BlackRock Capital Investment Corp (BKCC) 2008 Q4 法說會逐字稿

Good afternoon, my name is Michael and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Blackrock Kelso Capital Corporation Investor Teleconference. Our host for today's call will be Chairman and Chief Executive Officer, James R. Maher; Chief Operating Officer, Michael B. Lazar; and Chief Financial Officer, Frank D. Gordon. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

(Operating Instructions)

Thank you. Mr. Maher, you may begin your conference.

Thank you, Michael. Welcome to our Fourth Quarter Conference Call. I'm joined today by Mike Lazar, Chief Operating Officer, and Frank Gordon, our Chief Financial Officer. We will begin with having Frank review some general conference call information.

Thank you, Jim. Before we begin our remarks today, I would like to point out that during the course of this conference call we may make a number of forward-looking statements. We call to your attention the fact that Blackrock Kelso Capital's actual results may differ from these statements. As you know, Blackrock Kelso Capital has filed with the SEC reports which list some of the factors which may cause Blackrock Kelso Capital's results to differ materially from these statements. Finally, Blackrock Kelso Capital assumes no duty to and does not undertake to update any forward-looking statements. I would now like to turn the call back over to Jim.

Thanks, Frank. I'm pleased to have the opportunity to speak with you this afternoon. I'd like to modify our customary format to take a moment to discuss our year end financial position, our 2008 performance, and the action that our Board took with respect to our first quarter dividend declared yesterday.

First, the status of our portfolio, our balance sheet and our investment team remains very strong. We've taken steps throughout the year to safeguard our portfolio given the deterioration in the economy. With respect to our financial position, we ended 2008 in a position of strength. As a business development company, our balance sheet asset coverage must be greater than or equal to 200%. Our BDC statutory asset coverage ratio stood at 220% on December 31st.

We have substantial capital recourses available to fund additional investments. At December 31, 2008, we had more than $130 million of cash, cash equivalents and availability under our senior credit facility. During the year, our net investment income of $1.76 per share exceeded our taxable dividend payments of $1.72 per share.

Our balance sheet reflects our valuations which are derived through a rigorous process. At cost, more than 85% of our portfolio is rated level one or two, the highest levels of our ratings system. This represents more than 93% of our portfolio value in our financial statements. In other words, well over half of the net unrealized appreciation reflected in our financial statements corresponds with reduced valuations portfolio companies that are performing well.

Our financial statements will show that our investments currently not accruing income amount to less than 2% of our portfolio. In short, the earnings derived from our portfolio companies are substantial and sustainable. Notwithstanding our financial strength, we, together with our Board of Directors, have taken an approach to our quarterly dividend that is influenced by an abundance of caution.

This morning, we announced that our Board of Directors have declared a first quarter dividend of $0.16 a share. Blackrock Kelso Capital recognizes that the stability of its dividend is very important to its shareholders as it is to us. Reducing the dividend for the first quarter of 2009 is not a decision that we've taken lightly. This action was taken because we believe the current economic environment is both unprecedented and unpredictable. This reduction is not a reflection of any change in the fundamental earnings capacity of our portfolio.

We believe it is prudent to reduce our dividend until market conditions normalize. Retaining capital in this manner is a precautionary measure that will enable us to protect our balance sheet by reducing borrowings under our credit facility. This action will also allow us to make additional investments in existing portfolio companies and to preserve operating flexibility during this period. We were highly selective and cautious during the fourth quarter, preserving liquidity and availability to take advantage of dislocation in the credit markets and to weather the current economic storm.

Going forward in the near term, we expect many of our best investment opportunities to consist of secondary investments in existing portfolio companies. We believe that having sufficient investment capacity for these opportunities will give us the ability to derive very attractive returns in companies that we know well and monitor closely. Blackrock Kelso Capital intends to maintain its status as a RIC. As most of you are aware, to retain our RIC status we will be required to distribute at least 90% of taxable income that we earned during the year.

As large investors in our company, we, too, are disappointed in our recent trading price. We believe that our shares have under performed as a result of dislocation of the equity markets with respect to shares of financial companies, the debt covenants breached by some of our peers, and the need for liquidity among some of our large shareholders. While disappointed we remain focused on those things that are within our control -- our balance sheet, the performance of our portfolio companies, and the strategic positioning of our portfolio.

On August 7, 2008, our Board of Directors approved a share repurchase plan under which we may repurchase up to 2.5% of our outstanding shares from time to time. Through December 31, 2008, we have purchased approximately 378,000 shares for $3.2 million. These repurchases represented more than 25% of those authorized under the plan and were purchased at prices that were accretive to net asset value.

