BlackRock Capital Investment Corp (BKCC) 2015 Q3 法說會逐字稿

Good afternoon. My name is Carmen and I will be your conference facilitator today for the BlackRock Capital Investment Corporation's Third 2015 Earnings Call. Hosting the call will be Chairman and Chief Executive Officer, Steven F.Sterling; Interim Chief Financial Officer and Treasurer, Donna M. Milia; General Counsel and Corporate Secretary of the Company, Laurence D. Paredes; and Aaron C. Kless, Investor Relations and Strategy. Also joining the call is Michael Zugay, Managing Director, Head of Investments for BlackRock's US Private Capital Group.

Lines have been placed on mute and after the speakers complete their updates, they will open the line for questions and answers. (Operator instructions)

Mr. Paredes, you may begin the conference call.

Good afternoon and welcome to BlackRock Capital Investment Corporation's Third quarter 2015 Earnings Conference Call. 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 Capital Investment Corporation's actual results may differ from these statements.

As you know, BlackRock Capital Investment Corporation has filed with the SEC, reports which list some of the factors which may cause BlackRock Capital Investment Corporation's results to differ materially from these statements. BlackRock Capital Investment 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 Capital Investment Corporation makes no representation or warranty with respect to such information.

Please note, we've posted to our website an Investor Presentation that complements this call. Shortly, Steve will highlight some of the information contained in the presentation. The presentation can be accessed by going to our website at www.blackrockbkcc.com and clicking the November 2015 Investor Presentation link in the Presentations section of the Investor Relations page.

I would now like to turn the call over to Steve Sterling, BlackRock Capital Investment Corporation's Chairman and Chief Executive Officer, who will provide an update on our quarterly results.

Thank you, Larry. Good morning, everyone. And thank you for joining us for our third quarter 2015 Earnings Call. Before I provide my remarks on the quarter, I would first like to offer a special welcome to Michael Zugay, who joins BlackRock's US Private Capital Group as Head of Investments. Michael brings proven investment experience, deep relationships and commercial insight in the middle-market that will be instrumental in our investment activities, in implementing our core business strategies. Given he's only been with the business for less than 30 days, Michael will not be participating in today's prepared remarks. Michael will participate in future earnings calls to discuss BlackRock Capital Investment Corporation's investing activities and portfolio developments.

Now turning to our results. We are pleased to report strong financial performance for the third quarter of 2015 with GAAP net investment income and earnings per share of $0.32 and $0.29 respectively. Net investment income, as adjusted, which is a better measure of recurring income, was $0.24 per share for the period. This measure compares favorably with $0.23 per share on both a sequential and year-over-year basis. Our net investment income, as adjusted, covered shareholder distributions by 113% and excluding fee income by 101%. These operating results, coupled with share repurchases, increase NAV by $0.10 per share to $10.66.

During the quarter, we executed our investment priorities, strategic initiatives, and ongoing commitment to creating value for client shareholders, including, one, we grew sequentially total investment income by 3.6% and net investment income as adjusted by 5.5%, driven in large part by about $70 million of net new origination of income earning assets. Two, we repurchased over $6 million of our common shares, representing on a dollar basis approximately one-third of our total share repurchase activity since the inception of the BDC. Three, we streamlined our Finance Group and renegotiated a real estate cost to save over $1.6 million per annum or about $0.02 per share, of which $150,000 was realized in the third quarter. And four, BlackRock's US Private Capital Group hired Michael Zugay as Head of Investments. Michael will also serve as Vice Chairman of our Investment Committee.

We have worked diligently to position our team and BlackRock Capital Investment Corporation for the future. Today, BlackRock Capital Investment Corporation is positioned for market volatility, employees to patiently continue growing net investment income, given its low net leverage of 0.45 times and reduced portfolio risk resulting from our decision to monetize the majority of our equity investments during the second quarter.

Based on the observed increase in sourced ideas, muted prepayment speeds and short and strong existing distribution coverage, currently over 110% on a run rate basis excluding fees, we believe we are well positioned for the remainder of 2015 and into 2016. Given our ample liquidity of $335 million at September 30, we anticipate refinancing our $158 million of 6.5% notes due in January of 2016 under our revolving credit facility. This decision would have no effect on our borrowing base capacity, but could reduce our interest expense by more than $6 million per annum or $0.08 per share in the current rate environment. Pro forma for the refinancing of the notes, approximately 35% of our debt capital would be fixed rate as compared to 27% of our investment portfolio in fixed rate instruments. We will continue to proactively monitor our fixed floating mix, as well as capital markets conditions and other factors in prudently managing our capitalization. Before I provide more details on our third quarter results and review our portfolio activity, I would first like to discuss current market conditions.

