FS KKR Capital Corp (FSK) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the FS Investment Corporation's First Quarter 2017 Earnings Call. (Operator Instructions) Please note, this conference is being recorded.

At this time, Chris Condelles, Head of Capital Markets and Investor Relations, will proceed with the introduction. Mr. Condelles, you may begin.

Thank you. Good morning, and welcome to FS Investment Corporation's First Quarter 2017 Earnings Conference Call. Please note that FS Investment Corporation may be referred to as FSIC, the fund or the company throughout the call. Today's conference call is being recorded, and an audio replay of the call will be available for 30 days. Replay information is included in a press release that FSIC issued on May 10, 2017.

In addition, FSIC has posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended March 31, 2017. A link to today's webcast and presentation is available on the Investor Relations section of the company's website at www.fsinvestmentcorp.com under Presentations and Reports. Please note that this call is the property of FSIC. Any unauthorized rebroadcast of this call in any form is strictly prohibited.

I would also like to call your attention to the customary disclosure in FSIC's filings with the SEC regarding forward-looking statements. Today's conference call includes forward-looking statements, and we ask that you refer to FSIC's most recent filings with the SEC for important factors that could cause actual results or outcomes to differ materially from these statements. FSIC does not undertake to update its forward-looking statements unless required to do so by law. In addition, this call includes certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures can be found in FSIC's first quarter earnings release that was filed with the SEC on May 10, 2017. Non-GAAP information should be considered supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly named measures reported by other companies. To obtain copies of the company's latest SEC filings, please visit FSIC's website.

Speaking on today's call will be Michael Forman, Chairman and Chief Executive Officer of FSIC; Brad Marshall, Senior Portfolio Manager of FSIC and Senior Managing Director at GSO/Blackstone, FSIC's investment subadviser; and Jerry Stahlecker, President of FSIC. We will then open the call for questions.

I will now turn the call over to Michael.

Thank you, Chris, and welcome, everyone, to FS Investment Corporation's first quarter earnings conference call. We appreciate your interest in FSIC. On today's call, I will provide a summary of FSIC's key highlights, after which Brad will provide an overview of our investment activity. Then Jerry will discuss our financial results in greater detail.

Net investment income for the first quarter 2017 was $0.22 per share compared to $0.21 per share for the fourth quarter of 2016 and $0.21 per share for the quarter ended March 31, 2016. Adjusted net income for the first quarter of 2017 was $0.22 per share compared to $0.23 per share for the fourth quarter of 2016 and $0.21 per share for the fourth quarter ended March 31, 2016.

FSIC's net asset value as of the end of first quarter was $9.45 per share compared to $9.41 per share as of December 31, 2016, and $8.82 per share as of March 31, 2016. It is important to note that we, along with our Board of Directors, work with independent third-party valuation services -- service providers to mark 100% of the investment portfolio to market each quarter. We at FS recently celebrated our 10-year anniversary as a firm. That milestone led me to reflect on the dramatically different investment environment we face today relative to when we launched our flagship fund, FSIC, in January 2009. Over the past several years, we have seen loose monetary policy help to support a low default rate -- a low default and low yield environment, which has driven increased investor demand for credit-oriented products, especially leverage loans, which provide investors with a natural hedge to rising interest rates.

The increasing amount of capital which has flowed into direct-lending strategies has led to the current use -- issuer-friendly environment and a tightening of credit spreads in the middle market. These dynamics have led to increased competition for deals, and more importantly, increased risk-taking within the areas in which we invest. In light of these market conditions, we have already experienced an increased number of refinancings in the portfolio and expect that trend to continue in the near term. While these refinancings are expected to drive a short-term uptick in fee income received from prepayments and redeployment of capital into new direct originations, they create additional pressure to redeploy the fund's capital in a persistent tight yield environment.

Although the investing environment will continue to present new challenges over the next 10 years, our focus on ensuring that FSIC continues to be one of the top-performing BDCs will remain the same.

