BlackRock Capital Investment Corp (BKCC) 2014 Q1 法說會逐字稿

Presentation

Good afternoon, my name is Brent 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; Chief Financial Officer, Corinne Pankovcin; and Secretary of the Company and General Counsel of the Advisor, Laurence B. Paredes.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. (Operator instructions) Thank you. Mr. Maher, you may now begin the conference.

Welcome to our first quarter conference call. Before we begin, Larry will review our general conference call information.

Thank you, Jim. Before we begin our remarks today, I would like to point out that certain comments made during the course of this conference call and within corresponding documents contain forward-looking statements subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar expressions. 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 lists some of the factors which may cause BlackRock Kelso Capital Corporation's results to differ materially from these statements. BlackRock Kelso Capital Corporation assumes no duty to, and does not undertake to, update any forward-looking statements.

Additionally, certain information discussed and presented may have been derived from third party sources and has not been independently verified. Accordingly, BlackRock Kelso Capital Corporation makes no representation or warranty with respect to such information.

Please note that we've posted to our website an investor presentation that complements this call. Shortly, Jim and Mike will highlight some of the information contained in the presentation. At this time, we would like to invite participants to access the presentation by going to our website at www.blackrockkelso.com, and clicking the May 2014 Investor Presentation link in the Presentations section of the Investor Relations page.

With that, I would like to turn the call back over to Jim.

Thanks, Larry. Good afternoon and thank you for joining our call today.

First quarter highlights include new investments of $63 million, assets of $188 million and a $34 million realized gain on the sale of existing investments. And increase in the valuation of many of our remaining equity positions.

Adjusted net investment income equaled $0.19 per share. When taken together with our portfolio of net realized and unrealized gains, our adjusted NII exceeded our $0.26 dividend and resulted in an increase in our NAV of $0.05 per share to $9.59 per share.

Earlier this year we entered an agreement to sell our entire debt equity and warrant position in Arclin for an aggregate proceeds of $59.2 million. This transaction generated a realized gain of $37.2 million. Proceeds in the transaction will be approximately $7 million higher than the year-end valuation. Over more than five and a half years since the initial investment in Arclin, the investment generated a cash on cash internal rate of return in excess of 20%.

We have also entered into a contract to sell our largest equity investment ECI at a price range of $71.5 million to $72.5 million, which is anticipated to produce a realized gain of approximately $49 million. As anticipated, this would further reduce our portfolio equity composition, while generating additional proceeds to redeploy into income producing assets. We expect this transaction to close late in the second quarter.

Utilizing loss carry forwards to eliminate a capital gain distribution requirement will allow us to reinvest the proceeds from these transactions in interest bearing securities with a meaningful impact on NII. We have now sold or agreed to sell more than half of our equity investments by value.

With respect to the balance of our equity positions, we like their prospects. And although it is our goal to exit them on an orderly basis, we expect to continue holding a substantial majority of them over the near to medium term. We expect the rate of return on these investments will be accretive to our overall returns.

Economic conditions generally and the performance of our portfolio companies continue to strengthen into the first quarter of 2014. As we look at new investment opportunities we continue to balance the stronger economic fundamentals against the weaker rates and the terms available in today's credit markets.

Market conditions for new investments in the upper end of the middle market for sponsor backed M&A transactions remain challenging. Through the first quarter, loan funds continued to benefit from net cash inflows. Overall, the trend towards lower rates, higher leverage levels and issuer friendly structures seen throughout last year continued into the first quarter of 2014.

Our competitive strength is often more visible and more challenging credit market environments as we tend to be able to draw on solid credit underwriting and our private equity backgrounds to find ways to structure high returning investments in complicated situations. When the market is overheated as we feel it was in the first quarter, our tendency is to remain disciplined on credit terms, which over the long run are more important than rates.

It's not that we are not seeing our fair share of opportunities. In fact, those opportunities we are seeing generally give us pause as credit terms weaken. Given where we stand in the credit cycle, we expect that as we move forward in 2014, we will entertain investment opportunities that are more senior in the capital.

Our equity investments should benefit in this environment as we have seen significant equity appreciation. This results in a high quality problem of creating a high concentration of equity investments in the portfolio, which typically do not generate current cash returns, although they are accretive to valuation and overall performance.

