BlackRock Capital Investment Corp (BKCC) 2010 Q4 法說會逐字稿

Good afternoon. My name is Sarah, and I'll 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.

(Operator Instructions)

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

Thank you, Sarah, and welcome to our fourth quarter conference call. We will begin by 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 Corporation's actual results may differ from these statements.

As you know, BlackRock Kelso Capital Corporation has filed with the SEC reports which list some of the factors which may cause BlackRock Kelso Capital Corporation's results to differ materially from these statements. Finally, BlackRock Kelso Capital Corporation assumes no duty to and does undertake to update statements. I would now like to turn the call back over to Jim.

Thanks, Frank. We are pleased with our performance during what was a very busy and productive 2010. During the year, we completed more than $400 million in investments in new and existing portfolio companies. We extended our bank credit facility, completed two follow-on equity offerings at prices above our net asset value per share, and, subsequent to year end, raised longer term fixed rate debt in a private placement.

The overall business environment improved in the fourth quarter of 2010 and continues to improve into 2011, positively impacting our portfolio companies in deal flow. We invested more than $80 million during the fourth quarter. Investment income was $25 million in the fourth quarter and $105.9 million for the year ended December 31, 2010.

This level of investment income is lower than of the 2009 periods, due to the reduction in the average size of our portfolio in 2010. The lower level of investment income was partially offset by lower interest expense, lower base management fees, and lower incentive management fees during 2010.

Net investment income totaled $0.03 per share for the fourth quarter. Had our incentive fees been accrued ratably throughout the year, rather than all in the fourth quarter, as required under GAAP, our net investment income would have been $0.19 per share in the fourth quarter.

Our balance sheet remains under leverage. Total debt stood at $170 million on December 31. Our statutory BDC asset coverage test stood at less than 0.25 to 1 at year end. Our balance sheet places us in a strong position, with significant capital resources available for new investments.

Net asset value in the fourth quarter increased and now stands at $698.5 million, compared to $639.1 million at the end of the third quarter and $539.6 million at year end 2009. This equates to $9.62 per share at year end, up from $9.55 per share at year end 2009.

The fair market value of our portfolio, on a net basis, was relatively stable from the third quarter to the fourth quarter. On March 1, our Board of Directors declared a regular fourth quarter dividend of $0.32 per share, payable on April 1, 2011.

This dividend is consistent with the Company's fourth quarter dividend and is supported by our taxable and our carry forward income. Dividends declared for the year ended December 31, 2010, totaled $80.5 million, or $1.28 per share, compared with dividends declared of $44.8 million, or $0.80 per share, in 2009.

Looking into 2011, we expect that the deleveraging effect of the equity offerings we completed in 2010, the corresponding increase in our share count, and the higher all in cost of our net borrowing will likely combine to lower our level of net income per share in the near to medium term.

Furthermore, our interest costs will likely be higher in 2011 than in 2010, due to the costs associated with the extension of our credit agreement and our issuance of $175 million of senior notes during the first quarter. Over time, as we put this capital to work in new transactions, we expect that our net investment income per share will increase.

Longer term, we expect that we will be able to increase our net investment income, with the use of leverage, to make new investments. Naturally, the timing and magnitude of our investment will have an impact on our net investment income. Fortunately, as we enter 2011, our spillover income of approximately $0.12 per share provides near-term support for our dividend. We expect our net investment income to trail our dividend for the next few quarters, but we are optimistic that we can deploy enough capital to close that gap during the balance of the year.

Market conditions during the fourth quarter were quite strong in the high yield and middle markets as loan volume reached the highest quarterly levels seen since the period leading up to the credit crisis. This increased transaction volume was driven in part by leverage buyout and dividend recap activity, as private equity sponsors sought to realize dividends for capital gains ahead of a potential change in tax laws. This likely pulled some volume from the first quarter of 2011 into the fourth quarter of 2010.

And while the liquid credit markets are experiencing year over year volumes, driven by strong refinancing and repricing activity thus far into 2011, new transaction volume, requiring fresh capital with change of control and other new money leverage transactions, has been somewhat slower. This can be attributed to normal seasonality, as sellers of middle market businesses tend to wait for year-end audited financial results to be finalized prior to putting properties on the market. We expect this activity to increase as the year progresses.