While we have delivered strong returns to investors since the inception of our fund, I believe that the current market warrants our focus on several key areas to ensure that we continue to deliver top performance in the coming years.

First and foremost, we need to remain disciplined in the current market. We have an experienced investment team at FS and a strong subadviser in GSO to work with us to navigate the current investing environment, and we must remain prudent investors, maintaining our focus on high-quality direct originations with strong risk-adjusted returns.

To do that in the face of increasing competition need to redeploy capital from prepayments in a tight yield environment, we need to create more opportunities and then select the best risk-adjusted investments. We will do that by working to continue to expand our originations footprint and explore the structures through which we invest to ensure that FSIC has as many choices as possible in making investment decisions. More choices in the form of greater deal flow should lead to more selectivity, and in turn, more selectivity should result in better choices and, ultimately, better performance. We continue to make the necessary investments in our platform to ensure that result. All that being said, I believe we are well positioned, and I am confident that these efforts will allow us to build upon the robust strengths and large scale of our franchise.

With that, I will now turn the call over to Brad to discuss our investment strategy during the quarter. Brad?

Thank you, Michael. Michael mentioned a lot of capital is coming into the market and competitors are cutting interest rates to deploy capital, both of which are tell-tale signs of a market top. We believe it is an environment where you need to be cautious with credit risk and structure, especially given our view that we're in the later phases of a credit cycle.

Fortunately, we can compete based on the value proposition that we bring to a middle-market company, including the GSO Advantage program and the long history GSO has with many sponsors, which in aggregate can help us better sustain our portfolio yield as we did in Q1 2017 and over the past year.

Total purchases for the quarter were $539.7 million, 62% of which were in first-lien senior secured loans. Exits of $364.3 million during the quarter were driven largely by the prepayment of our investment in Ascent Resources. Commitments to direct originations totaled $429.4 million in the first quarter compared to $322.1 million in exits. If you exclude the restructurings and refinancings of existing loans, 82% of FSIC's purchases during the quarter were made in first-lien securities. We continue to use the size and scale of GSO's direct-lending platform and FSIC's capital base to identify, source and structure investments with attractive return profiles. As of March 31, 2017, the gross yield, prior to leverage and excluding nonincome-producing assets, was 10.2%, up slightly from 10.1% for the prior quarter.

The average leverage for our direct originations through the respective tranche in which we invested, excluding equity and collateralized securities, decreased to 4.5x from 4.8x in the prior quarter. All our directly originated portfolio companies have access to Blackstone's group purchasing organization program, which leverages the collective buying power of Blackstone's portfolio companies to reduce operating expenses. This potentially leads to improved EBITDA margins for the participants, and ultimately, better credit metrics for our portfolio companies. And in turn, stronger performance for FSIC. As of April 27, 2017, FSIC portfolio companies that participate in the program had an average saving on addressed spend of 20.1%, increasing EBITDA for those companies by an average of 4.3%.

As of March 31, 2017, we had 2 companies on nonaccrual, which in aggregate represented 0% of the portfolio based on fair value and 0.7% of the portfolio based on amortized cost. Note that Paw Luxco II Sarl, one of our nonaccrual companies, is also known as Jack Wolfskin, a German producer of outdoor functional clothing.

Since FSIC's inception, where FSIC's portfolio companies have defaulted on their debt, the funds average recoveries have been in excess of their corresponding cost basis, which means FSIC has made money in aggregate when a company has defaulted. We work hard as an equity owner, and as GSO is part of Blackstone, many tools are at our disposal in order to maximize our recoveries in the event of default. Equity comprised approximately 13% of the portfolio as of March 31, 2017, based on fair value, down from approximately 14% as of December 31, 2016. Looking forward, given strong market multiples, we expect our equity position to be monetized in whole or in part over the next few years.

Let me now turn to our energy portfolio. Given the size of our former Ascent Resources Holding, it is worth highlighting this particular energy investment. Confident in our underwriting, we held and supported Ascent through the energy downturn, and we were rewarded for doing so. Ascent was paid down at 105.5, and we realized an IRR of approximately 16% for this investment.