We evaluate share repurchases on much the same basis as we evaluate new investment opportunities. We believe that our shares provide an attractive current and total return opportunity. We anticipate that we will benefit from the current severe market dislocation as a result of our conservative positioning over the long term.

Perhaps most importantly, our balance sheet is solid and we have access to capital under our attractively priced bank credit facility. We believe that we have the financial flexibility to withstand the whims of the current market and the economic environment. Mike Lazar will now review our financial results portfolio and investment activity in more detail.

Thank you, Jim, and thanks, everyone, for joining our conference call today. For Blackrock Kelso Capital, the fourth quarter was characterized by an extremely slow environment for new transactions due to the general slowdown in the deal business, as well as the uncertainty of the credit markets generally.

We sourced our fair share of opportunities, but closed only one transaction with a new portfolio company. That investment was a secondary market purchase of a first lien bank loan at a significant discount to par in a defensively positioned company. We were successful in improving our portfolio through a handful of repricing and credit enhancement events in some of our portfolio companies. This includes one new investment in the securities of an existing portfolio company at a significant discount.

Our quarterly dividend of $0.43 per share in the fourth quarter was supported by $0.42 of net investment income in addition to estimated taxable income of more than $0.05 per share. Since inception, Blackrock Kelso Capital's distributions to shareholders have been derived almost exclusively from taxable net investment income. In 2008, Blackrock Kelso Capital generated $1.76 of net investment income. Taxable income from which our dividends are derived exceeded GAAP net investment income by approximately $0.23 in 2008. Blackrock Kelso Capital distributed $1.72 in dividends to shareholders during the year ended 12/31/08.

We believe that our portfolio is well positioned for the current economic environment. On December 31st, our net portfolio consisted of 63 companies and was 61% invested in senior secured loans and 6% invested in senior notes. At the end of the fourth quarter, only 3& of our portfolio was invested in equity securities and another 2% in cash.

The remainder of our investment portfolio or approximately 28% was comprised of unsecured or subordinated debt securities. We view the turbulence in the credit markets as an opportunity for Blackrock Kelso Capital to enhance the risk adjusted returns of our investment portfolio. Like many, we're very focused on the credit crisis and perhaps, more importantly, its effects on the economy.

We have worked hard to position our portfolio and each investment in it to withstand an economic downturn to the greatest extent possible. Much of this groundwork was laid as the portfolio was constructed. Toward that end, we enjoyed the benefit of more than $30 million of junior capital invested by equity sponsors in support of our portfolio companies during the fourth quarter. This brings the total of new junior capital infusions to our portfolio companies to more than $185 million during 2008. Those investments represent an increase in the capital and junior securities of those companies of more than 18% for 2008 and more than 24% during the fourth quarter.

In addition, our involvement in the due diligence, structuring and documentation of the significant majority of the investments in our portfolio has resulted in our having the opportunity to reprice a portion of our portfolio in the recent credit environment. During 2008, we repriced securities that account for more than 20% of our portfolio on a cost basis. We also received amendment and other fees on securities representing more than $270 million of par value.

The average rate increase on those securities has been in excess of 200 basis points and the amendment fees in excess of 100 basis points. In total, these increases will contribute 59 basis points of incremental return to our total portfolio. Although we invested only $13.9 million of capital during the quarter, we have invested in excess of $1.7 billion across more than 100 portfolio companies since our initial funding in 2005.

In that time, we've exited more than $525 million of investments at a compound rate of return of more than 14.5% and have paid dividends of $4.76 per share. We experienced $8.2 million of portfolio run off during the fourth quarter. Fixed rate assets, including those with LIBOR floor arrangements, comprised 60% of our debt investments and 58% of our total assets at market at the end of the quarter.

Our net exposure to changes in LIBOR continues to decrease and was reduced to approximately $56 million by year end 2008. The fair market values in our GAAP financial statements are determined under the requirements of the Statement of Financial Accounting Standards 157 or FAS 157. Blackrock Kelso Capital adopted FAS 157 on January 1, 2008.

Our process for determining fair value includes the use of market quotations and independent third-party valuations. During the fourth quarter, as in prior periods, the Company engaged independent, third-party valuation firms to perform valuations on all of its non-traded portfolio investments. These valuations are performed on a company by company, security by security basis for each investment every quarter.

