the interest rate in addition to the acceleration of the amortization period.

Since the imposition of the default interest rate, incremental default interest paid under protest plus legal fees have totaled approximately $10 million among other damage claims as of June 30, 2010. On August 2009 we filed a complaint against the lenders to clarify our rights and obligations under the facility documents. We also stated our belief that the lenders assertion that the company was in breach of its obligations was without merit and that the facility should not have been accelerated from 2012 to 2010. This case is still pending in New York State Court.

We continue to evaluate options to refinance or repay the outstanding balance of the credit facility. Should we do so, we would continue to pursue claims against our prior lenders for reimbursement of default interest and other costs we have incurred.

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

Thank you Chris. I'll start with some highlights of the quarter and then review our portfolio of middle market corporate loans and equity. As already noted by Chris, our NAV at June 30, 2010 was $9.20 per share, down from the $9.56 per share at the end of 2009. Our valuation process, as it always had, focuses first and foremost on the attributes of the subject asset, the credit quality, performance, industry and other unique characteristics of each investment. In addition, we continue to use a present value technique that discounts contractual cash flows based upon bond spreads and yields for comparable issuers for the specific asset and then adjust those yields using two market indices to adjust for the priority of the asset. The comparable issues are chosen based upon industry and credit considerations.

We also further adjust these discount rates to reflect any amendments or prepayments during the valuation period. As a result, the fair value of our portfolio more closely tracks the broader market yields for high yield and leverage loans. As of June 30, 2010 our weighted average mark on our debt securities portfolio was 83.

As for our CLO portfolio for which we are attaining weighted average yields in excess of 20%, our weighted average mark was 76 as of June 30th, 2010. Our total investment securities at the end of the second quarter was $352 million. Our debt securities portfolio has decreased relative to prior periods as we continue to de-lever using principal repayment on our investments. Subsequent to the end of the quarter we have had additional prepayments of almost $4 million from two particular borrowers.

Looking at the composition of our investment portfolio, our portfolio quality continues to hold up relatively well. At the end of the second quarter our debt securities totaled approximately $227 million and represented 64% of the investment portfolio. As in the past, first lien loans represented the largest percentage of our debt securities at 55%. At June 30, 2010 our 10 largest portfolio companies accounted for approximately 41% of loan portfolio fair value.

Excluding our investments in Katonah Debt Advisors and CLO fund securities, our 10 largest portfolio companies represent approximately 18% of portfolio fair value. As you know, we are diversified by borrowing industry in an effort to mitigate the effects of the ongoing recession. At June 30, 2010 the weighted average yield on our loan and bond portfolio was approximately 5.4%. Approximately 1% of our investments are fixed rate investments. As we noted earlier, credit quality on our portfolio remains relatively good. At the end of June 30th, 2010 our hard watch list consisted of six issuers and we currently have five issuers on non-accrual status. This is unchanged from the last quarter.

We continue to see prepayments at or above par which supports our belief that the unrealized losses currently reflected in our portfolio will not necessarily result in realized losses in respect to those investments. As a result of sales and pay-downs that have occurred in the first half of this year, this has reduced our debt facility outstanding to less than $145 million as noted earlier and as we noted on our last earnings call. As I said, in addition to almost $4 million in payments have occurred since June 30, 2010.

And now I'll ask Mike to walk through the details of our financial performance. Mike?

Thank you Dayl. Good afternoon everyone. For the three months and six months ended June 30, 2010 we reported net investment income of approximately $297,000 or $0.01 per share and approximately $3 million or $0.13 per share respectively. Our total investment income for the three months ended June 30, 2010 was approximately $7 million as compared to approximately $9 million for the same 2009 period. Our total investment income at the six months ended June 30, 2010 was approximately $14 million as compared to $18 million for the same 2009 period.

The most significant driver impacting the decline in investment income for the three and six months ended June 30, 2010 was a reduction in interest income from investments and debt securities. This reduction is primarily due to lower average investment balances on which interest is earned and a decrease of approximately 75 basis points in the weighted average LIBOR in 2010 relative to 2009.

The decline in debt securities revenue was offset by a cash dividend from our asset manager, Katonah Debt Advisors of $1.5 million in the first half of 2010 whereas Katonah Debt Advisors had no distributions to KCAP in 2009. During the remaining part of 2010 we expect additional distributions from Katonah Debt Advisors as they receive additional cash for accrued subordinated management fees for those CLOs which were previously deferred. I will discuss the lower average investment balances later.