We feel strongly about the quality of the remaining energy positions, especially our investment in FourPoint Energy. More broadly, energy-related investments as of March 31, 2017, comprised approximately 7% of FSIC's investment portfolio based on fair value, down from 12% based on fair value as of December 31, 2016, due primarily to the repayment of our investment in Ascent Resources.

I will now turn the call over to Jerry to provide additional details on our results.

Thanks, Brad. Net investment income for the first quarter of 2017 was $0.22 per share compared to $0.21 per share for the first quarter of 2016. Adjusted net investment income for the first quarter of 2017 was $0.22 per share compared to $0.21 per share, again, for the quarter ended March 31, 2016.

The rise in net investment income between the fourth quarter of 2016 and the first quarter of 2017 was largely attributable to increased fee income, driven largely by the prepayment of our second-lien investment in Ascent Resources. Fee and dividend income totaled $19.6 million in the first quarter of 2017 compared to $17.2 million in the fourth quarter of 2016, and $1.9 million in the quarter ended March 31, 2016.

Subject to the timing of anticipated prepayments and new direct originations, we expect fee income to be lower than average during the second quarter of 2017, which may result in a quarter-over-quarter decline in net investment income. As of March 31, 2017, FSIC's total accumulated, undistributed net investment income on a tax basis was approximately $0.59 per share. We will use a portion of this accumulated, undistributed net investment income if there is a need to bridge any resulting shortfall between net investment income generated in the quarter and our second quarter distributions.

In the first quarter of 2017, we declared a regular quarterly distribution of approximately $0.22 per share, which was paid on April 4, 2017. For the second quarter of 2017, we declared a regular quarterly distribution of approximately $0.22 per share to be paid on or about July 5, 2017, to stockholders of record on June 21, 2017.

NAV was $9.45 per share as of March 31, 2017, compared to $9.41 per share as of December 31, 2016, and $8.82 per share as of March 31, 2016, resulting in the first quarter NAV return of approximately 2.8%.

Net change in unrealized depreciation on investments during the first quarter of 2017 totaled approximately $112.4 million or $0.46 per share. Net realized losses during the first quarter were $100.9 million or $0.41 per share, driven primarily by the restructuring of Advanced Lighting and the sale of Swiss Watch International.

As of March 31, 2017, FSIC's debt-to-equity ratio was 79.5% compared to 74.1% as of December 31, 2016. This quarter-over-quarter rise is largely the result of short-term borrowings under our revolving credit facilities in order to facilitate the timely purchase of what we believe to be attractive income-producing investments. This ratio has already declined since quarter-end, and we estimate it at 76.5% as of May 5, 2017.

I'll now turn the call back to Michael. Michael?

Thanks, Jerry. As the largest manager of BDCs with more than $17 billion in BDC assets under management as of December 31, 2016, we at FS Investments believe our scale, relationships and experience will continue to benefit FSIC's shareholders. Given the strength of our portfolio and historical performance, we believe we are well positioned to generate strong returns for our stockholders. We look forward to an exciting reward in 2017. Thank you for your trust and investment at FSIC.

With that, we will now open the call for questions.

(Operator Instructions) Your first question comes from the line of Ryan Lynch with KBW.

First question. You guys exited quite a few stressed investments in the quarter as indicated by the $100 million of realized losses. However, you guys had very strong unrealized appreciation of over $110 million in the quarter to offset those realized losses. So can you just talk a little bit more about what drove the overall portfolio appreciation. Were you able to exit these stressed investments at better pricing versus your 12/31 fair value? Or was something else driving the overall net appreciation in your portfolio this quarter?

Ryan, it's Brad. The realized losses were a result of restructurings, Advanced Lighting and Swiss Watch. The appreciations came from a lot of our depositions, ThermaSys, NewStar Financial and some of our common equity positions in PSAV, which is audiovisual; Amaya, which is -- we have some warrants in that public company. So it's less about our stress investments, more continued performance in some of our core positions.