During the fourth quarter, as credit markets froze, some of the companies for which market quotes had been available ceased to have reasonable market quotes provided. As a result, we engaged third parties to value those securities during the fourth quarter. Our portfolio valuations were not immune to the effects of the current economic and credit environment. Total portfolio unrealized depreciation, including foreign currency, was approximately $134.6 million during the quarter.

Many portfolio investments experienced significant unrealized depreciation as a result of the increase in market yields for high yield loans and bonds during the fourth quarter. As the public and liquid debt markets seized toward year end, the market became characterized by distressed and forced sales by third parties in an illiquid market.

We believe these distressed sales had a significant effect on comparable yields and trading values which are an input into the determination of fair value for the fair value of many of our portfolio investments. Market-wide movements and distressed sales are not necessarily indicative of any fundamental change in the condition and the prospect of our portfolio companies. Importantly, unrealized depreciation on investments does not have an impact on our current ability to pay distributions to stockholders.

At year end, our net asset value per share was $9.23 compared to $11.52 per share at the end of the third quarter. As we hold most investments to maturity, we anticipate that for investments in companies with adequate, fundamental performance, we will not ultimately realize losses in value. One effect of the reduced mark to market valuations of our portfolio companies is on the incentive fees paid to our investment advisor. As many of you are aware, our incentive fee structure has a high water mark. As a result of this feature, which we believe is unique in our industry, Blackrock Kelso Capital paid no incentive fees during the quarter or the year due to the change in unrealized depreciation.

Notwithstanding valuations, we are pleased that the performance of our portfolio companies continues to be strong with an overall weighted average rating of 1.45 using our one to four credit rating scale. This compares to 1.37 at September 30th, and 1.23 a year ago. As of -- approximately 6% of investments are rated three or four with the remainder of the portfolio rated one or two at fair market value.

As of December 31, 2008, we have investments on non-accrual status representing just under 2% of portfolio value. The fair market value of these assets is $15.8 million compared with $16.5 million as of September 30th. The cost basis for our debt investments on non-accrual was $76.1 million at December 31st.

At December 31, 2008, the Company was in compliance with regulatory coverage requirements with an asset coverage ratio of 220% and was in compliance with all financial covenants under its bank credit facility. At December 31st, we had borrowings of approximately $426 million or $411 million net of cash and cash equivalents. Taking our most restrictive debt covenants into account, we had cash and borrowing capacity of just under $100 million at year end.

As we discussed on our last call, because we are actively involved in the due diligence and structuring of the assets that we acquire, we have constructed a conservative portfolio. The terms of the loans in which we invest are conservatively constructed with adequate covenants, security and other protections. These structural protections have been an important tool to reduce risk in our investments as the economy remains slow over the past several months.

The industry composition of our portfolio is reflective of our focus on investments in companies that demonstrate high, sustainable free cash flow. The largest industry segments represented in our portfolio are consumer products, business and other services and healthcare companies. As Jim mentioned earlier, many of our best opportunities today are available in the secondary market. Distressed sellers are parting with solid investments and performing companies often at fire sale prices.

We continue to believe that the changes in the environment for syndicated loans and public high yield debt will produce opportunities for higher returns at reduced leverage for Blackrock Kelso Capital. We believe this environment will provide great opportunities for us as the economy begins to slowly stabilize. I'd now like to turn the call over to Frank Gordon to review some of the GAAP financial information for the fourth quarter.

Thanks, Mike, and hello, everyone. I'll now take a few minutes to review some of the details of our GAAP financial information for the fourth quarter and full year 2008. Investment income totaled $35.2 million and $35.4 million for the quarters ended December 31, 2008 and 2007 respectively and $143.2 million and $127.8 million for the years ended December 31, 2008 and 2007 respectively.

The increase in investment income for the year ended December 31, 2008 reflects the growth of our portfolio as a result of the deployment of debt capital under our credit facility and equity capital from our initial public offering in July 2007. Net expenses for the quarter and year ended December 31, 2008 were $12.1 million and $48.1 million respectively versus $13.2 million and $51.9 million for the quarter and year ended December 31, 2007.

Of these totals, for the quarter and year ended December 31, 2008, $4.8 million and $18.7 million were interest and other credit facility expenses. Interest and other credit facility expenses totaled $5.8 million and $20.3 million for the corresponding periods in 2007. There were no incentive fees during the quarter and year ended December 31, 2008 due primarily to the increase in unrealized appreciation on investments. Performance based incentive fees totaled $9.4 million for the year ended December 31, 2007.