For the three months ended June 30, 2010 our CLO fund securities dividend income was approximately $2.4 million which also approximates CLO fund securities income for the same period in the prior year. For the six months ended June 30, 2010 CLO fund securities income was approximately $4.5 million, a $5,000 decrease from the prior year's six months reported income of $5 million. The reduction of CLO fund income for the six months 2010 period is primarily due to the suspension of distributions to junior securities from CLO fund investments in order to de-lever those CLO funds, primarily as a result of rating downgrades on the underlying assets of the affected CLO funds. That actually began in the second quarter of 2009.

Expenses for the three months ended June 30, 2010 totaled approximately $7 million as compared to approximately $3 million for the quarter of 2009. Expenses for the six months ended June 30th totaled approximately $11 million as compared to approximately $6 million for the same period ended in 2009. For both the three and six months ended June 30, 2010 periods the increase in expenses relative to 2009 is due to increased interest expenses and increased professional fees.

As for interest expense, as previously noted, we are currently paying under protest the default rate interest. In the six months ended June 30, 2010 we estimate that this additional default rate of interest had an actual impact of approximately $3.5 million or $0.16 a share to our actual interest expense for the period. Since we have been forced to pay default interest beginning in June 2009, we estimate that we have overpaid approximately $9 million or approximately $0.39 per share default interest to our lenders.

Professional fees year-to-date for 2010 have also increased relative to 2009. We have incurred higher than usual accounting fee and third-party valuation fee expenses of approximately $1.5 million related to the restatement of our year-end 2008 and first and second quarter of 2009 financial statements. In so doing, we effectively paid twice; once for the original services and then again related to the restatement for the financial audits for 2007 and 2008 and valuation services related to 2008.

In addition we have incurred legal fees with respect to the defense of the class action suits related to the restatement and have incurred other professional fees related to the SEC investigation. Lastly, we have incurred increased legal fees with regard to our claim and litigation against our lenders of approximately $1 million which we expect to recoup should we prevail in our claim.

Realized losses in the first half of 2010 were approximately $7.7 million, primarily related to the settlement or disposition of investments. Net investment income for the three months ended June 30, 2010 was approximately $0.01 per share compared to approximately $6 million or $0.26 per share for the second quarter of 2009. Net investment income for the six months ended June 30, 2010 was approximately $0.13 per share compared to approximately $0.56 per share for the same period of 2009.

If we were to eliminate the additional interest expense resulting from the default rate of interest on our credit facility, our net investment income would have been $0.29 per share for the six months ended June 30, 2010. This $0.29 and further adjusted to normalize unusually high professional fee expenses in the first half of 2010 which would be somewhere in the low $0.30 range, we believe is a reasonable run-rate in the first six months of the year.

I will now move to a qualitative discussion about our balance sheet and income statement and I will add a little more color to some of the previous comments made by Chris and Dayl. Our largest CLO Fund investment, the equity tranche of Katonah 2007-1 is yielding a current annual return on fair value of approximately 15% and our investment in the DD-rated securities at that same CLO currently has an IOR of over 54% based on the amount of original investment.

Our second largest CLO Fund investment, Katonah 10 is yielding a current annual return of approximately 31% of fair value. Our investment in the Katonah 3 CLO is yielding a current annual return on fair value of 79% and our investment in the Grant Grove CLO is yielding a current annual return on fair value of 31%. The Katonah 9 and Katonah 8 CLOs are no longer deferring subordinate management fees to KDA and will be paying equity distributions in the third quarter.

The other CLOs in our portfolio, approximately $3 million of fair value and representing less than 5.8% of our CLO Fund securities portfolio have currently suspended cash payments to the junior securities which KCAP holds due to ratings and credit downgrades on the underlying loans held by these CLO Funds. Fortunately these CLO Funds represent less than 0.9% of our investment portfolio.

By year-end we believe that nearly all of our CLO Fund investments will resume their equity distributions, at least those that KDA manages.

With regard to our wholly owned asset manager, Katonah Debt Advisors, its assets under management or AUM has remained fairly constant during 2009 and through year-to-date at approximately $2.1 billion. As noted previously, KDA continues to receive 100% of its quarterly senior management fees on its AUM. The older CLO Funds that are managed by Katonah Debt Advisors, Katonah 7, Katonah 8 and Katonah 9 are among those who suspended cash payments to the junior fund securities due to ratings and credit downgrades on the underlying loans held by those CLO Funds.