And, Ryan, as you know, also, when you realize a loss, then you have an offsetting net change in unrealized appreciation. So those 2 typically balance each other out and the delta between the 2 is where you see the real appreciation. Otherwise, it's just an accounting journal entry.

Yes, okay. And then you mentioned fee income being a little bit lower in Q2, which could potentially pressure NII lower and maybe even below the dividend, and you mentioned using the $0.59 of spillover income to bridge that gap. I was just wondering, I mean, is that a -- how do you guys, I guess, balance out that you guys have $0.59 of spillover income that you guys do have to pay out or get tax on it with the potential that, that earnings could fall below the dividend not just next quarter but in upcoming quarters and in the back half of the year? So how are you guys thinking about the dividend as far as maybe earnings falling below the dividend for a persistent time period as well as having a significant amount of spillover income that you guys are required to pay out or be taxed on?

We talked about on the year-end call that that's an issue that we'll have to address when we get to the fourth quarter. The spillover essentially funds the distributions for the first 3 quarters of the year. And as we get into the third quarter and we look at the environment in which we're investing, we look at our run rate, net investment income and the supportable level of distributions, and we'll make a recommendation, the board will make an evaluation at that time of what the appropriate distribution is going forward. So part of it'll be a function of what the market looks like at that point in time and what our portfolio looks like.

Okay. And, Michael, maybe one for you. I mean, corporate governance is very important in the BDCs, particularly in light of some of the things you've seen recently. And so with GSO been mission-critical to both your origination and investment process, can you just explain how not having a member of the GSO or the subadviser on the board makes sense given the pulse that they have on FSIC's investment process? And if you do think that they could add value to the board, why not add a member of GSO to the board?

Yes, thank you for the question. We think we've had a terrific collaborative relationship with GSO from launch. We have discussed this issue with the board, and the board's position is they decided it is not in the best interests for the investors at this point. So it's something we're always happy to reconsider, but the board's considered it and felt that we adhere to best practices under the current arrangement.

Your next question comes from the line of David Miyazaki with Confluence Investment Management.

This is really good to hear the outcome for Ascent. I think that we have heard in the past that you had confidence in our energy investments and the outcomes that could come about. So it's very nice to see you -- see that come to fruition. Just as a little bit of a follow-up to what Ryan was asking about. You guys are pretty unique in your structure and having this relationship between an adviser and a subadviser that most other BDCs don't have that, in that there's only one adviser, right? So as I listen to you talk about -- I think, Michael, you said that refinancing is going to be rising and that you've seen an uptick in fee income, and then on the other side, we're hearing from Brad that there's tell-tale signs that there's market top in the later stages -- and we're in the later stages of a credit cycle. So there could be some challenges for you in managing this portfolio, and I'm just kind of wondering between the adviser and the subadviser, I'm going to presume that you don't always agree on everything with regard to underwriting and how to position the company, and how to move through capital allocation decisions. So it's been collaborative, but can you kind of walk us through how the dynamic works when you don't agree on policy?

Yes, we've been doing this for a long time. We launched the fund in 2009, and there's others who have, for various reasons, have gone only with an adviser, others have adopted the adviser-subadviser model, particularly those who raise capital in the IBD space. So we certainly always strive for consensus. We always strive for collaboration. We recognize the role that we have as adviser, which is to make final decisions. Then we recognize the role that GSO has as subadviser, and we think it's really been a strength. We think it's one of the reasons we've delivered terrific performance across all of our funds, and we think it's worked very well to date.

I mean, that's great to hear. And I think that as shareholders, we certainly benefit by having the perspective of 2 different organizations in how you're making underwriting and capital allocation decisions. So I'm glad to hear that it is something that we're going to be mindful of, is that the benefit in owning your shares is having collaboration between 2 parties that may not always agree on things. And so some of the questions that Ryan raised around how the board is formed and how you form policies going together, I think, are going to be very important as we go forward.

Yes, we agree. I mean, we think a healthy tension is probably a positive, and it brings out the best in both parties. But we've been doing this for a long time together. I think we both take our roles and our jobs very seriously. And I think, at the end of the day, it's all about delivering performance for our investors, and we are singularly focused on that.