Expenses net of performance based incentive fees, interest and other credit facility expenses for the quarter and year ended December 31, 2008 were $7.3 million and $29.4 million respectively compared to $7.4 million and $24.3 million for the quarter and year ended December 31, 2007. Overall, the increase in expenses was driven primarily by an increase in base management fees resulting from the growth of our portfolio and an increase in other general and administrative expenses as a result of our becoming a publicly traded company in 2007.

Net investment income totaled $23 million or $0.42 per share for the quarter ended December 31, 2008 and $95.1 million or $1.76 per share for the year ended December 31, 2007. Estimated taxable income exceeded our GAAP net investment income during the quarter and year ended December 31, 2008. We anticipate carrying forward approximately $13 million or $0.23 per share of 2008 taxable income into 2009. For the corresponding periods in 2007, net investment income totaled $22.1 million or $0.43 per share and $75.8 million or $1.66 per share.

Total net realized gains or losses for the quarter and year ended December 31, 2008 were gains of $7.4 million and $6.1 million respectively compared to losses of $1.3 million and $0.6 million for the quarter and year ended December 31, 2007. For the quarter and year ended December 31, 2008, the net change in unrealized appreciation on our investments and foreign currency translation was depreciation of $134.6 million and $251.7 million respectively versus depreciation of $36.8 million and $59 million for the quarter and year ended December 31, 2007.

Net unrealized [depreciation] was $309.3 million at December 31, 2008 and $57.6 million at December 31, 2007. For the quarter and year ended December 31, 2008, the net change and net assets from operations was a net decrease of $104.1 million or $1.88 per share, and a net decrease of $150.5 million or $2.78 per share respectively. For the corresponding periods in 2007, the net change and net assets from operations was a decrease of $15.9 million or $0.31 per share, and an increase of $16.2 million or $0.35 per share.

The weighted average yield of the debt and income producing equity securities in our portfolio at their current cost basis was 11% at December 31, 2008 compared to 12.4% at December 31, 2007. The weighted average yields on our senior secured loans and other debt securities at their current cost basis were 10.2% and 12.2% respectively at December 31, 2008 versus 11.9% and 13.3% at December 31, 2007. At the end of the year, we had $15 million in cash and cash equivalents, $426 million in borrowings outstanding, and $119 million available for use under our $545 million credit facility, which matures in December of 2010.

Under the terms of our Amended and Restated Dividend Reinvestment Plan adopted on March 4, 2009, dividends may be paid in newly issued or treasury shares of our common stock at a price equal to 95% of the market price on the dividend payment date irrespective of our net asset value on that date. This feature of the Plan means that under certain circumstances we may issue shares of our common stock at a price below net asset value per share which could cause our stockholders to experience dilution. Reinvestment at such prices resulted in dilution of our net asset value of approximately $0.11 per share for the year ended December 31, 2008. With that I would like to turn the call back over to Jim.

Thank you, Frank. Looking forward to the remainder of 2009, we continue to feel good about our business and about our prospects. Our portfolio is well diversified, conservatively constructed and performing well. The private equity sponsors with whom we have partnered have committed more than $180 million of new junior capital during the year to support our portfolio companies through this economic downturn. Finally, I'd like to thank you for your interest in Blackrock Kelso Capital and for joining our conference call today. Michael, please open the call to questions.

(Operating Instructions)

Your first question comes from the line of Greg Mason with Stifel Nicolaus.

Good afternoon, gentlemen. First can you talk about how the Board came up with the $0.16 dividend?

Well we looked at -- we looked at a number of different alternatives and I think it's fair to say that we recognized that a significant part of our shareholders are tax payers and we -- the dividend reflects the notion that at least in cash we'd be paying a cash dividend that reflects probably the tax component or an approximation of the tax component of the ultimate dividend responsibility for individual shareholders.

Okay. And then can you talk about, since your operating income was running well above the $0.16 dividend, how can you offset the taxable income to match that $0.16 and not have either a massive spillover dividend or a required special dividend at the end of the year?

Well I think -- I think there are two ways to do that. And I'll let Frank address the alternatives.

Certainly. One of the ways is to offset some of the income with sales of all our portfolio companies that are currently below our cost and so, in certain cases, if we are direct lenders and originated the loan, we may be able to offset those losses against ordinary income.

Secondly, it is quite possible and, as you know, you can during the course of 2009 declare a stock dividend or dividend in kind that would count as taxable income.

And, Greg, this is Mike. I would just add that as we look at the -- as we look at it and think about the RIC rule in combination with the current market environment and the caution that we're using in terms of our approach to our balance sheet at this time, the requirement and our thought process is that certainly by year end we would have to remain a RIC, distribute at least 90% of our income.