Mike will now discuss our portfolio activity and market conditions in more detail.

Thank you, Jim. I'm pleased to have the opportunity to speak with everyone this afternoon. As we highlighted in our press release, new investment activity continued for BlackRock Kelso Capital in the fourth quarter. This activity was largely concentrated in investments in new portfolio companies. We also had an active quarter for repayments.

During the year ended December 31, 2010, we invested $406 million across eight new and several existing portfolio companies. This compares to investing $46.8 million across several existing portfolio companies for the year ended December 31, 2009. Sales, repayments, and other exits of investment principal totaled $395.3 million during the year ended December 31 versus $128 million during the prior year period.

Of the total new investments for 2010, we invested $84.2 million across three new and several existing portfolio companies during the fourth quarter. Investments in new portfolio companies during the fourth quarter of 2010 included $40 million in the senior secured first lien loan of Henniges Automotive, $20 million in the senior secured second lien loan of Ascend Learning, and $10 million in Advantage Sales & Marketing senior secured second lien term loan.

Each of these new investments is floating rate and contains a LIBOR floor arrangement, as well as call protection. In addition, each new investment was subject to either a closing fee, payable to BlackRock Kelso Capital, or was issued with an original issued discount to par.

Investments in existing portfolio companies included investments in A & A Manufacturing and Berlin Packaging and were characterized by current pay, fixed rate, call protected coupons in excess of 13%. At the end of 2010, more than 80% of the investments in our portfolio were in transactions, where we played a sole or shared lead role in structuring the securities.

Repayments of investments equaled $41 million during the fourth quarter. This includes our $25 million investment in LJVH first lien loan, which was priced at LIBOR plus 5.5%, with no LIBOR floor, and our nearly $7 million investment in Premier Yachts first lien term loan, priced at an average rate of approximately LIBOR plus 4.1%, with no LIBOR floor. We also exited our position in our Kaz warrants for $5.3 million, or $0.08 per share.

The number of transactions for portfolio companies seeking covenant and other amendments has slowed materially over the course of the year. As a result, the first quarter was not one in which we earned significant fee income relating to existing portfolio companies. This compares to amendment and related fees of approximately $1.6 million in the first half of 2010.

Now, income we receive from origination, structuring, closing, commitment, and other upfront fees associated with investments in portfolio companies, generally treated as taxable income when it is received, and, accordingly, generally distributed to stockholders. For financial reporting purposes, these fees are recorded as unearned income and amortized into income over the life of the respective investment. We received fees in the amount of approximately $2.7 million, or $0.04 per share, during the fourth quarter and $9.9 million, or $0.16 per share, for the year.

Our bank loans now extend through early December, 2013, and total $375 million of term loan and revolving credit availability. During the year, we added two new lenders to the revolver. In addition, subsequent to year end, completed an offering of five and seven year notes in a private placement that yielded net proceeds of $173.1 million. We currently have plenty of capacity for new investment.

During the second and fourth quarters, we completed equity offerings of 8.6 million shares and 6.9 million, at prices of $10.25 and $11.95 per share, generating $171 million in gross proceeds. We are pleased to have completed both transactions at prices above our net asset value per share.

Portfolio continues to be well positioned. Quarter end, our portfolio consisted of investments in 50 companies. We've invested 60% in senior secured loans and senior notes, 26% in unsecured, or subordinated debt securities, approximately 14% in equity investments, and 1% in cash and cash equivalents. Approximately three-quarters of our debt investments for interest at a fixed rate or were subject to LIBOR floor arrangements at quarter end. At year end, our weighted average yield on income producing securities, 10.9% on a cost basis and 12.4% at market value.

During 2010, our net unrealized depreciation decreased by $101.9 million, which resulted in net appreciation, after realized losses, of more than $10 million. This reflects a slight improvement [to] underlying portfolio company valuations.

At December 31, 2010, our portfolio was valued at 89.3% of cost, an increase from 80.3% of cost at year end 2009 and from a quarter ago value of 86.2% of cost. Since 2006, we've exited 66 investments, with a total cost of more than $925 million. Of those exits, we have received proceeds that exceeded the fair market value in our most recent financial statements 61 times.