(Operator Instructions) Your next question comes from the line of Jonathan Bock from Wells Fargo Securities.

Starting first with the equity that currently sits on the book and just churn and redeployment, Brad, Michael, can you guys walk through what you would believe to be churn-able equity in this environment, right, that's perhaps a little bit more subjected to a decision that you might make and/or, I mean, and perhaps visibility into the potential churn there? Because that is a good offsetting pressure for earnings as it allows you to expand NOI in this environment. Can you give us a sense of where that's headed today?

Jonathan, it's Brad. I'll take this one. Our top 10 equity positions make up about 75% of our equity exposure. I would say that of those 10, 9 are at or exceeding our expectation from a performance standpoint, which is the good news. I would say 7 of those we're working on -- GSO employees are working on them very actively on a daily or weekly basis, and I would say 3 of them are in process of exploring monetization events. So just to give you kind of rough numbers of what the equity portfolio looks like, not all of those we control, obviously, as you point out, but there's a handful in which we do and a handful which are in process to be monetized.

I appreciate that. And then also just on the new investment environment, can you walk through the opportunity set and where you see redeployment yields? I mean, clearly, we saw some fairly yield-y deals this quarter, right, a credit to the reach of the organization, but where are we settling on a true first-lien, senior-secured yield and what you'd consider the reasonable attachment point that one might be willing to lend at? So for example, looking at a sizable loan funding this quarter, JSS. Or I'm just trying to get a sense -- don't have to use that one, specifically, but the fairly healthy yield of 9-plus, a fairly sizable amount deployed at $100 million, right? What types of -- that would seem outsized in this environment where we're seeing folks put up 6s and 8s. Walk us through a little bit of the differentiation there and the origination, and sourcing items, and really where you could expect to be deploying capital in today's environment.

Sure, I'll take that one again. I think both Michael and my comments were centered around that the market is, as you pointed out, very strong. I think the VIX is at a 20-year low right now. So complacency has clearly set in, a lot of capital in the space, and so we're deploying our kind of pipeline and our resources across GSO. So you find those situations that are a little bit unique, maybe outside of a process, in order to maintain spreads that are in line with our historical spreads for first-lien securities. Not every deal, obviously, connects, given that there's a lot of capital, but we're trying to, again, sell our historical relationships, the platform, the GSO advantage, anything that will distinguish our capital from other pockets of available capital for these sponsors to try and maintain our yield for the portfolio. To answer your question, I think -- exactly, I think that the range of deals we're looking at right now is somewhere between 8% to 10% for first lien. If it's 10%, it's going to be fairly unique. So standard first-lien unitranche deals are -- be more in the midrange of what I highlighted.

And not -- and probably just worth mentioning, too, Jonathan, it wasn't more than a year ago that we were in the exact opposite position, where we didn't have enough capital to fund our deals, where the market was very volatile and spreads were a lot wider. So the markets do move, and we do appreciate that given how long we've been doing this.

And, Jerry, when origination comes in the door, we've also found some BDCs have the ability to classify something as OID or classify something as a structuring fee. And given the long-term rate -- dividend rate is unfortunately above what can be effectively originated in the credit environment today on a safe basis, which we respect focus that protect NAV. Can you talk to us about the temptation to classify something as a structuring fee versus OID? One provides a short-term alleviation of an earnings shortfall of the dividend, the other wouldn't, but it's a very important item I'd imagine you've considered. So how do you kind of fall out on the accounting of what you would choose to call structuring fee versus original issue discount, because at times folks look at them the same way?

Well, the structuring fee is obviously the fee for services, whereas the OID is a yield enhancer. And historically, from the inception of the fund, if on average we're getting about 3% in fees, roughly breaks down 50-50 between the 2. In some cases, it might be a 1% structuring fee, 2% OID, or 1.5%, 1.5%, and I think that continues to be consistent even in today's environment. There's no temptation really to try to move things around just to make 1 quarter's worth of dividend coverage.