In light of these factors, our Board of Directors has reexamined our dividend policy and has elected to reduce our dividend rate to $0.21 per share. Our Board has determined to set the quarterly dividend to much better match the return profile and composition of the portfolio given the current market environment.

We believe that by setting the dividend at a level that is largely covered by interest and dividend income, rather than capital appreciation, gains and fee income, we are now in a position to grow net asset value.

Finally, our first quarter borrowings decreased as a result of loan repayments. Our goal for leverage over the long term remains at 0.75 times. At quarter end, giving effect to the Arclin transaction, our leverage stood at 0.56 times. As a result, we still don't expect to raise additional equity capital in the near term.

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

Thank you, Jim. As Larry mentioned, in advance of this conference call we posted our quarterly investor presentation on the website. An overview of our first quarter results starts on page two.

We're pleased with the solid performance of our investment portfolio. Net assets increased to $714 million and net asset value per share increased by $0.05 during the quarter to $9.59 per share. Total investments were $1.1 billion at quarter end.

With respect to earnings, our portfolio generated investment income of $29.6 million for the first quarter, which was a decrease relative to $33 million in the prior quarter. While interest income was up by almost $1 million in the period, fee income was down substantially in the first quarter. Fee income tends to be relatively consistent for our business over the long run, although it can be volatile in any given quarter. For the quarter, fee income totaled $908,000. This compares to $4.8 million or $0.06 per share for the prior quarter and an average of more than $4 million per quarter over the last two years. Although there were $64.7 million more exits during the current quarter, only one of these exits was accompanied by a prepayment fee.

Total expenses for the three months ended March 31st were down significantly at $18.5 million compared to $28.4 million in the prior quarter. The principal difference between the two periods relates to incentive feels, including those accrued on unrealized gains.

Incentive fees relating to income were zero in the quarter and incentive fees accrued based on a hypothetical capital gains calculation were $3.5 million.

On a pro forma basis, incentive management fees for the first quarter were less than $300,000, far less than the $2.5 million attributable to the fourth quarter as adjusted. Of the current period totals, $3.5 million in the quarter, compared with $5.5 million in the fourth quarter, representing incentive management fees accrued based on a hypothetical capital gains calculations required by GAAP. As of March 31st, the accrual for incentive fees related to capital gains stood at $29.2 million.

We believe that our adjusted net investment income, which removes the hypothetical fees and adds an adjustment to account for incentive fees earned on income, is a better indicator of our quarterly performance. A reconciliation of these GAAP and non-GAAP measurements appears on page 11 of the investor presentation.

Adjusted net investment income of $14.3 million in the quarter compares with $16.5 million in the fourth quarter and equated to $0.19 per share versus $0.22 in the fourth quarter of 2013.

In the first quarter, our adjusted net investment income of $0.19, when added together with gains realized during the quarter of $0.45 per share, resulted in $0.64 per share of combined net investment income and realized gains. Taken together, this income provided dividend coverage of 248% of our previously declared $0.26 dividend.

Our origination efforts remain focused on higher quality investments and special situations where we have an investment edge or a benefit that results from experience, information or relationships. We look at opportunities with a long-term view and focus on maintaining and growing our NAV over time. Our investment strategy does not favor portfolio growth at the expense of lower credit underwriting standards that we believe do not benefit our shareholders over the long run.

Generally, current market conditions have led us to focus on higher quality loans often with some significant credit support from asset coverage. Since quarter end, the market has backed off somewhat as what had been a 95 consecutive week streak of net positive cash inflows into loan funds finally ended in late April.

Exits, including the $59 million received in the sale of Arclin, exceeded the amount of new investment in the first quarter. Some of the other significant transactions in the quarter included TriMark, Crimson and the repayments or sales of Attachmate, Renaissance Learning and road infrastructure.

During the quarter as part of a refinancing transaction, we exited our existing TriMark senior secured second lien term note of just over $50 million. We invested $15 million in a new term loan to the Company. TriMark is one of the country's largest full-service providers of design services equipment and supplies to the food service industry.

We also provided a $30 million second lien term loan to Crimson Energy Partners. Crimson is a Texas based E&P operator with 29 producing wells. The second lien term loan was utilized to pay down Crimson's existing revolving credit balance, providing liquidity for the Company to execute on its drilling program.