As has now become well documented, global growth has meaningfully slowed and with the US economy evidencing the strongest relative performance, as a consequence, monetary policy divergence has become a focal point for financial markets with real implications for rates, currencies and commodity prices. The uncertainty of future real economic growth and policy decisions has generated meaningful volatility. From a US perspective, technical implications to leverage finance markets during the third quarter relative to the second quarter can be observed in fund flows, which decreased by $5.1 billion; the gapping out of high-yield credit spreads, which increased by 157 basis points and the decline in new issue leverage financed volumes, which decreased by 12.5%; anecdotally dealer situations become difficult with the rise in hung syndications that have continued into the fourth quarter. This does not bode well for tomorrow's bank underwrites, but does potentially create opportunity for those with deployable capital and strong fundamental direct investment expertise, such as BlackRock Capital Investment Corporation.

The US middle-market has unique characteristic that partially insulate the market over the short term from the volatility in public US leveraged finance markets. Nonetheless, based on the best available information for this opaque market, total US middle market loan volume year-to-date decreased 26% year-over-year and nearly 28% as compared to the second quarter. This is in line with the 25% decline in broader leveraged loan market volume. Despite the weak market tone, our sourcing activity levels increased 37% over the prior quarter. We observed, however, a decline in quality, as well as ironically, pricing that was frequently unattractive. To some extent we think this pricing dynamic may reverse itself during the fourth quarter, as dealer hung syndications provide a wakeup call for private investors and borrowers seek to directly negotiate with junior capital providers, rather than rely upon uncertain bank underwrites.

Fundamentally, we remain constructed on the US economy. Although defaults are hedging up, we continue to expect a continuation of a relatively supportive credit environment, accepting of course ongoing headwinds for sectors or companies exposed to global macro developments, including oil and gas, materials and currency-sensitive borrowers.

That being said, we are mindful of the elevated risk related to both the slowing growth dynamic and its inherent policy challenges, as well as the rising level of global tension. Consequently, consistent with our last call, we intend to remain disciplined in our investment process, proactive in managing underperforming situations and prudent in regards to portfolio construction and financial leverage. We believe that the earnings power of our investment portfolio affords us the ability to remain patient with the deployment of client shareholder capital.

I would now like to turn to the third quarter highlights. Our portfolio has generated total investment income of $33.9 million or $0.45 per share during the period, of which over 94% was derived from interest and dividend income. These results represent more than a 2% increase in total investment income over the third quarter of 2014 and excluding fee income, an increase of 13% year-over-year. Net investment income, as adjusted, totaled $17.7 million or $0.24 per share during the quarter, as compared to $17.3 million or $0.23 per share in the third quarter of 2014, representing about 2.5% growth on a year-over-year basis. Absent fee income, net investment income, as adjusted, increased over 27%.

At September 30, 2015, the fair market value of our investment portfolio totaled $1.1 billion, representing approximately 100% of cost. Relative to December 31, 2014, this represents a $108 million decrease in investments at fair value, which is largely attributed to our significant equity sales during the second quarter. The debt portion of our portfolio actually grew over 4% since year-end 2014 to just over $1 billion, accounting for 90% of total investments.

At quarter end, the debt investment portfolio was 70% floating rate, of which 92% was subject to a LIBOR floor. Because of our low financial leverage and nearly 35% fixed-rate funding, pro forma for the refinancing of the private notes due in January, net investment income would be modestly affected by a rise in short-term borrowing rates. For example, a 25 basis point rise in LIBOR would reduce net investment income by about $600,000, which is more than offset by the estimated $6 million in annual interest expense savings that may be realized by the refinancing of the notes.

Overall, we remain comfortable with our portfolio diversity in terms of size, industries and geographies, as well as across capital structures. No one sector exceeds 13% of the portfolio and our mix of instruments continues to bias towards senior secured loans, which has increased 11 percentage points to 64% since year-end. While we continue to observe pressure associated to oil and gas and currency-sensitive investments, we remain comfortable with the exposure in the context of the total portfolio and continue to closely monitor developments to ensure effective risk mitigation.