I respect that and understand and also agree kind of looking back. And then just as a small wrap, and Michael, the corporate governance environment is important, sadly, due to -- if we think of some BDCs talking about externalization and, of course, poor dividend policy leading to dividend reductions, and dividend policies set by the board, all items that have just kind of pounded BDC investors this quarter. If I look at, just on a data-driven basis, right, the arrangement that you have effectively allows FS to collect 50% of the fee, and then GSO the other 50%. And so if I'm looking at that correctly just on the '16 numbers, it's about $61 million that goes to FS to effectively be the final decision maker. Though I noticed something interesting in your comments, you've mentioned that different from being a final decision maker, you were looking to expand your investment team or investment opportunity set/origination footprint. I'm curious, is that a final decision-maker move to expand your origination footprint? Because it sounds more like an opportunity to be a net originator as opposed to the final arbiter.

Thank you, Jon. The relationship between advisers, subadvisers has been the same relationship we've had since 2009 across all the funds we manage. With GSO, all of it is disclosed and, I assume, digested by the marketplace. I'm sitting here in a room for this conference call with 14 people, 13 of them are FS folks. And Brad, we all know, Brad does a great job. But we handle all of the management and operations of the funds, which is an awful lot of work, and we think we do a great job at it. We focus on best practices and transparency and work across the platform. We've always taken our role seriously, Jon. We don't -- we only serve one master. This is our master. We look to deliver performance to our investors. I think we've done a good job at that. And we'll continue to build our platform so we can continue to deliver the best results possible. That's the way we started in 2007, the way we launched this fund in 2009, the same way we look at the marketplace today.

Got it, and I appreciate that. That makes sense. Then, I guess, just because we're looking at a data-driven number of $60 million to handle administration agreements, that's one thing, particularly when you're already able to charge BDC investors fees for doing that. But then the other question is, the role as final decision maker is an important one, right? And know you talked about double underwriting and that process in the past, and you've mentioned that you're starting off and work with GSO at the very beginning or -- and then make a decision at the very end. So I guess, the question would be, to judge the $60 million going to FS, could you at least give us a data point on how many deals you turn down from GSO at any point in the process?

Yes, we certainly would not want to be at the finish line turning deals down. As I said before, it's a collaborative process. We've been doing this for a long time and are engaged in every deal in the structuring, underwriting of the deal and monitoring the deals and think we've got a good partnership with GSO and something that's worked to deliver terrific results.

Totally agree, but I often get pinched by investors that ask for numbers. Do you actually have a number of how many you do? Because many underwriters, it's their job to be the early decision maker or a late decision maker at any point in the process. One way to judge whether or not they're the job is how many deals are rejected. Do you actually have a statistic?

Yes, it's not -- we try not to keep score that way, Jon. As I said before, we try to make it a collaborative process. If you want us to go back and count, we'll try to count. But I've been involved in every deal since inception, and we look at every deal, and there's deals we like, deals we don't like. Deals we like, the risk-adjusted reward deals that we don't. That's kind of our job to oversee the process.

That statistic would be so helpful, and largely because of this. I mean, if I'm going through a 15(c) process, as many BDCs are this quarter, the fundamental point of how many deals are turned down to judge whether $60 million should flow to the adviser, who serves as that final authority, that'd be a statistic I'd be very, very interested in.

Your next question comes from the line of Terry Ma with Barclays.

I just wanted to follow up on the equity positions for a bit. The equity markets remain around an all-time high. So given where valuations are right now, that actually make it easier or harder for you to monetize your equity investments?

Terry, it's Brad. Again, the majority of the equity positions that we have exposure to, we don't control the process. There is a handful in which we do, and we are exploring exits for those names, given the robust equity environment and M&A environment.

Okay. So you mentioned a time frame of up to several years that it could take to monetize all your equity. I think that's actually shifted and elongated since I've asked you the last time. So what's the risk around just the pullback in the equity market around you guys realizing your marks? How would you actually frame that and balance that?