The second lien term loan had a cash coupon of 10.75% and was issued with a two point fee to yield 11.28%. The security also requires mandatory amortization and reflecting the mandatory amortization the IRR on this loan is anticipated to be 11.65% to maturity. In general, our portfolio companies continue to perform quite well. We had no investments on non-approval at quarter end and no changes in the ratings of our portfolio companies since year end.

We continue to look to make commitments in the capital structures of business in which our investments are well supported by future free cash flow generation, current enterprise value and identifiable assets. We view this as a defensive posture, we expect to continue seeking these more conservative investment structures.

Ours is a business where paying attention to the details is of paramount importance. The performance and prospects of the companies that we invest in, the strength and character of the managers of those businesses, the transaction specific covenants and the details of the assets that support our positions all enter into our analysis of potential transactions.

Over time, this has been somewhat difficult to convey as many focus on analyzing our investment portfolio, by the general category or type of each investment viewed through the lens of the current market conditions for larger, more liquid credit investments.

Our investment made in the second lien loan of Crimson is a perfect example. On the one hand, Crimson is a second lien loan whose security, interest and the assets of the underlying company are subordinated to the Company's commercial banking revolving credit agreement. Importantly, it is the lien that is subordinated, not the loan itself.

Some people might view the credit as being particularly risky as the credit statistics surrounding the typical broadly syndicated second lien loan in the first quarter generally had pretty loose credit terms, such as lacking financial covenant protections and having high debt attachment points approaching four times EBITDA or even higher.

Often leveraged loans in the liquid credit markets have been extended well beyond the value of the tangible assets of the Company and rely nearly exclusively on free cash flow as credit support. We made our investment in Crimson more than six months after initially meeting with the Company. We negotiated the terms over an extended period of time and benefited from watching the Company's performance. Our loan, while second lien, is supported by the liquidation value of the Company's assets. Our loan contains performance covenants focused on the value of those assets. At closing, the attachment point of BKCC's second lien loan was at a half of a turn of EBITDA and total leverage through our security was approximately 2 times EBITDA.

Furthermore, asset coverage was more than six times, representing a loan to value ratio or LTV of less than 20%. Liquid asset coverage was at an LTV of less than 70% at the closing of this investment. In short, this is not a typical syndicated second lien loan.

In essence, this is what we do. When we speak about our conservative approach, we are referring to the details rather than just the headlines. These opportunities are difficult to source and difficult to underwrite, but well worth the effort in our view. While we can participate in more traditional sponsor led buyouts from time to time or in liquid market opportunities, it is the fundamental blocking and tackling that drives our business.

With that, I'd now like to turn the call to Corinne to review some additional financial information for the quarter.

Thanks, Mike and hello, everyone. I will now take a few moments to review some of the other details of our 2014 first quarter financial information.

Portfolio composition was relatively stable in the first quarter. The percentage of our portfolio invested in senior secured loans and unsecured or subordinated debt securities each increased 1% to a respective 44% and 17% while our concentration in senior secured notes declined 3% to 15% as compared to the prior quarter.

Although our sale of Arclin during the quarter removed a significant amount of fair value from our equity investments, this was offset by continued appreciation in our existing investments. In addition, when the $96.3 million decrease in overall portfolio size is taken into account, equity investments comprised 21% of the portfolio at quarter end. This represents a 5% increase in our non-income producing securities from 16% at this time last year, driving the 40 basis point decrease in our total portfolio yield between the two periods.

The weighted average yield of the debt and income producing equity securities in our portfolio at their current cost basis remains stable at 12% at March 31st. The weighted average yields on our senior secured loans and other debt securities at their current cost basis were essentially flat at 11.4% and 12.9% respectively.

Net unrealized appreciation decreased $22 million during the current quarter. While this number represents less unrealized appreciation in the portfolio in the aggregate than at the end of the prior quarter, this is largely due to reversals of unrealized appreciation of $28.6 million because these investments were in fact exited and these unrealized gains became realized.

Removing the reversals, the current portfolio appreciated $6.6 million in value during the quarter. Taken in conjunction with the $33.8 million of realized gains during the period, our net realized and unrealized gains of $11.8 million helped to drive our net asset value per share up another $0.05 for the quarter to $9.59 per share. This was a further increase over our $9.47 net asset value per share at this time last year.