As of quarter end, our oil and gas portfolio represented 10% of our total portfolio, of which 63% was in first-lien senior secured positions. The majority of this exposure is U.S. Well, a Texas-based oilfield services provider that delivers both traditional and clean fleet pressure pumping services. They are operators in the Marcellus and Utica regions. U.S. Well has a strong management team, relatively new competitive fleet assets, long-term contracts with strong counterparties and an improving credit profile, as price pressures have been more than offset by cost reduction measures, coupled with the increased asset utilization. We own both credit and equity exposure in the name.

Our largest investment is Gordon Brothers Finance Company. At September 30, 2015, Gordon Brothers Finance Company had total assets of $324.8 million with total investments of $298 million across a diversified pool of first lien, collateral based investments, overweight to retail, consistent with Gordon Brothers Group, legacy expertise.

Total investment income for the three and nine months ended September 30, 2015 was $7.8 million and $20.5 million, respectively. Net income, excluding non-cash items was approximately $600,000 and $500,000 respectively for the three and nine months ended September 30, 2015. The total debt relative to total partner invested capital was 1.15 times.

Overall, new deal activity continued to pick up with total deals reviewed during the third quarter up over 37% compared to the second quarter and up over 27% year-to-date. Deal flow from the BlackRock platform continues to enhance our origination efforts. Increased new deal activity has continued into the fourth quarter. Our net new investments totaled approximately $70 million, comprised of $77 million in gross investments, offset by approximately $7 million of prepayments, excluding $4 million related to non-current income assets.

Our most significant new investment during the quarter was a $32.5 million second lien term loan to Recorded Books Inc., the largest independent publisher of unabridged audio books and a leading provider of digital content. The investment was created at a 9.5% floating rate with a 100 basis point floor, plus a 275 basis point structuring fee.

Now, I would like to turn the call over to Donna for some additional details regarding our third quarter financial and portfolio results.

Thank you, Steve. I will now take a few moments to review additional financial information for the third quarter of 2015. For the three months ended September 30, 2015, our basic earnings were $0.29 per share, our GAAP net investment income was $0.32 per share and our net investment income as adjusted was $0.24 per share. $0.6 per share of our GAAP net investment income was driven by a $4.2 million reversal of the accrual for incentive management fees based on gains during the current quarter. Of the $28.2 million accrued for incentive fees based on gains, as of the measurement period ended June 30, 2015, $24 million was earned and payable resulting in a $4.2 million reversal during the current quarter, to bring our gross to zero.

Fee income earned during the current quarter totaled $1.9 million, relatively unchanged from the second quarter. Excluding fee income, our total investment income of $32 million increased 13% year-over-year and 4% over the second quarter. The weighted average yield of our debt and income producing equity securities at their current cost basis remained unchanged from the second quarter at 11.5%. The composition of our senior secured loans increased 1% from the second quarter to 64%, and increased 8% over the last 12 months. The portion of our portfolio invested in senior secured notes remained unchanged compared to the second quarter at 8%.

Unsecured or subordinated debt securities decreased 1% to 18% during the quarter, as a result of the increase in size of our overall portfolio from debt investment activity. In the third quarter, there were no investments on non-accrual and the average investment rating was 1.24.

Net unrealized depreciation increased $4.7 million during the third quarter, bringing total balance sheet unrealized depreciation to $6.5 million. Gross unrealized depreciation of $15.1 million was partially offset by $10.1 million of gross unrealized appreciation, over 99% of which is in equity securities.

At September 30, we had approximately $376 million in debt outstanding and $7 million in cash and cash equivalents, resulting in net leverage of 0.45 times, adjusted for available cash, receivables for investments sold and payables for investments purchased, as compared to 0.33 times at the end of the second quarter.

At September 30, 2015, we were in compliance with regulatory coverage requirements with an asset coverage ratio of 308% and were in compliance with all financial covenants under our debt agreements.

As Steve mentioned earlier in the call, we anticipate refinancing our $158 million, 6.5% notes due in January 2016 under our revolving credit facility, which matures in March 2019. Pro forma for the refinancing, approximately 35% of our debt capital would be fixed rate, as compared to 27% of our investment portfolio in fixed rate instruments. Additionally, our pre-payable debt outstanding would be only $230 million on a pro forma basis.