We are pleased with the performance of our portfolio companies. The cost of our -- of debt securities on non-accrual is lower at year end. Currently, 1.4% of our debt portfolio at fair market value, corresponding to 1.8% of our portfolio at cost, is held on non-accrual. This decrease is the net result of three securities removed from non-accrual, one security added, and a net slightly larger total portfolio. Finally, the weighted average rating of our portfolio companies, December 31, was 1.32, compared to 1.30 at September 30.

Now, 2010 volume for middle market LBO loan activity, tracked by Standard & Poor's, increased to approximately $3.5 billion, from less than $800 million in 2009. This was driven by a particularly busy second half, relating to the anticipated tax law changes. The rush to close transactions in the 2010 tax year may have pulled forward some transactions into 2010 and is contributing to a slower first quarter 2011 for new middle market leveraged buyouts. Overall, leveraged buyout transaction volume totaled $79 billion in 2010, accounted for $35 billion of new loans, with the volume skewed toward larger liquid market deals.

The prospect of higher overall interest rates in the future has been driving investor interest into leveraged loan asset class, with new leveraged loan vehicles being formed, frequently, in the first quarter. Retail and institutional inflows into high yielded bank loan mutual funds have been strong. Loan repayment activity has increased as the economy and markets have improved.

This increase in liquidity, together with weak supply of new issues, has impacted pricing in the broadly syndicated loan markets so far in 2011. While the structural and pricing changes are more evident in this broadly syndicated liquid credit market, they're starting to have an impact on the middle market as well.

Any number of factors, most importantly, new change of control transactions coming to the market, could reverse these current market trends. We remain conservative and diligent in the current market environment and continue to source new opportunities and structure transactions that can take advantage of any market opportunities that may arise.

At BlackRock Kelso Capital, we continue to have an active opportunity pipeline and hope to close several transactions in the next few months. While the market has been aggressive recently, middle market transactions continue to be more conservatively capitalized at lower levels of leverage and higher levels of debt coverage than those available in liquid credit markets. With that, I would now like to turn the call over to Frank Gordon [to review] some of the GAAP financial information for the first quarter -- for the fourth quarter.

Thanks, Mike, and hello, everyone. I'll now take a few moments to review some of the details of our year end 2010 financial information.

Net investment income totaled $2.4 million and $59.9 million, or $0.03 per share and $0.96 per share, respectively, for the three months and year ended December 31, 2010. For the three months and year ended December 31, 2009, net investment income totaled $5 million and $76.1 million, or $0.09 per share and $1.36 per share, respectively. The decrease is primarily result of a decline in interest income, partially offset by a reduction in expenses.

Total expenses for the three months and year ended December 31, 2010, were $22.4 million and $45.7 million, respectively, versus $24.3 million and $47.8 million for the three months and year ended December 31, 2009. Of these full year totals, $15.1 million was incentive management fees in 2010 versus $16.8 million for 2009. Base management fees were $16.9 million for the year ended December 31, 2010, compared to $18.5 million for the prior year. Interest and other credit facility expenses for 2010 were $6.2 million versus $6.4 million for the year ended December 31, 2009.

Total net realized loss for the quarter and year ended December 31, 2010, was $27.5 million and $90.2 million, respectively, compared to $45.4 million and $110.2 million for the three months and year ended December 31, 2009. Net realized loss on investments for the year ended December 31, 2010, resulted primarily from the restructuring of our investments in Electrical Components International, Inc., the Marsico Capital entities, and Penton Media, Inc. Nearly the entire net realized loss on investments represents amounts that have been reflected in unrealized depreciation on investments in prior periods.

For the three months and year ended December 31, 2010, the decrease in net unrealized depreciation on investments in foreign currency translation was $27.6 million and $101.9 million, respectively, versus $56.7 million and $101.4 million for the three months and year ended December 31, 2009. Net unrealized depreciation stood at $105.9 million at December 31, 2010, versus $207.9 million at the end of 2009.

The valuations of our investments were favorably impacted by market wide decreases in interest yields, as well as increased multiples used to estimate the fair value of some of our investments. Market wide movements and trading multiples are not necessarily indicative of any fundamental change in the condition of prospects of our portfolio companies.

For the three months and year ended December 31, 2010, the net increase in net assets from operations was $2.4 million and $71.5 million, or $0.03 per share and $1.14 per share, respectively, compared to $16.3 million and $67.2 million, or $0.29 per share and $1.20 per share, for the three months and year ended December 31, 2009. As compared to the prior year, the increase primarily reflects the decrease in net unrealized depreciation on investments, net of realized gains and losses, for the year ended December 31, 2010.