As part of our strategic tax planning, from time to time we are able to reduce our investment company taxable income by losses taken on ordinary assets, thus minimizing the amount of taxable income to be reported by our shareholders. Relative to our $1.1 billion portfolio at fair value, we continue to have sufficient debt capacity to deploy in attractive investment opportunities. At March 31st, we were in compliance with regulatory coverage requirements with an asset coverage ratio of 255% and were in compliance with all financial covenants under our debt agreement.

At March 31st, we had approximately $34.1 million in cash and cash equivalents, $459 million in debt outstanding and subject to leverage and borrowing days restrictions, $250 million available for use under our amended and restated senior secured revolving credit facility, which now matures in March of 2019.

As compared to last year, our weighted average cost of debt decreased 59 basis points to 4.91% due to securing more favorable pricing with the amendment of our credit facility during the quarter. Average debt outstanding increased from $359.5 million last year to $482.4 million this year, resulting in a 3.7 increase in total borrowing costs during this quarter.

With that, I would like to turn the call back to Jim.

Thanks, Corinne. We are pleased with our accomplishments year to date, particularly the successful exit of one of our two largest equity positions and the signing of a final purchase and sale agreement for the other. As we have said before, even after we have exited those investments, we still will hold equity positions that comprise a higher percentage of our overall portfolio and is our long-term goal.

Redeployment of those proceeds of these and future transactions will only further contribute to our ability to grow our net investment income per share. As we think about dividends for 2014 and into 2015 and beyond, we have set the dividend at a level that we believe takes into account the rates available for more conservative types of investments that we are comfortable with in today's environment.

Furthermore, this dividend level requires no capital gains or free income to sustain. We believe that the retention of any excess earnings is a prudent and cost effective way to grow available capital and therefore total assets. Any future retention of excess capital would be available to help protect and sustain our dividend over the long term.

On behalf of Mike, Corinne, Larry and myself I would like to take this opportunity to once again thank our investment team for all of their efforts and to thank you for your time and attention today. Brent, would you now open the call for questions?

(Operator instructions) Troy Ward, KBW.

First I'd just like to say congratulations on the great sale on Arclin and the upcoming sale of ECI. Two very strong results for shareholders.

Mike, can you walk through quickly just on the Arclin exit though? [While I am] looking at the cost basis is December 31st and the exit price given, it seems like there would have been an additional $14 million over where you had it marked and you mentioned a $7 million increase. Was there some additional capital put forward?

That's an easy question. We had to exercise -- I'll answer that. (Multiple speakers) I'm going to take the easy one. Some warrants were expiring in January so we had to exercise those and that was an additional $7 million.

Okay, good. That'll make it then great. And then back on the fee income. Like you talked about, you had strong exits in the quarter but the fee income generation just wasn't there as we've seen in the past. Is that a function of investments that have been added to the portfolio over the last couple of years? Is there just a lower embedded amount of exit income in there because of the competitive nature that we've seen over the last couple of years?

There's no single answer to that question. I think the single biggest contributing factor to the unusually low amount of fee income in the quarter was that so many of the exits, while it was a large number, on dollar terms were equity exits and those don't tend to have any type of fee offsetting them.

With respect to the debt exits, yes, some of those were more -- it was a combination of exited investments of a few slightly more recent transactions that had lower types of prepayment penalties. 102, 101 par type of structures, because they were floating rate loans.

Others of the exits, TriMark for example, are investments that had been on our balance sheet for many years and had just been paying their rate and had made it through any non-call period or prepayment penalty period. And that it was just sort of the timing of when these particular loans repaid or expired. So it's a bit of a mixed bag there.

That's helpful. And then one final one, Mike. On the pipeline and what you're seeing today, you did note that the streak of inflows finally ended. How does that -- are you seeing that translate into your business and do you feel like there's a little bit opportunity and then separately what is the current mix of opportunity you're seeing out there? New opportunities versus refinancings?

Sure. I think when we think of what we were doing so far this quarter, first of all, as you said, and as we said in the prepared remarks, we were very pleased to see the 95-week streak end of inflows. Obviously that doesn't have a single direct effect on our marketplace, but we did see the liquid credit markets trade off just a little bit in light of that change as people started selling some of these recently completed loan assets and things started trading back down from premiums to par to being down 50 to 75 basis points depending.