Comparing full year 2014, the nine months ended September 30, 2015, our weighted average cost of debt decreased 8 basis points to 5.14%. Pro forma for the refinancing of the notes, our run rate weighted average cost of debt would be 3.8%.

Our liquidity position was $335 million at the end of the third quarter, subject to leverage and borrowing base restrictions, as compared to $455 million at June 30, 2015. Pro forma for the refinancing of the notes, our availability under the revolver would be $175 million. We will continue to monitor our fixed-floating mix, as well as capital market conditions and other factors in prudently managing our capitalization. During the nine months ended September 30, 2015, we purchased a total of approximately 691,000 shares of our common stock on the open market for approximately $6.1 million, including brokerage commissions at an average price of $8.84 per share. At September 30, 2015, the total amount of remaining shares authorized for repurchase was approximately [3.3 million].

With that, I'd like to turn the call back to Steve.

Thank you, Donna. Our third quarter results reflect continued execution on our strategic initiatives and ongoing commitment to creating value for client shareholders. We continue to expand our efforts in leveraging the breadth and depth of BlackRock, not just in cost savings, but in strengthening our investment decision process and broadening our opportunity set. Unequivocally, BlackRock's resources, brand and reputation will only continue to enhance our ability to create value for our client shareholders.

We have exercised and will continue to exercise a prudent approach to capital allocation, selectively deploying capital into attractive risk adjusted return opportunities and repurchasing shares in a value accretive manner. Further, we will continue to invest in our business by adding sourcing, investing, and operating capabilities. We believe our vision and execution ability, along with BlackRock's commitment to private credit will allow us to attract, retain the strongest fiduciary client-focused talent.

BlackRock Capital Investment Corporation is well positioned for these times. Given our projected distribution and run rate coverage of 110% and low leverage at 0.45 times, we are poised to patiently grow our net investment income and return on equity, to create value for our client shareholders with a focus on maintaining a confident distribution. We intend, however, to remain disciplined in our investment process, proactive in managing underperforming situations and prudent in regards to portfolio construction and financial leverage.

As we think about distributions for the balance of 2015 and beyond, we have set the distribution at a level that we believe takes into account the rates available for the types of investments that we are comfortable with in today's environment, but we will continue to actively manage our distribution in line with continued net investment income growth.

In closing, I'd like to take this opportunity to thank our client shareholders for their support, our team for all of their efforts and to thank you for joining the call today.

Carmen, you may now open the call for questions.

(Operator Instructions) Jonathan Bock, Wells Fargo Securities

You had such significant progress as it relates to equity, churn and as well as your ability to [dozen] the franchise and deploy. Maybe taking a moment just to look at repayments in this current environment, right, when we think about Foundation Building Materials, perhaps a few others with lofty yield what's your view on the likelihood of prepayment of attractive assets in your portfolio in light of the current volatility in credit markets that we're seeing today?

As you noted, Foundation paid out in the early part of the fourth quarter here. I think as we look forward and we do closely monitor what we anticipate is to prepayment speeds on a investment by investment basis, I think we feel pretty comfortable in terms of the quality of prepayments as it relates to yield, we're in pretty good shape. Moreover, to the extent that we do receive prepayments, which I anticipate some of that to occur in the fourth quarter, we truly believe that we have substantial opportunity for capital deployment on the back of volatility and opportunities to directly engage with borrowers around interesting investment opportunities. So with that being said, I think the opportunity to redeploy capital against the sorts of prepayments that we potentially could envision would be a net potentially accretive event for us.

And taking two of the new originations in the third quarter into context , the Recorded Books, as well as Water Pik, my question is how would you describe the process or the ability to which you were able to originate that investment? Obviously, Water Pik is a name we've seen in other portfolios and so you know Steve, BlackRock is very opportunistic, but as you move towards the private, more direct origination model, how do you balance what one would see as perhaps a bit more syndicated clubby versus what folks are very, very focused on in this environment, because it's relatively void of true value in some cases, the guys that are originating, that are talking to sponsors, that are writing a check, that are doing all of the things that we know you'll be able to do. Just give us some thoughts and color around your direct origination efforts, as it relates to those two investments.