The weighted average yields of the debt and income producing equity securities in our portfolio, our senior secured loans, and other debt securities at fair value were, respectively, 12.4%, 11.3%, and 14.3%, at their current cost -- and -- excuse me -- and at their current cost basis, were 10.9%, 10.1%, and 12.1% at December 31, 2010. With that, I'd like to turn the call back to Jim.

Thanks again, Frank. As we look forward, from our 2010 results and into the balance of 2011, we find that our portfolio is performing well, and new investment activity has picked up. And while the leveraged finance market is currently dominated by refinancings, rather than change of control transactions, the middle market continues to be -- to offer better turns and higher returns.

We continue to believe that BlackRock Kelso Capital is well positioned to prudently accelerate the growth of our portfolio. We have increased our equity capital, expanded our base of shareholders, and increased the float in our stock. In 2010, we originated more than $400 million in new investments, and we expect the environment to continue to support our focus on originating and structuring new transactions.

In short, we are in a strong position to continue to prudently increase our portfolio for the remainder of 2011 and beyond. On behalf of Mike, Frank, and myself, I'd like to take this opportunity to thank our investment team for all of their efforts and to thank you for your continued interest in BlackRock Kelso Capital. Sarah, please open the call to questions.

(Operator Instructions). Your first question comes from the line of Arren Cyganovich with Evercore.

If you could just help me put together how you're thinking about 2011. You have a little bit of a conflicting story with better prospects for portfolio growth, but a near-term net interest income pressure. So, I don't know if you could just help us understand how much pressure you're expecting from net interest income. It was a lot worse than we were expecting for the fourth quarter and whether you'd expect that to improve, either in the near-term or throughout the year.

Okay. Arren, hey, it's Mike. I think -- a couple of different thoughts on that. First of all, I think, on a per share basis, as we said in the prepared remarks, and as you can see in the financial statements, the additional shares that we offered earlier in 2010 and in the fourth quarter of 2010 have increased our share count, and, at the same time, we've raised some additional access to debt capital.

So, when we talk about our prospects, and we look forward into 2011, beyond, what we think we've done is we've put ourselves in a terrific position to have plenty of solid capital of long duration to put to work in the kind of investments that we seek, which are, again, typically, middle market change of control transactions, frequently with a private equity sponsor. What we don't -- what we aren't able to do at any moment in time is predict what percentage of the transactions that we're currently working on will close and when they might close.

So, what we look to is we look to whether or not we continue to have a strong, robust, and diverse pipeline of new investment opportunities, and we monitor the market to make sure that we're getting an appropriate risk adjusted rate of return for those investments that we make. Now, none of that translates directly into a number, quarter versus quarter versus quarter.

We just know that we are well positioned with the capital that we have, over time, to grow the portfolio prudently in good, solid transactions of high credit quality with excess return. And so, we just like to put ourselves in a position to continue to do that.

Okay. And then, on the valuation of the portfolio, at a little under 90% of cost -- the debt portfolios, what we've seen competitor B, C has been rising recently, closer to 95%, or even some, actually, at par. Why is it that yours is lagging, and did you expect that to go towards par? At least, the -- even the broadly syndicated market seems to be at least around 95% of par at the current time.

Sure, I think -- impossible for us to comment on other folks and how they go through their process. All we can really talk about is the process that we have in place, which is the same one that we've had since we started. We value every asset every quarter, and as you all know, I think, we don't perform that task. It's all done by independent third parties, and it's ultimately the responsibility of the Board of Directors to take those valuations, under the recommendation of the Audit Committee, and make sure that they make sense.

And we've always had a bit of a conservative [bend]. You can see that from the statistic that I quoted in the prepared remarks about exiting the significant majority of the transactions that we exited over the past five years at values that were higher than, rather than equal to or lower than, the prior period's mark. And we just think being consistent and being conservative and using this approach is the prudent way to go over the long term.

What I can comment on is the improvement of our own portfolio relative to cost, which, again, in the prepared remarks I mentioned, has gone up from about 80% to just under 90% over the past four quarters, and so, that does, I think, show some of the improvement in the markets generally and the effect of the improving economy on the underlying portfolio companies.