You know as we progress through the year, certainly it's something we will keep our eye on as it is our intention to remain a RIC. So the timing of that distribution is not set in stone anywhere, but certainly to remain a RIC during this year we would have to make dividend distributions equal to at least 90% of our taxable income and that is our intention.

And they could be in cash or they could be in kind and we've made no determination as to what we will do. We'll just try to protect our flexibility during the course of the year.

All right, thank you. And then can you talk about the non-accruals on a cost basis? Last quarter it was 3.6%. This quarter is 6.6%. Can you talk about where you expect non-accruals on a cost basis to go from here and what was the big driver of that increase?

Sure. The -- it's very difficult to tell you where we expect -- you know we don't forecast what our non-accruals will be in the future. We think about entering into each investment almost with a zero loss tolerance, so we monitor the portfolio companies very closely, we stay on top of them. We do our best to make sure that they continue paying on a current basis.

I would mention that of those things on non-accrual, certainly one of the largest on a cost basis, items on non-accrual is the subordinated debt that was originally part of our investment in Tygem or Al Solutions, which is a portfolio company we've talked about for some time having some issues.

In terms of the period over period change, you know we added three investments to non-accrual and they're all junior debt facilities and we're just monitoring these companies very closely and to the extent that we see developments in the businesses where we believe it's unlikely that they'll continue paying on a current basis, we're very quick to put them on non-accrual as to not generate a tax liability for dollars that we don't think we'll be getting.

And is your policy of loans going on non-accrual if they're 30 days past due, or can you actually look and make expectations that they're going to be past due but maybe they're current today? How do you look at that?

Well I think it varies from security to security. Because of the breadth of the types of investments that we make ranging from senior secured loans all the way to preferred stocks with pay in kind coupons, there's a different approach to each type of security. A preferred stock investment, for example, that has a stated coupon where it -- the purpose of that coupon is to earn ahead of the common shareholders and to gain a preference to the extent we view that there's issues with the potential equity value of that business, we'll stop accruing that dividend income for -- on a tax basis.

It doesn't mean that our preference doesn't continue to accrue. So that -- and those tend to be -- those dividends tend to be paid on a quarterly or annual basis, so the timing of when we might put something on non-accrual is certainly ahead of anything happening other than our making a determination that the equity value of that business may be impaired at the ultimate realization at this point in time. With respect to a senior secured loan, its likely that a company either missed or is likely to miss a coupon payment and that will be the event that gives rise to our putting it on a [non-accrual] status.

Okay. And then one more quick question and I'll hop back in the queue. Kind of on this line, the fundamental EBITDAs of your companies, are you seeing any stabilization yet, or EBITDAs continuing to decline and how are they trending relative to your expectations?

Well I think -- you know, it's very case by case to look at these businesses when -- one of the things that we like about our portfolio is the diversification of the types of businesses and the niche nature of many of these middle market companies. So we don't find that there's a huge amount of correlation among the portfolio companies.

Having said that, of course, in an economic downturn such as this, many of the companies or some of the companies began to miss their initial forecasts that had been established as part of the initial investment. It doesn't necessarily mean that they're down year to year. It doesn't necessarily mean that they're down relative to our underwriting expectations. But certainly they begin to miss the original equity plan under which some of the investments were made.

In that case -- in that type of a case, we make sure that there are covenants in place where we're able to catch these companies as they start to go sideways and before they go down in terms of reducing EBITDA and try to mitigate our total return by repricing the loan or doing something to restructure the balance sheet to improve our position. So again, very case by case basis.

And I think, as I mentioned in my remarks, 85% of our portfolio at cost is rated one or two and those are all securities where we expect to get a full recovery of not only our principal but our interest on those securities. Now there was a shift in the last quarter between ones becoming twos, but a pretty significant portion of our portfolio is still ranked one, which is on plan, which means that the Company is on plan.

Great. Thank you.

Your next question comes from the line of Chris Harris with Wachovia.

Great. Thank you. Real quick, guys. On the incentive fee, can you -- can you remind us, is that -- is that based on a trailing 12 month test or is it a quarterly test whether that gets paid?

It is on a trailing four quarters test, so it's 12 months but it's measured quarterly.

Okay. Thank you for that. So I'd assume then you're not going to be paying any for the -- probably for the first quarter of 2009 at least?

Unless the world changes rather dramatically in the next few days, I think it's safe to say that.