As a result, these funds during the course of 2009 deferred payment to KDA of quarterly subordinate management fees. In the second quarter of 2010 Katonah 8 and 9 resumed their normal distribution to bond holders and to KDA for full payment of KDA's quarterly senior and subordinate management fees.

In addition, these CLO Funds paid KDA approximately $2 million of the accrued and unpaid subordinate management fees with the remaining balance of approximately $1 million to be paid in the third quarter, along with residual cash flows being paid to the CLO Fund equity investors.

Similarly, we believe that Katonah 7 will resume its normal distribution to the bond holders and to KDA of its subordinate management fees, which is approximately $2 million, beginning in the third quarter of 2010 and will begin to pay the accrued and unpaid management fees from prior periods.

On the liability side of our balance sheet, as of June 30, 2010 our debt facility had a balance of approximately $145 million. At the end of June our leverage was 40%, well in compliance with our debt covenant leverage ratio and our asset coverage was 243%, well above the minimum 200% required by the Investment Company Act of 1940. The significant decline of the facility balance was due mostly to payoffs or redemptions at par during the first half of the year.

Weighted average interest rate on weighted average outstanding borrowings was approximately 5% during the first half of 2010 as compared to 2% for the same six month period last year. The credit facility is non-recourse to KCAP and is secured by approximately $212 million of assets of current [core] value, consisting primarily of senior secured loans and representing 45% of gross investment income. The remaining $144 million of assets representing 55% of gross investment income is not pledged for secure repayment of amounts outstanding under the facility.

We've done this in the past, but I'll provide a little bit of a recap regarding our debt facility. In August 2008 the company was notified by the 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 lenders deemed to terminate our ability to obtain revolving advances and commenced a two-year amortization period for the facility which we believe has been wrongfully commenced. During the amortization period all principal and net interest collected from the assets pledged as collateral for the facility are used to amortize the facility balance. There are no fixed required amortization payments during this two-year amortization period.

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. In June 2009 in a separate action, our lenders under the facility asserted that we are in breach of certain terms of the facility. Specifically they alleged that we failed to properly determine ratings on certain pledged loans, which resulted in multiple incorrect calculations for the terms of the facility. We disagree with this assertion and are seeking judicial relief to clarify our and our lender's obligations under the facility. The lenders also stated that as a result of such default they were entitled to interest payable at a higher default rate, equal to 85 basis points above the prime rate, plus 75 basis points.

The company has been paying such higher interest rates under protest. As Chris mentioned, since the imposition of the default interest rate, incremental default interest paid under protest and legal fees have totaled approximately $10 million as of June 30th, 2010.

We intend to vigorously pursue the claims set forth in our complaint against the lenders. Neither the outcome of this litigation or the amount in range of potential damages recoverable by the company and the borrower or our exposure associated with this litigation can be determined at this time. For more information regarding this litigation and for more information regarding our second quarter financial results, please refer to our recently filed financial reports filed on Form 10Q that was filed yesterday with the SEC.

For the second quarter we declared a $0.17 dividend which was paid in cash on July 29, 2010 to holders of record as of July 7, 2010. In determining the dividend for the second quarter, considerations included estimated current quarter net income, anticipated net income for the year, the impact of increase legal, accounting and valuation professional fees associated with our restatement and the related legal and governmental proceedings and the impact and timing of the resolution of our dispute with the lenders.

Between cash on hand, liquid investments and net income on assets not secured by the facility, we anticipate that we will have sufficient cash and liquid assets which could be sold as needed but potentially at a loss, to fund normal operations and continued dividend distributions over the next 12 months. The aforementioned discussions on the second quarter 2010 financial results are also discussed in our Form 10Q, again, filed yesterday. You can look at our website www.KohlbergCapital.com or www.SEC.gov to find that 10Q.

And with that we'd like to turn the call back to the operator to start to the question and answer session. Operator?

(Operator instructions) Our first question is from Troy Ward of Stifel Nicolas.

Real quick, on the CLOs, if we assume that all of the CLOs by year-end or sometime around then get back to receiving their allotted distributions, what would the quarterly income from that group of assets be?

It's a little too early to tell, because there will be a partial distribution initially and then what would be probably a more routine equity distribution subsequent to that. But if we were to look at Katonah 8, typically that distribution to us would be - I'm sorry, I have to look it up real quick.

