Golub Capital BDC Inc (GBDC) 2012 Q1 法說會逐字稿

Good afternoon. Welcome to the Golub Capital BDC Inc.'s February 7, 2012, quarterly earnings conference call. Before we begin, I would like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical fact made during this call may constitute forward-looking statements and are not a guarantee of future performance or results, and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Golub Capital BDC Inc.'s filings with the Securities and Exchange Commission.

For the slide presentation that we intend to refer to on the earnings conference call, please reference the Events and Presentations links on the home page of our website, www.golubcapitalbdc.com, and click on the Investor Presentation link to find the February 7, 2012, investor presentation. Golub Capital BDC's earnings release is also available on the company's website, in the Investor Relations section.

I would like now to turn the call over to Mr. David Golub, Chief Executive Officer of Golub Capital BDC. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Thanks for joining us today. I am joined today by Ross Teune, our Chief Financial Officer. I hope you've been able to review our earnings release and investment presentation, which we posted on the website. I will be referring to this presentation throughout today's call.

I'd like to start today by providing an overview of the December 31, 2011, quarterly financial results. Ross is then going to come back and take us through the quarterly results in more detail. And then I'm going to return and provide some commentary on our recent stock offering and provide, also, some summary of some recent regulatory matters.

With that, let's get started. As I highlighted on page 1 of the investor presentation, net investment income for the quarter ended December 31, 2011, was $6.3 million or $0.29 per share. That compared to $6.5 million or $0.30 per share for the quarter ended September 30. Net investment income, including the net spread payments of $700,000 generated from the total return swap, was $0.32 a share for the quarter. We've included this additional non-GAAP measure, which includes the net spread payments from the total return swap, as we viewed the net spread payments from the total return swap as a recurring source of revenue and liquidity to pay dividends to our investors.

Net increase of net assets resulting from operations for the quarter ended December 31 was $6.2 million or $0.28 a share. That compares to $3 million or $0.14 a share for the quarter ended September 30. If we look at the combination of net realized and unrealized loss on investments and derivatives for the quarter, it was negative $200,000 -- a loss of $200,000 or $0.01 a share for the quarter.

I'm going to suggest, when we talk about this, that we combine both realized and unrealized, and divide the sum of those two into three categories to help explain where we got to the negative $200,000. It's a little bit confusing otherwise.

Let's first look at the total return swap. Net realized and unrealized gains on the total return swap were plus-$2.1 million, and that's comprised of two pieces -- $1.5 million of unrealized gains that was primarily a result of the rally in broadly syndicated loan prices in the loans that were referenced in the total return swap. In addition to the $1.5 million, there was also an increase in net interest accrued on the total return swap of $600,000 for the quarter. So a total of $2.1 million, consisting of two pieces.

Now let's talk about the second component of that realized and unrealized, which is GDBC's investments in loans and equity securities. Here we had a bad guy on net of $1.8 million -- a loss of $1.8 million, that was comprised of $2.1 million of realized loss on the sale of a non-earning asset, that was Den-Mat. $2.5 million of unrealized depreciation -- because we actually sold that Den-Mat position for more than its carrying value -- and we also had $2.2 million of unrealized depreciation, principally the result of a write-down on one new non-earning asset.

The final piece of net realized and unrealized relates to our futures hedge. If you recall last quarter, I mentioned that we -- in connection with drawing down debentures under the SBIC program -- we currently have temporary borrowings under that program. It will get fixed in the SBA's next pooling date in March. So to eliminate interest rate risk on those temporary securities, we entered into a futures hedge. And the futures hedge for the quarter ended December 31 had a $500,000 mark-to-market loss on it. That was comprised of $400,000 of losses on the settlement of one futures contract, and an unrealized loss of $100,000 on a new contract that we rolled into at Year end.

We view this as prudent management of interest rate risk. In an ideal world, this would roll into the origination costs of the SBA debentures. The loss reflects the fact that interest rates have actually gone down, so we'll get the benefit when we hit the pooling date of lower-rate debentures. But we are paying the price for that this quarter, in the form of a $500,000 loss on the derivative.