Thank you.

Your next question comes from the line of Troy Ward with Stifel Nicolaus.

Yes, good afternoon, gentlemen.

Hey, Troy.

Just a real quick question on the portfolio movement you saw in 2010 and maybe what we can expect in 2011. Clearly, with $400 million of originations, very strong 2010, but you had the prepayments of [$390 million]. Just broadly speaking, how much of that prepayment activity in 2010 was initiated by you versus prepayments that occurred kind of without your persuasion?

Sure. I think, as a general matter, in 2010 and in, really, 2009, into the beginning of 2010, there were some portfolio companies where we were trying to -- working with the portfolio company, to find a way to exit our investment, either because it had too low an all in return. In other words, it might have been LIBOR based, where LIBOR had gone down from over 5% to under 1% during the time that we held the particular investment, and so, that it was no longer appropriate for us.

But over the course of 2010, as the economy strengthened, most of the repayments were really due to the fact that loans were coming due. They were maturing, or there were some opportunities for our portfolio companies. With better financial performance over time, they might have outgrown the capital structure that we had originally put in place or able to access either more financing or more efficient lower cost financing or, most likely, engage in a change of control transaction, where the business was actually sold, because, again, most of these portfolio companies do have the involvement of a private equity sponsor, who typically want to exit their investment between three to six year period of time.

The only thing I would add to that, Troy, is that if you look at, sequentially, from the first quarter to the fourth quarter, over the course of the year, net new investment was essentially flat. But if you look at it, sequentially, on a quarter to quarter basis, both the first and second quarter investment -- net investment went down on our balance sheet, and in the third and fourth quarter, it went up. So, it's -- the trend is, I think, noteworthy.

As we look to 2011, and you talked about NII is going to trail the dividend for a few quarters, but you expect that gap to close by year end, what, kind of, are the prepayment assumptions -- I guess, the portfolio growth assumptions, kind of, based in that expectation?

It -- the expectation is that we will be able to continue to increase our net assets during the course of the year. As Mike said earlier, it's very hard to predict exactly when investments will actually take place. As I said, in my prepared remarks, we're optimistic that we'll be able to close that gap during the course of the year, but there's -- there are certainly no guarantees that we'll be able to do that.

As you well know, repayments are largely out of our hands. New investments are totally under our control, at least, in terms of saying yes to them, but, on the other hand, we don't control the other side of the equation, which is the borrower saying yes to us. So, it's a lumpy process, but we're optimistic, given the level of activity, that we're going to be able to significantly increase our assets during the course of the year -- our net assets during the course of the year.

Great. And then, would that also include, for the NII purpose, anyway, churning out of a few investments. For instance, Electrical Components, you obviously have a very nice equity gain in that. Would it be your thought to move out of something like that and into a yielding investment throughout the course of 2011?

Well, it's sort of a -- it's sort of a bit of a dilemma, because if the company is performing well, it is -- we expect it to -- its value to increase throughout 2011, at a -- on a discounted basis, at a pretty significant level. Now, we could be wrong about that, but our expectation is that the business will continue to improve and that the underlying value of our security will appreciate during the course of the year.

We are very cognizant, though, on the other hand, of the fact that we have, from a net investment income standpoint, a very significant asset on our books that's not producing income -- net investment income. So, we continue to monitor that situation, work with management, and look at what, ultimately, will be the best return to our shareholders.

Okay, great. And then, just a couple quick modeling things. Frank, I don't -- I'm sorry if you already said this, but what was the weighted average yield of the fourth quarter originations, and, maybe, how does that compare with what you're seeing here in 2011?

I think, in our prepared remarks, we said that the fixed rates were -- had coupons of over 13%, and the floating rates had floors on them, also making them well over 10%. The floors -- they have -- they're -- they've all been issued with a fee -- an upfront fee or an original issue discount, and I think I also mentioned that there are prepayment fees on those non call types of arrangements on many of those loans. So, time will tell what the ultimate outcome is, but on a run rate basis, the -- we tend to underwrite to a double digit yield to worst, at least.

All right. Great. Thanks, guys.

Your next question comes from the line of Jasper Birch with Macquarie.