I think 7 and 8 together would be probably somewhere around $500,000 a quarter, conservatively, on a normal run-rate basis.

Probably somewhere between $400,000 and $500,000 for 7 and 8. Katonah 9 would be a little less because we have a much smaller investment in that one.

Okay. As we think about the $4 million that you're expecting from KDA here in 2010, you made a comment that it will roughly offset the higher professional fees. As we think about professional fees, how should we think about those over the last two quarters of the year?

For the last two quarters of the year they should be substantially less than we've had in the first quarter. Under GAAP you can't actually accrue management fees ratably over the year, professional fees, so for instance if you know that your audit's going to cost you $500,000 for the year, you can't take a twelfth of that every month. You have to actually accrue it based on when the services are rendered.

So in the second quarter, in the first half of the year we had substantial audit fees that hit the P&L, most of which in the second quarter for the re-audits of 2007 and 2008 and for the audit of 2009, as well as for professional fees related to the valuation services that were rendered and then obviously the legal expenses. So moving forward into the last half of the year, you would expect the audit related fees to be substantially less, same with the valuation fees. Those won't pick up again until we get toward the end of the year in the audit season and the beginning of next year.

With regard to legal fees, there will be continued ongoing legal fees with regard to the litigation that we have against our lenders but with regard to the class action suit and the SEC investigation, those fees are now being picked up by the D&O carrier since we've met the deductible.

The heavy part of the fees, vis-à-vis the lender litigation was the discovery phase, which is drawing to a close, so those fees will fall off too.

Great. Then one last one and I'll get back in the queue. What happens September 29, 2010 is obviously when the lenders call the maturity date versus the 2012; what happens as we approach that in the next month?

Again, we continue to pursue alternatives to refinance that before the end of that termination date. That is our primary focus at the moment.

Once we hit that September 29th does anything really change? Do they have the ability to seize the assets at that point?

It'd be better to seize the assets now if they want to. They could seize the assets tomorrow if they were so inclined.

That is one of the issues and this is a matter of public record that we're challenging in a lawsuit whether in fact maturity is 2010 or actually 2012.

Your next question is from John Hecht of JMP Securities.

First one, you mentioned six issuers, Dayl, on the watch list. Do you have at your fingertips what percentage of fair value is on those six companies?

I don't have it at my fingertips but we can figure it out fairly quickly. The watch list, by the way, includes everything that's on non-accrual, so do you want the non-accruals or do you want the watch list?

I think you have five on non-accrual and you had six on watch list if I heard you right.

There's a lot of double counting.

So all of those five would be on the -- the only figure I'm looking for is what that incremental one on the watch list would be in terms of fair value? We can get it offline. It's just a data point I follow.

In terms of total assets, it's less than 10%. At fair value or at cost?

Fair value.

At fair value I think it's less than 3%, it's around 2% at fair value, around 2.3%.

Okay, generally consistent, maybe a little lower in terms of watch list and non-accruals relative to fair value from last quarter?

Yes.

A little follow-up on some of Troy's questions. I guess the only one would be, can you tell us what the normalized CD accruals fees from KDA could be once you in a sense reclaim all your accruals; what would a normal run-rate of fees be at KDA? Net of expenses I suppose.

It would be probably around $2 million.

Okay. And how much of that would you feel comfortable dividending to KCAP and how much do you want to keep at the subsidiary just for working capital purposes?

The subsidiary doesn't really have any working capital needs.

It doesn't have any working capital needs because its balance sheet really is just cash receivables and some payables. So we can kind of control the timing of those distributions but we would like to generally repatriate the cash up to the parent--.

Is the timing sort of based on minimizing taxes and things of that nature?

It's minimizing taxes, it's cash management up at the parent level, it's a variety of different things.

Okay. Then based on the volatility in the credit markets that began occurring in the middle part of this year, do you expect repayments and payouts to slow in the second part of this year or is that just asset by asset and we'll take it case by case?

Well to a certain extent it's case by case, but not surprisingly the second quarter was an enormously active period for repayments because the high yield market was very strong which allowed companies to either refinance or get sold and get refinanced through the high yield market and that high yield market is coming back but not nearly as strong as it was in the second quarter. But as I said, subsequent to the second quarter, we had two loans pay off in full, both of which were M&A transactions.

Okay. Final question and I know you're working hard to refinance or get a new line of credit, but what would the next step in the complaint be and is there anything we should be looking for over the next few weeks in terms of that process?

We can't really comment on that, John.