Okay. Then I'd like to talk a little bit, I guess, about leverage. In looking at your -- your balance sheet at the end of the year, your debt to equity was right around 0.8 to one. I guess we're all aware of the one to one limitation. What -- I guess, what steps are you planning on taking to get that down?

Obviously a lower dividend will help that in Q1, but, you know, if we continue to see asset values fall, my guess is it's a concern that you might come pretty close to running up against that limitation. So maybe just any -- any comments you had about how you -- how you plan on managing that on a go forward basis would be helpful.

Well I think a couple of things. One, we continue to review our portfolio in terms of assets that might make sense to sell and we do that -- we do that on a regular basis. And secondly, we have a number -- we expect a number of securities to be paid off during the period -- during the course of the next year so they'll be -- there will also be some -- some reduction in total of assets from that standpoint.

I would also say one final point is that during the course of the first two plus months of this year, our portfolio and the valuation of portfolios is very much impacted by the quote rates for securities like the ones that we hold in our portfolio. And there was a significant deterioration on what I would call a macro level in the fourth quarter of last year, which has not occurred to anywhere near that degree in the first quarter so far.

Yes, and, Chris, it's Mike. I would add the following couple of things. You know, as you'll recall, a significant portion of our portfolio consists of senior secured loans, either first or second lien. Many of those, and certainly it's not universal, but many of those contain cash flow sweeps and amortization requirements that typically would be structured into a facility of that type. So throughout the year, we expect repayments and prepayments on that basis.

In addition, as Jim mentioned, there a few things that are currently -- a few investments currently in the portfolio where we expect to be repaid as a result of sort of the normal course of business for those businesses over the medium term. And then the last thing I would add, you know, again, as Jim was saying, there's been a lot less volatility in the macro market for loan and high yield bond securities during the first quarter.

And in addition to that, much of the effort that we put forth during 2008 to reprice and improve the credit quality of many of the investments that we've made by getting additional capital put into the businesses on a junior basis, reducing debt, increasing rates -- all of those things add to the value of the security interests that we continue to hold in those portfolio companies.

Okay, that helps a lot. Thanks, guys.

So our next question comes from the line of [Derrick Fob], a private investor.

Hi, gentlemen. A couple of questions for you. First of all, I noticed that you have a fair number of portfolio companies which [pick toggles]. I'm wondering of the $34 million of interest that you booked for the fourth quarter, how much of that was pick?

Sure, Derrick, this is Mike. We don't really have very many investments that have pick toggle features. In fact, I think off the top of my head and, Frank, correct me if I'm wrong, I think there are two. And those pick toggles are really primarily pick.

We, as in our junior debt securities that we invest in, we frequently include a portion of interest that's paid in kind. So while there's a significant number of investments that we've made that have some element of pick returns, the majority of the returns in most of those securities is on a cash basis. And you know our K isn't out today, but will be out shortly and as in all prior periods you'll see that when we put the K out on the schedule of investments, each interest rate and its cash and pick component will be itemized in the financials that we publish so that anybody can go through any particular investment and take a look at it.

And actually the largest pick toggle as it occurs to me that we own has went from picking to paying cash fairly recently. It's a company that I can't imagine will go back to paying anything other than cash.

I apologize if I misinterpreted that as a pick -- these as pick toggles but it was based on a voice mail I received back from Frank saying that a number of these securities in the schedule that have the amount of the coupon followed by pick were optional picks.

Oh, sure, what I meant by that, Derrick, was that at any time any issuer can voluntarily make a cash payment of interest. I don't think that necessarily means it's pick toggle, but you know from time to time we do receive those cash payments instead of pick.

Okay. And one other question for you going back to your covenants. I'm just wondering if you have a minimum net worth covenant and if you could disclose what the level of that is.

This is Mike again. You mean on our debt facilities or in the covenants that we structure into our loans that we make to third parties? I assume you mean in our debt covenants.

In your debt covenants.

The answer to that -- is that, Frank?

I think the covenant -- the calculation of the covenant is disclosed in our public filings. I don't think the calculation is. There's plenty of -- I can say that there's plenty of room under that at December 31st and really that's not the most restrictive covenants under the facility; that would be really the one to one test -- the one to one debt to equity test. So we would probably bump up, if we were to, we would probably bump up against the one to one test before we bump up against the net worth test.

Okay. And then just one more question, a follow up on the pick question. Do you -- will you be disclosing the amount of pick in your 10K when it's released?