That has a small effect on what we're working on at any given time, but what it does do is it's good for our forward calendar because that marginal second lien or first lien syndicated loan that was just going to get done in the marketplace on the smaller side, on the more difficult to underwrite side, that's the deal that's going to not get done now in the liquid credit markets and it's going to move back into our marketplace and give us an opportunity going forward. That's really kind of this month's and next month's business we hope. As we look forward there should be some opportunities from that.

We have been looking for transactions similar to the one I described in some detail, Crimson, where we're looking for some off the run deals. And we've found a couple that we're currently working on and we're hopeful about for this quarter that are sort of away from that broad marketplace environment.

Arren Cyganovich, Evercore.

Just looking at the equity that you have coming back to you, a pretty large amount, $72 million from ECI and $59 million from Arclin, it seems to me as though that you'd be able to -- if you can reinvest those in not too quickly, but that would be pretty meaningful from an NII perception. So I guess my question would be with a lower dividend level, how low of a yield are you willing to go to with kind of a lower bogey now that would be particularly accretive to NII once you rotate that proceed into your new loan book?

Well, that's a big [thought of ours]. But any yield would be accretive because obviously we are -- at the margin we were borrowing to carry those investments and paying management fees on those investments. So take a number, it's over. We eliminate a cost of over 5% just by selling those opportunities. Or if said a different way, if we were to put even 1% yield on our books, it would be incremental. I'll let Mike now answer the harder question, which is what's the target?

Right. So Jim of course took the part that I would have taken first. And I think with respect to what our new target investment yield is, without giving too many specific hints to people who might seek to borrow from us, I would suggest that overall what this allows us to do is it allows us to focus on slightly more senior, slightly more secure, slightly less risk profile, higher up the capital stack, as Jim said in the remarks. It allows us to focus on some of those opportunities that perhaps have less future volatility and less risk to them and take some of those onto our balance sheet as we look forward.

So it's not so much independently the return, it's the risk adjusted return and it allows us to broaden the portfolio into some more senior positions.

Okay. I mean I guess the problem with that is that -- it's not a problem, it'll be positive once you reinvest those, but from a senior loan perspective you can have senior loans from small companies that high yields are large companies that pretty low yields. So I guess can you give any kind of range? Are you going sub 7%? Sub 8%? I mean any kind of idea would be helpful.

Sure. I mean I think we don't intend to migrate our fundamental strategy, which is to serve lower middle market companies, companies that are away from broadly serviced capital markets, where there's an attractive premium available for those assets. So again, if the liquid credit market would do something at 5% or 6%, that's the kind of loan we might make at 7% or 8% or 9%. Those loans were really not available to us to put on our balance sheet before and now we may be opportunistically capable of making some of those investments as we round out the portfolio.

Thanks, that's helpful. And then did you provide any quarter to date investment activity other than, I guess, the $72 million that you're selling? Are there any other loans coming back to you that you know of and what's the deal pipeline, I guess, looking like?

We elected not to do that in a formal way on this call at this time. There's a couple of things that we're working on presently that could go one way or the other that would make a significant enough difference to that number that it sort of wasn't fair to give one at this point.

There are a few investments that we have in portfolio companies where their portfolio companies have or may market new deals. Those obviously become publicly available. Some of those you'll pick up on, but on the other side of the coin there's a bunch of things that we're currently working on that we're not quite ready to share any details on. I'm sorry about that, it's just the timing at this point.

Fair enough, thanks a lot.

Rick Shane, JPMorgan.

Look, we've followed you guys for just over three years now. And I think what's come through is that there is a sincerity and a genuineness about how conservative you guys are. I don't question that. I guess the question we do need to ask though is has there been an opportunity cost associated with that? When you guys look back over the last three years, do you think that this has brought you to missing investments? And then when you think about that opportunity cost, one of the other things that you point out is that you've been conservative about raising capital, which is true, but one of the things that we theorize about VDCs is that when you get to that $1.5 billion to sort of $2.5 billion in assets there's some operating leverage and some opportunities that develop. And is that something that you need to consider in terms of the opportunity costs related to the conservatism?

I think it's fair to say that we have always been quite open about our desire and belief that the appropriate size or a very good size for us would be to be in the range of $2.5 billion to $3 billion. So you'll get no argument here. It is still our goal to be of that size.