Your next question is from William Mansfield with Berkley Asset Management.

Thank you gentlemen for doing the conference call. Just to follow up on a couple of the questions that I guess were asked before. On the loan situation you're in now and a potential refinancing or something like that, on the last conference call it sounded like you were -- I don't know whether the right word is hopeful or expectant or something that it would occur by end of September date on the existing loan. Is that still the timetable you're thinking or potentially has it slowed down a little bit?

I think our timetable is still to try to refinance ahead of the purported September 29th maturity date but obviously we can't guarantee that that's going to happen but that is our target.

Then in terms of what a new loan might look at, obviously you have a number of peers that have been redoing their financing arrangements over the last three to six months; are those peers useful, the loan terms and stuff that they've been able to obtain, are those useful comps for what a new loan might look like for you?

Potentially, yes. It all depends. There've been a lot of different data points, but those are as good of data points as any.

Okay. One thing I was curious about understanding a little better; the valuation you attribute to KDA on a quarterly basis, as I understand it, you sort of do this dual valuation methodology of assets under management but also some kind of discounted cash flow.

Correct.

What I was trying to understand; does that link into at all the future dividend potential from KDA if you will? Because as a shareholder in KCAP, I guess what I really care about is all the dividends that come out of KDA.

When you do the discounted cash flow, you're effectively looking at the income stream for KDA less expenses and those are pretty objective data points, because if you know what the AUM of KDA is and you know you have these long-term asset management contracts, you have pretty good confidence that you're going to get that stream--.

But it is a net number; it's not a gross number.

Yes, it is a net number and that would somewhat correlate to what the dividend capability is of KDA up to the parent.

I think I understand. Just to make clear, what I'm trying to get at is that you're valuing KDA at something in the $50-$55 million valuation today, over whatever period of time it is, whether it's two years, five years, 10 years; is that ultimately the amount of dividend capability that KDA should have?

Yes, on a [de-cap] basis. You have to remember that there are deferred performance fees built into all of these funds and those don't come in until you hit certain targets, so those come in down the road. So the $2 million is just for the ongoing annual fees and those performance fees can be rather substantial.

The answer to your question is yes; the valuation placed on it is based on the cash available to KCAP and therefore available to be a component of KCAP's dividend to its shareholders.

Your next question is from David Chiaverini of BMO Capital Markets.

My remaining question is regarding repayments and sales. The $50 million in the quarter; how much of that was sales versus repayments?

We had no sales of assets during the quarter.

Okay. So looking at the realized loss line of $5.4 million, so if there were repayments, I presume that they weren't repaid at par?

No, they were all prepaid at or above par. (Inaudible) like the restructuring of other securities and when you restructure a security you take a realized loss, but they had already been written down, so it doesn't impact our NAV.

Okay. So in the unrealized depreciation line there wasn't really an offset to realized loss if they had already previously been written down?

Well, what you would do is reverse out the unrealized loss and make it realized. In other words, if you had a loan that was $1 million and you had marked it at $500,000 and you now lost, you actually crystallized that $500,000 loss that would be a $500,000 realized loss but a $500,000 unrealized gain to offset your earlier loss. So the net impact on NAV is zero.

I guess I just don't see the $5 million reversal in the unrealized depreciation line. But we can take that offline.

It's also unrealized losses that's netted against that and fair value adjustments.

Okay. Then regarding KDA, did you mention in your prepared remarks that you expected the dividend up to KCAP to fully offset the professional fees in the second half?

As much as possible, yes.

Your next question is from a follow-up from Troy Ward of Stifel Nicolas.

Following up on what Dave was talking about there with the restructuring, it looks like Legacy Cabinets and International Architecture were two of the restructurings. If I recall, Legacy was on non-accrual last quarter and you said non-accruals didn't change on a number basis.

Correct. Actually I think non-accruals may have gone down. There are no new non-accruals in the quarter. The watch list hasn't changed. The non-accruals actually did go down.

That's what's better. And then with regard to the portfolio and the activity in the portfolio, repayments and/or sales, how actively are you seeking liquidity in the portfolio to further de-lever?

We haven't really been actively doing that, because part of the reason is, if we're looking to refinance, a lot of people are looking for as many assets as possible in a refinancing structure, so to sell assets may actually impact our ability to refinance, because the assets that are the most saleable are the ones that are most attractive for most financing structures.

We have no further questions in queue at this time.

We thank you all for joining us on the call.

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