Turning to page 3 of the investor presentation -- as we communicated in our press release back in early January, originations for the quarter ended December 31 were very strong, totaling $164 million. After factoring in repayments, the net increase in investments was $102 million. I'm pleased to add that the mix of these new investments was consistent with our goal of shifting the overall mix of the portfolio to have a higher percentage of unitranche and sub-debt investments.

So the asset mix of on the new originations were 38% unitranche, 29% sub-debt and second lien, and 30% senior secured investments, and 3% equity. Unitranche investments now comprise over 40% of our total investments, and sub-debt and second lien investments at 20% of total investments. Deal flow remains strong, but as we said in the press release, we do expect originations to slow down for the quarter ended March 31, following the very robust quarter ended December 31.

Ross is going to go through the financials in more detail now. And I'm going to come back after he's done with some more information on our recent stock offering and an update on some recent regulatory matters.

Ross, over to you.

All right, thanks, David. I'm going to start on page 4 of the investor presentation. As David already mentioned, we closed a new investment commitments totaling $164 million for the quarter. Exit from repayments and sales totaled $42.9 million for the quarter. So our overall net funds growth was $102.2 million for the quarter.

As shown on the asset mix table, and as David also mentioned, we continue to make progress on shifting the asset mix from senior secured investments to more unitranche and subordinated debt and second lien investments. On a year-over-year basis, the percentage of senior secured assets declined from 59% of total investments to around 37% of total investments for the quarter ended December 31.

We still have some more work to decrease the percentage of senior secured assets in the portfolio, but we are getting close to our targeted asset mix.

Looking to the next page, the balance sheet, total assets were $634.0 million, which includes total investments of $562.1 million at fair value, and total cash and restricted cash of $39.9 million. Looking at the liabilities, borrowings were $311.9 million, which includes $174 million in floating rate debt issued through our securitization vehicle. It also includes $100 million of fixed-rate SBA debentures and $37.9 million on our revolving credit facility.

At December 31, 2011, net assets were $316.2 million, and our net asset value per share was $14.53. Flipping to page 6, the income statement, total investment income for the quarter was $12.5 million, an increase of 15.2% quarter over quarter. The increase was attributable to an increase in the average investments outstanding, as well as an increase in the average total yield on investments of approximately 30 basis points.

On the expense side, total expenses of $6.1 million increased by $1.8 million during the quarter, primarily due to an increase in incentive fee expense, as we exceeded the quarterly hurdle rate of 2%, or 8% annualized, on the income component of the incentive fee calculation. We also experienced an increase in base management fees as average investments increased. And last, interest expense increased, due to an increase in the average debt outstanding, as well as an increase in the average rate on our floating rate debt due to increase in the LIBOR rate.

The net loss on investments and derivatives for the quarter was $151,000, for which David provided a breakdown of those components in his opening remarks.

Turning to page 7, these charts graphically summarize the breakdown of our new originations and end-of-period investments. As shown in the chart on the left, 38% of our new originations during the quarter were unitranche investments. 30% were senior secured investments, with the remaining 32% in junior debt and equity investments. The chart on the right provides a breakdown of our total investments at the end of the period.

Turning to page 8, I'll walk you through the spread analysis, focusing first kind of on the red line, which represents the interest income yield. The interest income yield represents all income earned on the investments, excluding the amortization of discounts and origination fees. Our interest income yield continues to increase, reflecting our progress in the shifting asset mix. For the quarter ended December 31, the interest income yield increased 20 basis points from the prior quarter to 9.3%.

On a year-to-date basis, we have increased the interest income yield by 120 basis points from 8.1% for the quarter ended December 31, 2010, to 9.3% for the quarter ended December 31, 2011. Including the amortization of fees and discounts, the total yield on investments -- the dark blue line up on top -- the total yield was 10.2%. As we have previously noted, our total yield on investments will fluctuate on a quarterly basis depending on the level of runoff in the portfolio, as when a loan prepays, we accelerate the remaining unamortized fees.