And obviously, if one looks back over the last 12 to 18 months and the sort of steady erosion of rates during that period of time, one could easily come to the conclusion that one should have been more aggressive during that period, particularly given the lack of real credit problems during that period and the likelihood that there's not going to be much credit problems given the economy for the next -- certainly for the next 12 or 18 months.

So the answer is yes, we probably have been a little bit overly conservative.

I would add to Jim's comments, Rick, by saying that with a large portion of the portfolio dedicated to equity investments over the past couple of years it has affected us in terms of our willingness to be more aggressive on some of the more marginal debt securities because we think about the whole portfolio's performance, should there be some turn in the economic environment.

So there's a double benefit in many ways to the sale of these two large equity investments at this point. One is obviously to redeploy the cash into some sort of a returning investment, something with positive current returns. But also it changes the overall portfolio risk. And it allows us, I think, to be able to go out and think about new debt investments and growth differently.

Lastly, with the dividend set where it is, there ought to be an opportunity to grow NAV and thereby grow our portfolio that way as well.

That's helpful. And I again realize it's very easy sitting in my seat to tell you guys how to run your business, especially with hindsight and that's not fair. I think it's a very clear answer. Thank you, guys.

(Operator instructions) John Bock, Wells Fargo Securities.

Mike, maybe jumping to the comment as it relates to subordinate and second lien, I appreciate that definitely as you provide details there. So maybe turning to the other second lien investment that I think you originated this quarter, can you walk us through the leverage stats in -- as well as kind of the rate you're receiving in TriMark USA to the same degree as you did with Crimson? That'd be helpful.

So TriMark is -- we came across slightly differently. Obviously it was an existing portfolio company for us. We had been in that investment since I believe 2006 earning a 13% or better current return. We didn't view the new refinancing security as being as good a risk adjusted return as the original security, but we do have some pretty good insights into where we expect the business to be.

So with that in mind, the structure of that transaction is a first lien, second lien. We're in the second lien. An important element of the analysis in being a part of that particular second lien is that that that second lien loan relative in size to the first lien loan that it's behind, they're almost identical in size. Which gives the second lien lenders an opportunity should something go wrong to really fix the situation and be active rather than be a participant in this small tail that gets wagged by the dog in a restructuring.

The run rate return on that, it's a LIBOR based loan, it's floating rate, but it starts off at 10%. And the attachment point, I will just say it's sort of below 3.5 and it goes -- the loan extends through just around -- just slightly over five times.

Slightly over five times, okay. So I guess the question is, and while we appreciate the discussion that looking at Crimson at 0.5 to two times EBITDA with low loan to value is attractive, there has to be some amount of segmentation because not all of these are going to be created equal. And it's probably best for investors to focus on the lowest common denominator rather than assume everything's as pristine as Crimson. Would you agree with that?

No, I'm not sure I'd agree with that, Jonathan. I think that what investors really should do is look at the particular assets and how they're underwritten and who's doing the underwriting. Doesn't make one group right or wrong, but I think this is a pretty small number of investments in any particular VDC portfolio, certainly in ours. And we know we're happy, as always, to talk about the specifics around the transactions that we enter into. And I would say when you look at our loan book, there's a lot more episodic, individual, unique structured investments than there would be sort of participations in the ordinary run of the mill liquid credit market deal.

I appreciate that. I mean we always understand that everybody underwrites differently. So it's -- appreciate you with the honest answer.

So now maybe turning to the capital deployment picture. As we walk through kind of the timing, right? Timing here is key in light of the dividend reduction. Capital deployment is something that will drive NOI, no matter what you invest in. And so the idea is that you say you're going to be conservative and prudent, yet any loan that you put on the books today is effectively accretive if I remember. So the question is what's best for you? To go ahead and start to grow earnings immediately? Or to just be a little bit more, let's say, careful in terms of what you're deploying and choose to grow earnings slowly?

I think what's best for us is to continue to look at each investment opportunity as a separate opportunity. To evaluate that and to go forward and not to make a generalization about putting the money to work more quickly or less quickly. I think that's the way we intend to do it.

I mean I think, as Mike said earlier, the sale of the equities gives us an opportunity to look towards, I suppose less risky credits. But it doesn't really impact the timing. As we see things we will evaluate them and make that decision.