Yes, again, as I mentioned a moment ago, every single instrument is listed with the portion of interest that's not -- that's paid in pick. Again, some of those are junior debt securities, but quite a few of them, as I mentioned earlier, when we were talking about AL Solutions, can be preferences on equity investments that we have. So dividends rather than interest payable in more notes, but -- but we do itemize everything.

Okay. Just for future reference, it'd be helpful to see an integrate schedule pick -- some of your peers do that. But that's all the questions I had for today. Thank you very much.

Sure.

Your next question comes from the line of Frank Elliott with Jaguar Funding.

I have a question going back to the dividend strategy in terms of trying to balance the taxable income with taking some offsets by selling some holdings of losses. And it would seem to me that that'll sort of lock in your -- your losses at fire sale prices where you won't be able to recover what you would recover through holding to maturity. So is the plan to replace those with other like assets or how do you -- how do you get comfortable with that?

Well there's a few components of assets that we hold with values currently below cost. There are just a very few that we hold that we don't think they are going to recover anywhere near cost, so we wouldn't really be getting rid of those at fire sale prices. We really don't think there's going to be substantial recovery any more than the current value we have on our books. So those are the -- really the investments I was referring to (inaudible).

Okay. Well presumably some of the assets that have been mark to market you think are being unfairly penalized in terms of just being marked down for liquidity concerns.

Yes. Oh, no, question. We think there's a very substantial portion of the unrealized depreciation that is -- that we'll never -- we'll hold the securities to maturity and it will never realize it.

Okay, fair enough. And then one last question. I just -- just in terms of stock performance, I'm really mystified why in the last 35 days the stock price has gone down something like 75%. I mean the market hasn't done anything like that overall. Is there something that I missed or something [that's going on]?

Well that's a good question. It's one that -- one that if you could give us the answer we'd be -- we'd be delighted. I guess I'll give you a couple of speculations one -- one of which is that we were trading on a relative basis, I think, to the other PDCs at a substantially higher percentage of net asset value. Two, when Apollo announced that it was cutting its dividend, that seemed to coincide with the time that people -- our share price took -- started to slide precipitously.

And three, as we have said in the past, the lock up from our original shareholders was ended in the end of December and those shareholders received their shares in February and it's quite possible that we don't know the answer to this -- that some of them may have been selling shares. The volume has been higher of late than it -- than it has been historically. Those are my speculations.

Okay, fair -- fair enough. I appreciate the comments.

Sure.

Your next question comes from [Dan Mazara] with Harvest Capital.

Thanks for taking my question. I just wanted to see on the portfolio valuation how many of the -- of the investments did you get quotes but you thought they were unreasonable or distressed and used another method?

There's probably about 20 or so that we evaluated and thought that they were not really fair value based on the quotes.

Okay. And then you know the quotes typically and if you look at like the indexes -- the LCDX or something like that -- is that -- I mean, does that account for maybe some -- some of the dislocation or difference between some of the, let's say, your non-affiliated investment valuations relative to cost of say the index and stuff like that?

Dan, this is Mike again. The -- I would suggest that the -- the types of securities that are behind the LCD index which is sort of 15 of the largest and most liquid bank loans, first lien bank loans, are traded and quoted differently than the types of securities that are typically found in our portfolio which are either structured by us or structured by us in conjunction with others in sort of a club deal situation.

Frequently, in those loans which tend to be junior loans, there will be a senior loan -- a small senior loan that's in the capital structure. Those loans would be typically underwritten by a bank or an investment bank and distributed although they're way smaller than anything that would be a component of LCDX. Those loans tend to get quoted and frequently we would find that in the quoting of those senior loans people would sometimes also quote the loan that we held even though the loan that we hold doesn't trade.

And what we found during the fourth quarter during much of the dislocation in the marketplace is that broker dealers and banks were very reluctant to put quotes out in anything sort of close to a normalized bid [asked] spread or relative value to the LCDX for fear of getting hit on those quotes, for being asked to buy the stuff because of the dislocation in the marketplace. So we found that those quotes got very, very wide when they still existed where were people just ceased offering the quotes.

Interesting.

And that's somewhat typical of the type of loan that we invest in. You know, Frank can talk about it in more detail certainly, but the influence of FASB or FAS 157, and particularly 157-3, requires that quotes that don't represent fair value be relied upon either less or not at all as part of the process.

Okay, that makes sense. And then can you just help me understand, Frank, on the dividend payable -- if you can explain that to me again on what happened and why that was still on the balance sheet.