Looking at the green line, the cost of our borrowings increased slightly from 3.3% for the quarter ended September 30, 2011, to 3.5% for the quarter ended December 31, as the three-month LIBOR rate increased by a comparable amount.

Turning to page 9 -- for new investments, the weighted average rate on new investments was 9.7%. The weighted average rate on new investments is based on the contractual interest rate at the time of funding. For variable rate loans, the contractual rate is calculated using current LIBOR, the spread over LIBOR, and the impact of any LIBOR floor. For fixed-rate loans, it's obviously the stated fixed rate.

The 9.7% for the quarter compares favorably to the weighted average rate of 7.5%, for investments that were sold or paid off in full during the quarter.

As shown in the middle of the page, the investment portfolio remains predominantly invested in floating rate loans. In regards to credit quality and non-earning assets, I'll turn to slides 10 and 11. The portfolio risk ratings on the top of page 10 tell a familiar story -- that overall, fundamental credit quality remains strong, with over 90% of the investments in our portfolio rated a four or five. However, non-earning loans did pick up during the quarter to 1% as we added one new account, which has a current fair value of $3.4 million.

In regards to the TRS, we had unrealized appreciation of $1.5 million during the quarter, primarily due to improved market pricing, which represents $1.1 million of the appreciation, with the remaining $400,000 due to earned spread income on the referenced loans.

As a reminder, independent valuations firms valued approximately 25% of our investments as of December 31, 2011.

Turning to page 12 -- our Board declared a distribution of $0.32 a share, payable on March 29, 2012, to shareholders of record as of March 16, 2012. Turning to slide 13, looking at liquidity and investment capacity, unrestricted cash totaled $25.4 million as of December 31, while restricted cash totaled $14.5 million. Restricted cash is cash held in our securitization vehicle and our SBIC entity, and is available for new investments that qualify for acquisition by these entities. Subject to leverage and borrowing base restrictions, we had approximately $37.1 million available for additional borrowings on our $75 million revolving credit facility.

As noted on the bottom of the slide, we've recently received approval from the SBA to issue an additional $30 million in new SBIC debentures that are subject to customary SBA approval and procedures.

I'll now turn it back to David, who will talk and provide more details about our public offering that is summarized in the middle of page 13. David will also provide an update on recent regulatory matters and provide some closing remarks. David?

Thanks, Ross. So we summarized in our press releases last week -- on February 3, we closed on a public offering of 3.5 million shares of our common stock at a price of $15.35. We raised $53.7 million in gross proceeds through that offering. We also granted the underwriters a typical greenshoe to purchase an additional 525,000 shares to cover overallotments, if any. If the underwriters exercise the overallotment option, the Company will receive an additional $8.1 million in gross proceeds.

In the offering, Golub Capital Trust purchased $3.1 million worth of the stock at the public offering price. This is something we've done before; this is a trust that will then go on and distribute the shares to our key investment professionals as part of incentive compensation. We think this is a really important way for us to continue to stay aligned as a management team with you, our shareholders.

As I said before, we are going to -- we have, and we will continue to look to raise capital. We feel it's a good time for both existing shareholders and new shareholders, so we (technical difficulty) very careful about avoiding earnings dilution from equity offerings that are too large or too frequent. You'll note this is a relatively small offering. In terms of that size, we feel it was the right amount given our current capacity. We've got additional borrowings we can take advantage of in our revolving credit facility. We have $30 million of additional debentures as part of the SBIC program that we recently received approval for. So we think we've got sufficient firepower to grow our balance sheet and our net investment income for a while.

Before I sum up, I want to provide you with some details on a couple of regulatory matters. First, on December 30, 2011, and we submitted filings on this -- two of the founding shareholders of Golub Capital BDC, two of our private funds, GCB V and GCB VI, sold a portion of their shares in GBDC to a pension fund that is managed by a longtime Golub Capital investor. The form for reportings are a little confusing; it looked to some like I sold shares. This is not the case. The shares were sold by the private funds. And these private funds are using the proceeds to invest in middle-market loans and equity investments -- in many cases, right alongside GBDC.