One of the, I think, factors entering into the dividend was the redeployment of the money, how long it would necessarily take. I mean if you can -- as you can appreciate, if we took that money and redeployed it immediately and put a few other assets on our books, we'd be covering the dividend -- the old dividend with no problem. The conservative approach is to say it's going to take some period of time to put that money back to work. We're not going to get the money in the case of ECI until the end of this quarter. And Arclin will be during this quarter, so.

Appreciate that. And again, no one would ever quibble with reducing the dividend substantially. In light of economic reality we definitely appreciate people aligning dividends with pure cash flow.

And then just maybe one comment as it relates to overall risk, particularly in the -- as it relates to fixed charge and coverage. You spoke about Crimson and the opportunity and being a second lien. And Mike, appreciate that. So it sounded great. Walk us through how that loan can go wrong. And more importantly also, how it was originated and whether or not you participated with anybody else on that transaction.

So much like that quiz show movie, I'll take those questions in reverse, if that's okay with you.

That'd be fine.

We are it in that loan. We originated it here through relationships in the industry, through a relationship with the manager that runs the Company. And through having looked at a potential transaction that looked like a more liquid or market oriented transaction that did not come to pass. Gosh, it's coming on almost a year ago now.

And so by staying with the business, by following it, by meeting the capital needs of the Company, we were able to stick around it, watch the Company develop and get involved in a transaction, being in the right place at the right time of building those relationships and thinking about the Company and providing them with something that they needed.

In terms of what could go wrong, it's a loan. There's risk to it. It's related -- the Company fundamentally is an E&P Company. They drill oil, they extract it from the ground. There is a risk that they drill poorly, that oil prices change dramatically, that there's some sort of a government change in -- or government led change in how these minerals and how those energy resources are extracted. We believe we're very, very well covered in all of those cases because of our low loan to values. But those are the types of things that could go wrong.

Now having covenants and monitoring the Company means that you have an opportunity when things begin to go wrong to try to find a way out of the loan while there's still plenty of asset coverage there. Doesn't mean it's going to happen. Again, these are loans. Sometimes they go wrong. You show me a loan book that's never had a loss and I'll show you somebody who's never made a loan.

That makes sense. Thank you so much for answering my questions.

Arren Cyganovich, Evercore.

I just wanted to ask you quickly about the credit quality of the portfolio. Were there any loans on nonaccrual at the end of the quarter? It looked like there was a really small amount that went into a category three loan in your internal rating system. Just overall, what are you seeing in terms of credit of your portfolio?

There were no changes in terms of credit ratings during the quarter.

(Multiple speakers) shift the valuation that could (multiple speakers) but not a changing category.

(Multiple speakers) that created a slight change in the aggregate or the average rating. But there were no downward or upward revisions in terms of credit ratings.

And no --

And there's no nonaccruals.

Okay, thank you.

Troy Ward, KBW.

Just one quick one. A lot of questions about the pace of redeployment of the equity capital coming back at you. In the quarter it looked like there was three investments that were actually made in the fourth quarter and then exited in the first quarter, Isola, Omnitracs and Renaissance Learning it looks like. Can you -- what's the opportunity to continue to find things like that? Not necessarily originate one quarter and exit the next, but those are probably, I'm assuming, much more liquid opportunities. Are those type of opportunities available to you today to put some of this capital to work more quickly?

So I think the general answer to that is yes. We've been reluctant to put capital to work in too many liquid opportunities at one time. As we talked about on our last conference call, we have put an application to the SEC for some exemptive relief around starting an asset management company, whose focus would be on senior loans and liquid credits. We talked about that some last time.

As part of watching that market and being involved in that marketplace, we have from time to time been able to very opportunistically and very effectively generate some quick returns on companies that we've seen and known who are participating in that liquid credit market. But again, that is not our focus, so it would be unlikely that we would turn around and very quickly put this large amount of money, equivalent to more than 10% of our overall portfolio, to work in that marketplace, sort of overnight. That's an unlikely outcome. But we will continue to be opportunistic as we have and as you've seen these smaller investments roll on and off as they may be carried over a quarter end.

Okay, great. Thanks so much.

Sir, we have no further questions in the queue at this time.

Well, I thank you all for participating. And as always, if you have any further questions, feel free to give us a call. Thank you.

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