Hey, good afternoon, gentlemen. I guess, just starting off with -- it looked like the portfolio cost -- your equity portfolio cost increased in the quarter. I was just wondering if you could give us a little color on what you're investing in and what your thought process in -- is -- sorry -- is between the tradeoff of equity securities versus current income. Just curious.

I think the value of our equities increased.

Oh, it was the value -- okay, I must have just looked (inaudible).

It's largely ECI.

Okay, I must have just looked at the K wrong. That's fine. And then, going back to the outlook on the dividend and the comments that you're optimistic that you could close the gap between income and the dividend by year end. I guess, just looking at that, is that outlook -- is that based solely on NII, or is that based on taxable income and the possibility of some gains.

And then, secondly, to get there, is that just looking at deploying the excess capital that you have available now, or are you expecting to getting more capital available [to you], in terms of additional debt capital, maybe?

Jasper, it's Mike. I would -- a couple of questions in your question, so, I think that, first of all, at appropriate rates, we have plenty of existing capacity under our current debt facilities and our current equity capital base, where, if we put -- were to put that capital to work, we would certainly be able to earn sufficient income to support our dividend level. That's first of all.

Second of all, as you know, we've talked about it from time to time, we manage our business on a taxable income basis. As a [RIC], that is our first requirement, so we pay close attention to how we're earning taxable income over time, and, as you know, since the significant majority of the transactions that we engage in come with some kind of a fee arrangement, payable to us for the structuring or the upfront fee on the deal that we're doing, much of that is taxable in the year that it's received, rather than on a GAAP basis, amortized over time. So, as we think about the dividend, it's taxable income that we focus on.

And then, in terms of realizing capital gains, we are, have been, will be opportunistic as we think about the performance of the underlying portfolio companies and their prospects, but we can't ever forecast when exactly that might come to pass. We're going to be as opportunistic as we can, we're going to be thoughtful about it, but we don't want to be forced to sell a business just to -- at an inopportune time, because we had some planning session that told us it might make sense in the future on some specific date.

Okay, that's helpful. And then, I guess, just lastly, in terms of modeling out the incentive fee, should we be accruing it quarterly for you guys or just keep it at the end of the year?

Well, I guess it was last year, Frank, we started to provide some voluntary disclosure that tried to put the incentive fee on a adjusted basis, across all of the quarters, and so, if you look back at each Q, there will be an estimate in there for what the incentive fee might have been, on a quarterly basis, and we expect to continue to provide that kind of disclosure going forward. As you know, the way the formula works, and due to the high water mark, it does tend to be lumpy, and it does tend to be fourth quarter dominated, at least, it has been for the last couple of years.

All right. Well, great. Thank you, guys, very much for your time.

Thank you.

Your next question comes from the line of Jim Ballan with Lazard Capital.

Great. Thanks a lot. Could you guys give me a sense -- I guess I'm trying to get a sense of the run rate income that you're earning. Can you give me a sense of the timing of when the capital was put to work in the fourth quarter and when the capital came back? Was it pretty much even over the course of the quarter, or -- could you give me some color on that?

Well, the -- sure, Jim. The new capital put to work was very much back end orientated. Of the transactions -- the three new transactions, for example, that we booked during the quarter -- all three of them -- each of those three happened past the midpoint of the quarter.

Okay.

So, later in the quarter.

Okay. That's helpful. And -- I mean, I guess you talked a little bit about what you were seeing in the fourth quarter, but given that we're most of the way through the first, I mean, are you seeing similar type of rates on the deals that you're looking at, sort of, these -- greater than 10%, greater than 13% on floating and fixed rate? Is that what you're anticipating for the foreseeable future?

Well, I think -- Jim, I think it's all over the lot at the moment, and we view it very much as our job to make sure that we're getting the risk adjusted rate of return. I know we say that frequently, but having said that, there has been some pressure on both pricing and structure in middle market transactions on the margin, because the liquid credit markets have been so bullish recently. The fundamental reasons for the bullishness have to do with the funds flow into floating rate investment vehicles rather than fundamental changes in the performance of the underlying companies.

We tend to focus our investment process on the performance of the underlying companies, so we would expect to be -- continue to find opportunities priced in similar neighborhood to those that we've seen as recently as the fourth quarter. On the margin, we are -- we tend, culturally, to be more willing to be slightly flexible on price rather than to be flexible on credit quality. So, we would be more conservative. We might do something more senior. We might take a slightly lower rate to make sure that we're getting a higher credit quality product [where and when] our capital is put to work.