As I think I said to you in our last earnings call, our first order of focus is ensuring that we can deploy capital in quality investment opportunities and ultimately generate attractive risk-adjusted returns for investor clients, that's really job one. How we source those opportunities is certainly important, but where you may be able to get an opportunity, given sort of circumstances can vary. There are times for which intermediated opportunities can be attractive and there are times that they're not. Certainly on balance, though, the direct origination is our focus. And even if we were to do something for which there is an intermediated opportunity, the standard upon which we would evaluate that investment would be no different than our direct originations, i.e., we would need to have a direct relationship with the company to be able to do fundamental diligence that's supportive of a direct investment event.

So as we think about the two names that you highlighted, first and foremost, Recorded Books is a more material investment. Recorded Books is a direct investment for which we have a very good relationship with the sponsor, very quality sponsor. It's a name that we've known for quite some time as a company and have a lot of confidence in the prospects of that company and we're able to control structuring of the investment to fit within the parameters of what we would deem to be a quality investment for our clients. So, I think it fits very much in the frame of a directly originated investment.

With respect to Water Pik, there's history there. As you noted, it's an existing position, but Water Pik is one in which -- dates back, I think, more than a couple of years for us as an exposure, where we do have a relationship with the management team. We're very familiar with the company. So, when you think about the quality of the business and the opportunity to add on exposure in the name for which we're pretty material owner of that tranche. It's an attractive deployment of capital and a diversifying opportunity, for which we believe there's a lot of downside protection. So we like the name fundamentally. I wouldn't extract from Water Pik anything more than we had a specific [axe] in the name that was supported by a fundamental investment approach.

The only other question that relates to the two investments and this is just an item that's like a pervasive theme throughout the space relates to second lien. So, clearly we see both our second liens giving good yields and often we hear the second lien market is extremely heated, simply because there are quite a bit of funds, be it mass funds or the like that are competing for high yielding paper, best terms and covenants etc seem to diminish at times, certainly aren't as good as what they were. That we understand, but perhaps some additional level of comfort, given that folks don't have your viewpoints and can't see through to the security itself. All they see is a subordinate position, originated at a time when subordinate credit, some folks would argue gets tougher and tougher to originate quality transactions. How do we think about risk in those two specifics in light of the second lien hearing there?

So when we think about risk, I think the first point of focus for us is really understanding the fundamentals of the business model of the borrower and making a determination as to the durability of that business model, understanding how that business works to discern that view is critical to evaluating then the stability, revenues, EBITDA and with that ultimately cash flows. So that's really the first order of business. Behind that what we look very closely at is management team and the quality of the management team and how long they have been with the business, how long they've been in the industry, but equally important, what their track record is in performing through time in creating value for the shareholders of that middle market company. I highlight this point, because in middle-market companies, certainly just by virtue of their size, inherently, they have higher business risk than large corporates. And so, you could have a quality business model, but when you add on that a quality management team it gives them the capability to actually navigate the uncertainties of economic conditions and protect value and therefore protect our investment position in a debt tranche. The third piece of this is understanding the ownership itself and who that is and how they behave and what's their cost basis in the investment and the required return, such that we can feel comfortable that the behavior of the sponsor is one in which we'll be aligned in the interest of us as a debt holder.

When we take those different components into consideration and then we evaluate the instrument, it's really a question of the allocation of those risk factors against the capital structure and that could come in the form of first lien, it could come in the form of second lien mezzanine or equity. Obviously we're a private credit investment fund and in circumstances for which we believe the durability of the business model was there or collateral support, if that's what's required, we will in fact be very comfortable owning second lien exposure for which we can have visibility to what we see the upside of the investment to the downside under different sets of conditions.

Now, integral to the instrument itself is understanding its fundamental structure and what protections are afforded to us as a creditor to ensure that we have the opportunity to come back to the table in the event there is a deviation from the expected performance or alternatively, we at least have the ability to re-price the risk to be more appropriate for the company's risk and at times maybe even market pricing at that moment. So it is an all encompassing, very holistic approach as to how we evaluate where we invest in the capital structure.

Greg Mason, KBW.

First one, quick question on -- following up on Jon's question on Foundation. Given that that investment I believe is like six months old and three-and-a half years still left to maturity, are there going to be any material prepayment penalties associated with that repayment in the fourth quarter?

There is a prepayment penalty. Donna?

$500,000 was realized.