Sure. It's basically administration reasons. At 12/31/08, under our DRIP there was a condition that if the end of year stock price was below NAV that we would not issue shares under the DRIP. And if it was above NAV, then we would issue shares under the DRIP. So with the volatility of our stock at that time and the whole market valuations at that time, you know, we couldn't tell until the close of business on that day whether the condition was going to be met or not. And so for those who did not participate in the DRIP, the dividend went out the door on December 31st. But for DRIP participants we had to wait until the end of the day and it basically got paid the next day.

So did you end up paying that in cash or stock?

Cash.

And can you use your debt facility to -- to pay the dividend? That -- that's okay?

Yes.

Okay. So on [GN One] you just use the -- you use your cash and the debt facility to payoff the dividend?

We had cash in excess of the dividend payment, I believe.

Okay. And so does that mean -- so what's going to happen with the first quarter dividend? I mean, if it looks like you know most of the dividend is in this, in the DRIP program, does that mean most of it will be issued in stock unless the NAV has the -- or the stock of the big recoveries from here?

Well actually the -- the -- we've got some clearance from the SEC since December 31st. The reason why we had the condition in our DRIP was because the SEC said they -- they required us to have. Since that time, they said that -- that we no longer have to have that condition under any dividend reinvestment plan. You can issue shares for reinvestment at whatever the price is on that day. You need not test the price against net asset value.

Okay, great. Thanks.

(Operating Instructions)

Your next question comes from Greg Mason with Stifel Nicolaus.

If I can just follow up on that last question. As you look at the stock price today at $2.68 and you've got potential DRIP issuance. You've talked about potentially paying the dividend in stock. How do you look at that regarding the stock price today? I can't imagine you would not use cash to pay the DRIP or the dividend at this point, given the stock price.

Well we have a share repurchase program which I mentioned and I would expect that if -- based on historical performance that the number of shares that might be DRIPs or issued in conjunction with the DRIP program in conjunction with this dividend would probably be repurchased during the quarter.

And can you talk about that share buy back? It look like you've got a little more than 1 million shares left outstanding. What you bought in the quarter -- it looks like you bought about an average stock price of around $8.50. What is your willingness and ability to buy the remainder here at -- in under $3 as well as your ability to increase that amount more than the 1 million plus shares you have left?

Well to answer your question in reverse order, to increase that we would have to have a Board meeting. I think as a practical constraint we are not allowed to buy -- we're allowed to buy, I think, 25% of the -- of the past average volume and that is, given the liquidity in our stock and the amount of stock that trades, is a relatively low amount of stock. So I wouldn't expect that we would -- I would not -- I do not expect that during the quarter that we would -- that we would exhaust that repurchase program.

That makes sense.

That's just based on the simple math.

Yes. Going to your depreciation in the portfolio, could you bifurcate what you think is -- or what you view that was credit deterioration versus simply mark to market deterioration of the $134 million write down?

This is -- Greg, it's Mike again. I think, you know, one indicator that Jim mentioned in his remarks was that 85% of the portfolio at cost -- a little bit greater than that actually -- is in securities rated one and two. And that equates to over 93% of the portfolio on a fair market value basis. So if you think about it in terms of securities where the security is performing -- where the Company's performing under our rating system and the depreciation afforded to that portion of the portfolio, you'll see it's a pretty -- and you apply those percentages, I guess as soon as the K comes out, Frank, that you'll see it's a pretty significant portion of the depreciation relates to securities that are rated one and two in our rating system or that is to say performing credits.

Or as I said, well over half of the net unrealized depreciation is reflected in companies that are -- that are performing well, i.e., one and two.

All right, thank you. And then one last --

So that gives -- so that gives no -- and then if you take that math a little further, that obviously gives no credit to recoveries under three and four, which would be of some significance.

Great. And then one other modeling question. As I looked your debt on the balance sheet outstanding declined from $491 million to $426 million, but interest expense actually increased from $4.3 million to around $4.85 million. Can you talk to us about the -- the timing or why did interest expense increase when debt from quarter end to quarter end declined?

Sure. This relates to our borrowing under the revolver. When times were very choppy shortly after quarter end, third quarter end, we borrowed some $60 million to $65 million to hold in reserve in cash equivalents and of course we had maybe a slight negative carry on that -- those amounts during the quarter. We repaid the borrowings just before year end. So that's the main reason why you see the interest expense increase slightly.

All right, great. Thank you very much.

And there are no further questions at this time.

Well thank you, all. We appreciate your -- your attention and look forward to talking to you in the future. Thank you.

This concludes today's conference call. You may now disconnect.