And I think it's fair to say that there's more pressure on larger middle market companies or entities than there is on the smaller middle market companies.

I mean, that's one of the things we hear a lot from the [VDCs] is that their competition is -- has been less and less in the middle market, really, since the credit downturn. And so -- I mean, are you starting to see a little more competition, and that's what has been driving a little pressure on the rates there, or is it still -- you're still pretty -- are you still seeing a lot of opportunity?

I think both of those things are true. I think that we always behave -- we've always worked in a competitive environment. Sometimes it's more competitive, sometimes it's less, but we try to be thoughtful and prudent. We work over -- we have a lot of repeat customers, right? We've in transactions with many of the same parties on a repeated basis -- many of the same private equity firms, many of the same senior lenders.

And so, there's a value to what we bring to that community of participants by being thoughtful, by having capital to put to work, even in slow or down markets. And so, on the margin, we will continue to get better pricing than you'll find in a liquid market, where the only thing that prices a deal is the last liquid dollar. Having said that, we have to be cognizant of what is going on out there, and we need to be thoughtful about making sure that we don't lose good opportunities, simply because we're inflexible and at too high a price.

Got it. Great. Thanks a lot.

Your next question comes from the line of Jason Shum with Bank of America.

Hi. Good afternoon. Thank you for taking my question. I'm filling in for Faye. Actually, most of my questions have already been asked, but just one thing I want to check. I saw a substantial increase in the dividend income. Can you guys comment on what happened there and if we should be expecting that as sort of the new run rate going forward?

There are one or two one-time dividends this quarter and rather sizeable. And in terms of whether they will continue, not on a run rate basis, but we do sometimes get these dividends from time to time. One shot dividends that may not repeat on a chronological basis, on a calendar basis, but they do come up from time to time.

Okay. So, I guess, can you comment on what the expected run rate is -- I mean, excluding these kind of one shot deals?

That is not all -- I mean, I think there's a lot -- this is Mike. There's a lot of small components that make up that number, and without trying to pin down a run rate, because I think that wouldn't be possible. I think it's fair to say that 2010 may have been on the higher end of a normalized level of dividends, and I think that 2009 might have been on a slightly low end of a normalized range of dividend income.

Okay. That's helpful. Also, I guess, can you comment on, I guess, your pipeline, if possible?

The pipeline -- I think -- without being specific, I think, we had -- we actually had a pipeline meeting this morning. So, the pipeline is good. We've seen -- we're seeing more transactions over the last few weeks than we have in the earlier part of the quarter. Jim mentioned in his comments that that tends to be seasonal, as people put companies on the market only after their financial statements are ready. So we've seen an increase in deals.

As usual, though, hard to know which of the large pipeline will materialize at the end of the day. A transaction needs to happen, and our financing needs to make sense, as part of that transaction. And on average, we end up closing a pretty small percentage of the things that we start out looking at, but we're always glad to see when the list of deals under consideration is longer, rather than shorter, and, in fact, as we move through the quarter, it is getting longer.

Okay. That's very helpful. Thank you very much. That's all I have.

Your next question comes from the line of Joel Houck with Wells Fargo.

Guys, can -- not withstanding the near-term margin pressure, once that normalizes in a couple quarters, can you give us a sense for where you're comfortable running your leverage ratio? Obviously, you got $375 million available. It looks like, just on that, you could go up to .6, but how should we think about an average leverage ratio, particularly, in the back half of the year, heading into 2012?

Well, we actually have $550 million is the total available -- total availability.

I'm just going off the press release, which, I'm adding the existing outstanding plus what you --

Okay. Okay.

You're saying that -- Joel, that's fine. On a net basis, at 12/31, that's correct. It's approximately $375 million or so of capital, if you take into account the transaction that we completed just after year end.

Okay.

Having said that, I'm going to give my -- at least, for my part, and I'm sure Jim will have some words as well. I just think it's almost easier to tell you what we're not comfortable with, which is, we believe that our current level of leverage is low, and that it -- within -- we could prudently run the business with substantially more leverage than we've deployed today. And having said that, because of the types of assets that we own and the types of deals that we structure, it -- we don't need to run at the maximum -- .9999 leverage to achieve good solid returns for shareholders.