So, there is a prepayment penalty associated with that. Our investment in Foundation, though, we actually anticipated that refinancing event on their horizons. It was all certainly taken into consideration when we did the investment in the outset and as highlighted with Jonathan in his question, as we looked very closely at what our prepayment speeds are and with that then where we need to be relative to deployment of capital given our objectives on growth, that was taken into consideration. So, I think you can assume as we move into the fourth quarter, we fully have captured that in how we're thinking about the deployment of capital for that period.

And then just looking at the liability side of the balance sheet that's great news moving the term debt over to the credit facility. As we look, once that's done, there's about $160 million left of capacity on that credit facility and if we do some simple math, to get a [0.7] kind of target leverage that's $170 million of additional new investments, so slightly more potential to make investments than capacity left on the revolver. So what are kind of your longer-term thoughts about either upsizing the revolver or doing some other type of unsecured debt financing for managing the liability side of the balance sheet and your growth?

So I think from a capital structure point of view, we will always monitor what is the rate and optimal capital structure for the BDC that will maximize value. We believe that the various capital markets, as well as the bank loan market is very much available to us and in fact, we'll look across those markets at different moments in time to figure out where we think we can optimize that capital structure, taking into consideration of course, the mix of assets we have, fixed versus floating, as well as then, appropriately, the alignment of liabilities accordingly and the diversification of funding sources, obviously underpinning the business. So we will take all of these things into consideration. I thinks that our pre-payable debt outstanding pro forma for the repayment of the notes is about $230 million, which from our perspective is not really a size that would drive toward an efficient capital markets execution, nor would we want to be sitting in a position for which we didn't have flexibility of pre-payable debt, that wouldn't be a prudent financing either. So we will continue to monitor it and as we continue to deploy capital into the market, we'll pick points in time of opportunity, we think it makes sense to do something in a capital market basis or we may very well just leave it in the bank facility.

With respect to the bank facility, we're always looking at that in terms of its maturity, in terms of its size and quite frankly in terms of whether there's opportunities to improve upon pricing and we've think on all those points there's probably opportunity for us to do some additional work if we so elect to do that. So we will continue to monitor that as well.

You said refinancing the debt into the credit facility wouldn't impact the borrowing base capacity. Do you think that assuming the size doesn't change, do you have the borrowing base capacity on the assets to fully utilize that $405 million of current capacity there?

We do have the borrowing base capacity to utilize the $405 million pro forma for the notes. So I think we're fine on that. I actually would take a step back and think about where do we see optimal leverage given our views around the future. I've mentioned in the past and I am not changing that position at the moment that something in the sort of [0.6 to 0.7] is the right range and we will navigate into that zone over time, picking spots that opportunity against volatility that we feel will continue to show itself in the market.

And one last question, just going to the portfolio, New Gulf Resources, one of your oil and gas plays, pretty decent write-down this quarter, second lien at 11% of cost and the first liens at 70% of cost. So any commentary that you are willing to give us around the state of that investment and the potential for that going on non-accrual in the future at some point?

Well, a couple of things there. From an investment point of view, our exposure there at fair market value at [9/30] is $14.7 million in the senior secured notes, and $450,000 in the subordinated notes. We are a public level as it relates to our investment in that particular name as a legacy position for the BDC. We continue to monitor that situation quite closely. It is a real-time developing set of facts and as we proceed through the month for which there is an anticipated bond payment in mid-November, we'll see what they ultimately do as it pertains to the payment of that note, remembering at least from public level information perspective, the company, as these companies often do, work pretty hard and become quite resourceful finding opportunities to create cash. They have been on the record as it pertains to asset sales, as well as joint ventures pertaining to the Johnson Ranch property. So it's unclear to us, given our position we said relative to public information as to where they stand on those efforts. Obviously, to the extent that there is a failure to pay on the bond that would precipitate a necessity for a non-accrual status relative to the New Gulf investment. So that's certainly something that we had contemplated. Having said as much, when you look at it from a materiality point of view, for us, we would be looking at something here that is relatively small in terms of the impact around interest income on the portfolio. On an annualized basis, it's about $3 million and on a cents per share quarterly is about $0.01. So it's not a material investment for us.

David Chiaverini, Cantor Fitzgerald.

I just wanted to ask a follow-up on New Gulf Resources. So the first lien, you've got it marked at $0.70. But on Bloomberg, it looks like it's quoted meaningfully below that level. Could you just talk about your valuation process and how you arrived at the $0.70 mark?