Yes, sure. So I think last time we spoke, we -- there were 5 deals that we were considering, or the sponsor, or the owner of the -- primary owner of the asset was considering exiting or selling. That number is down to 3, and so the number has come down a little bit. And the offset to that, the good news is that, as I said, 9 of the 10 primary equity positions are meeting or exceeding our expectations. So be obviously want to get the best results for our shareholders. So I think the sponsors and where we control the process, we're being patient on finding the best exit.

Terry, I think you'll find there's some portfolio companies -- one portfolio company in particular that I sit on the board of, I know that management, what they've told me is that they are looking at looking for an exit probably 3 years out. They think that there's increased value that they can drive between now and then in terms of continuing to build the company and putting the company in a position to maximize the value. So while the public equity markets may be frothy now, when you're looking at private companies where the sponsors and management are continuing to build the company and position the company for what they think is the ultimate value-creation event, they are looking at it somewhat independently of where the public equity markets are and more in relation to where their businesses are in relation to where they ultimately hope to build them.

Your next question comes from the line of Arren Cyganovich with D.A. Davidson.

Michael, in your comments, you talked about expanding the origination footprint and exploring structures that would help increase the opportunities. Can you talk a little bit more about what you mean by origination footprint and also what structures you're currently looking at to increase your opportunities?

Sure. Thank you, Arren. We're always looking, collectively, how to deliver the best risk-adjusted returns to the investors, particularly in the tight market that we live in today. I was talking to some investment bankers yesterday, and there is 82 different firms trying to raise money in the direct origination space right now. So it's going to be a more and more competitive market. So we think that requires covering a large universe, looking to see where we can find the best risk-adjusted returns, whether it's in first-lien assets, other assets. So we explore that all the time, and we'll continue to look to see how we can deliver the best returns to the investors.

What type of structures were you considering?

Yes, we've looked at JV structures. We've looked at syndication operations. I think JV's done right is a way that you can deliver a good risk-adjusted return to the investors. We're not there with anything yet. We're starting to kind of socialize these issues. So we look at ways to enhance performance, and I think in this type marketplace, it's even more critical to look for where you might want to take the capital where there's not a huge amount of competition.

Okay. And in terms of the repayment expectations starting to rise a little bit with refinancings, I believe you indicated the prepayment fees may start rising, but the second quarter fees, I guess, on the structuring side are going to be lower. So can you -- is the discussion more about longer-term over the next few quarters? Or is 2Q just higher prepayment fees with lower structuring fees? I'm just trying to balance the fee discussion.

Arren, it's Jerry. In terms of prepayment and new origination fees, I think what we meant to highlight was that fee income was higher in the first quarter because the pace of repayments and the redeployment into new assets, which generate additional fees. Second quarter activity, we don't always have perfect visibility into the timing of repayments, and therefore, then the timing of redeployments. But given that -- the somewhat frenzied pace of the first quarter, we'd expect thing to slow down a little bit in the second quarter, and therefore, for fee income in the second quarter to be lower than that in the first. But the market is always subject to change and time lines get moved up and time lines get pushed back, and so there's not perfect visibility into a deal we think may close in the second quarter, gets moved into the third or gets moved from the third into the second, but -- which is more a general statement of we don't expect second quarter numbers on the fee side to be quite as robust as they were in the first quarter.

And Arren, it's Brad. Ascent accounted for a large portion of the fees that were generated in the first quarter, so that moved the needle quite a bit it.

Got it. Okay. And then with the heavier amount of repayments expected with the tight environment, are you anticipating that you'd be able to reinvest those repayments? Or would you expect the portfolio to shrink a little bit over the next few quarters?

Sure. It's Brad again, Arren. I think the pipeline is pretty strong. I think we've got pretty good visibility, given that we're already midway through the quarter, that we'll be able to redeploy repayments into new proprietary transactions.

At this time, there are no further questions. I'll hand it back over to you for closing remarks.

Okay. Well, thank you, everybody. We appreciate your time and attention today and look forward to talking to you next quarter.

Thank you, ladies and gentlemen. That does conclude today's conference call. You may now disconnect.