I guess we could give you a percentage. We have chosen in the past not to do that, in part, because -- and what we've always said is that we have a fair amount of visibility, on a going forward basis, as to what securities in our portfolio are likely to be paid back. And depending on that visibility, we might want to leverage a little bit higher, and if we felt that there wasn't anything coming off of our books in the near-term or we felt that we were at a point in the business cycle, that we might want to be less leveraged. So it's a combination of things that enter into our thinking. We can't really give you a fixed ratio, but we would certainly feel comfortable using all of the leverage available to us today.

Okay. No, that comment alone is helpful. Thanks, guys. And just a second question, if I could. You -- I think you said your marks went from, like, 80 -- the high 80s -- call it ten point increase in 2010. You had two accretive equity offerings, and yet, NAV only went from $9.55 to $9.62. I mean, what is -- can you kind of reconcile that for us -- why we didn't see more increase in NAVs throughout the year per share?

Sure. Part of it is that, as Mike mentioned, we pay out our dividends from taxable income, so we had much higher taxable income than GAAP income, and so, that's going to cause a -- what seems to be a smaller increase in the NAV.

Okay. And just getting back into the sector, can you remind me -- do you guys disclose taxable earnings in your K?

No, typically not. We do disclose, though, that we are -- we have a carry forward of approximately $8.9 million into 2011. That's about $0.12 a share. So that's going to help in the near-term, in terms of covering the dividend.

Okay. All right. Thanks, guys.

Your next question comes from the line of Dean Choksi with UBS.

Good evening, gentlemen. Did you say what the origination fee income was that you recorded in the fourth quarter?

Yes, we did. It's $2.7 million for the fourth quarter and approximately $9.9 million for the year.

And that's on a -- on that $40 million -- or the $80 million of originations?

That would -- yes, it corresponds with -- the $2.7 million corresponds with originations in the quarter, and the $9.9 million would correspond, obviously, with the full year.

And then, on the portfolio, is there, like, a typical prepayment fee or an exit fee?

There are, all across the board, depending the security that we own and what we were able to negotiate as part of structuring the investment. In today's market environment, we typically see either prepayment penalties, so loans may be prepayable, at any time, at some additional fee, or in some of our more junior or fixed rate securities, we tend to have some type of non-call period for the loan, where, if the loan were to be repaid or called during that period, there would be a penalty calculated in the traditional, sort of, defeasance methodology. So, those can range from nothing, on the low end, to very high, if a non-call of a loan were to be prepaid quickly, after we put the investment on our books.

Okay. And then, on the -- can you just remind what the [PIC] non-accrual policy is, or under what scenario would a PIC loan be placed on non-accrual?

Sure. So, it's Mike again. The -- for PIC loans, the interest that is accrued for them, for any that are valued at any kind of substantial discount, the interest -- the way the loan accretes is only at the fair market value that it's carried at. Does that make sense?

So, I guess -- would it ever be placed on non-accrual, or would it just continue to PIC?

Well, it -- again, it's -- if it's got material depreciation, it's already only accruing at its fair market value, to the extent it's accruing.

Okay.

So, if you had -- I mean, if you had a theoretical loan that was carried at a value of a penny on the dollar, the interest that would accrue to that loan -- I mean, that would actually probably accrue non, but in theory, at least, that loan would accrue only 1% of its interest during any period.

Okay. Thanks.

Your next question comes from the line of Steven Runnion with Wells Fargo Advisors.

Good afternoon. How much (inaudible) do you guys have (inaudible)?

Steven, I'm sorry. We can't hear you on this end of the line so well. Hello?

I'm just -- what I'm trying to do is figure out how much lead time you guys have for what NII is going to be for the quarter. Do you have some way to possibly warn ahead of time, or do you just have to wait until quarter end?

Frank?

Yes, typically, we do have to wait until quarter end to assemble the numbers, and things change from month to month, so we typically do not give guidance -- inter quarter guidance.

Okay. Thank you.

At this time, there are no further questions.

Is that it?

Presenters, do you have any closing remarks?

I'd just like to thank everybody for participating. Look forward to talking to you again in another quarter, and if you have further questions, feel free to call any one of us. Thank you very much.

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