First of all, one has to be a bit careful about Bloomberg listings that doesn't necessarily represent a market. It just represents an indication, and so a market is a function of a two-sided market and trading activity, actually in the name. So, you can just put that out there, it's just a point of caution. Look, we, I think like others look toward third-party valuation firms as an integral part of a valuation process and the valuation firms will take a look at secondary activity in the names, will also look at the leverage and the capital structure against cash flow and against enterprise transactions or in the case of collateral, value in the circumstances (inaudible) companies like an oil and gas producer. So, the determination of $0.70 is a reflection of the yield associated with that senior note and what was determined to be appropriate relative to perception of our collateral coverages. So, I think at the $0.70 that was as of September 30, deemed to be the appropriate fair value based upon the available information at that time.

And I also had a follow-up on your leverage, so that the net leverage at 0.45 times, you've got capacity there to grow. Is there a timeframe or how long would you expect to get to your target leverage level of 0.6 times to 0.7 times, or would it really be dependent on the market environment and you being opportunistic?

I think it's really market environment and opportunistic. Look, we're not trying to force a play, I think we sit in a very enviable position, with an under-levered balance sheet, with good NII coverage of our distribution, at a time for which market volatility, as noted in the prepared remarks, has come upon the financial markets. We don't think that's going to change and we think in the face of that volatility there'll be terrific opportunities to pick spots that will fit within the investment parameters I highlighted in my responses to Jonathan Bock's questions. So we will pick our opportunities, we will deploy against that, but I do think that the presence of volatility is sooner than later and more rather than less, and so you can assume that when that happens, we will be opportunistically deploying capital against it. So it's not a specific timeline, it's an opportunity and we'll take advantage of those.

Charles Dickie, Pacific Madrone.

When looking at your portfolio, I was looking at particularly your Energy Holdings and I was surprised to find it looked like you actually made money on the year, I think on Energy Holdings that really comes down to two issues. One was the U.S. Well equity holding has gone from a price of, I think, about $9 million to $17.7 million and then the other issue with the write-down was on the bond you were talking about before, New Gulf Resources. Now, New Gulf Resources is one of the few holdings in your portfolio that actually is a bond that trades in the market and has trace pricing, in this bond, if you look back, traded in mid-September [31.25 cents] on the dollar. So I guess how do I get comfortable that, one, the equity of U.S. Well has really increased by that much, and two, when larger than a [$1 million] trade of New Gulf happened in September with a 31 handle, and you marked it at [$0.70] that the market pricing for energy is correct?

So I think as it relates to New Gulf, I've covered that off, the markets are really defined by two-sided markets and flow of liquidity, not a single data point, and the circumstances upon which one might transact. And an individual investor's challenges, if you will, may give rise to lower levels. That doesn't necessarily reflect where fair value is in an actively traded market. So, as I said, I outlined kind of what the valuation approach is in general and what it was specifically to New Gulf as of [9/30] that really wasn't an actively market in that name.

With respect to U.S. Well, U.S. Well I think is, as I highlighted in the prepared remarks, is really a quality company. And while one may be predisposed to casting all participants in the sector into the same bucket, the fact of the matter is U.S. Well, I think is differentiating from the larger population of oil and gas participants. The company has performed extraordinarily well, even in the face of the challenges. Obviously, I can't share specific information, given the confidentiality arrangements. All that I would say to you is directionally the company, with respect to its own performance, is up meaningfully on a year-over-year basis and is exceeding its budget by a good margin. So the company's quality of its assets, utilization rates, the quality of the management team, sort of playing on a theme earlier that I mentioned, that it is about management and what management does in moments of adversity, it was very successful in taking substantial cost out of the business that covered any pricing adjustments that were required in the services business. So, the company has done very well.

The other thing to note is with respect to an instrument, instruments can be structured in a lot of different ways. And so, sometimes you're going to find circumstances, in the case for instruments, for which they accrete value with the passage of time based upon different triggers. So, when you look at the company in the aggregate, based upon performance and its valuation, in part, obviously it's driven by third-party valuation, but also you have to look at the actual instrument itself. So you can end up with some of these anomalies in a tougher sector, because you have a standout performer and we would categorize you as well in this regard.

(Operator Instructions) And there are no other questions at this time.

Okay, thank you very much. We appreciate everybody's participation on the call. Have a good day. Thank you. Bye-bye.

Thank you for participating in today's conference. You may now disconnect.