Second, for purposes of compliance with the asset coverage ratio test, we agreed with the staff of the SEC to treat the outstanding notional amount of the total return swap, less the amount of cash collateral on deposit with the custodian, as a senior security for the life of the instrument. We don't agree with this treatment as a philosophical matter, but we've agreed to this treatment at least for so long as the SEC is continuing its review of the treatment of derivatives and treatment of similar instruments. And we are hopeful that the SEC comes out with different guidance, as we think this approach is really not appropriate.

And finally, based on the discussions with the SEC, we also were told that it was important for us to include the interest spread income from the total return swap as part of the income component of our incentive fee, as against the capital gains components of the incentive fee. We had previously planned on including everything related to the total return swap in the capital gains component in the incentive fee. That approach, our approach, is consistent with the GAAP treatment of the interest spread payments. But the SEC informed us that it's their view that that's not the right way to look at it, that it has to be in the net interest income incentive fee.

So we agreed to treat it as the SEC provided us guidance. When we reviewed the incentive calculation with the interest spread statement -- the interest spread payments included in the income component of the incentive fee, we found that the result would be that the manager would be paid $647,000 more in the quarter. And we felt thought that was not appropriate. So we decided to, and have, irrevocably waived that incremental portion of the incentive fee that is attributable to the changed treatments of the TRS interest spread payments.

Again, here we are, acknowledging the SEC's guidance, but respectfully disagreeing, and deciding to handle that disagreement through an irrevocable waiver, turning down those fees.

Finally, I want to talk briefly about 2012. We continue to look forward with confidence for a strong year in 2012. The first fiscal quarter is off to a strong start with very good originations and funds growth, and particularly good movement toward our goals from a mix perspective. In addition, we feel, as we've discussed, that we have sufficient investment capacity now to continue to make attractive investments for our balance sheet and grow net investment income.

And finally, we think we are well positioned to benefit from what we anticipate will continue to be a slowly improving economy. As I said before, we don't need robust economic growth to have a good year, and we are not counting on it.

The Golub Capital platform has never been stronger. We were recently ranked as the number one traditional middle-market bookrunner for 2011 by Thomson Reuters for senior secured loans of up to $100 million, for leveraged buyouts. And that's the fourth consecutive year that we've been ranked a top-three player.

I thank you for your time and support today, as always. And with that, operator, I'd like to open up the line for questions.

Thank you, sir. (Operator Instructions). Jonathan Bock, Wells Fargo.

Just a few quick questions. We'll start with the market first. The recent rise in high yield bond prices and, particularly, bond-for-loan takeouts -- could you give us a sense of the competitive dynamics that really sit in the middle market now, maybe looking out six months? And particularly for those second lien and mezzanine securities that you're migrating towards?

Sure. So, Jonathan, as you alluded to, there's been a very significant rebound in public trading prices for both broadly syndicated bank loans and high-yield since the darker days of August and September. Vis-a-vis the middle market, I would say they impact of that is modulated by the fact that when broadly syndicated loans and high yields declined in August/September, I don't think that decline was fully reflected in middle-market pricing, nor do I think its rebound is going to result in giant changes in middle-market pricing.

We do see some pressure on spreads in middle-market senior and one-stops right now -- not a lot, but we are seeing some, where we were seeing spreads widening in August, September, October. On the mezzanine front, I would say we are seeing a renewal, which has kind of shifted away for a little bit. But we are seeing a renewal now of some pretty aggressive mezzanine proposals from smaller boutique private mezzanine shops that are eager to put money to work, who during the fall were, I think, waiting and seeing in the context of the recalibration of the public high yield market.

So I think it's going to be, for us, it's going to be a very good market over the course of the coming months in one-stops. We are cautious about the environment on sub-debt.

Okay. Now, following along with that, can you maybe give us a sense of repayment expectations for 2012?

Yes, that's the hardest question we ever get -- is what to expect with respect to repayment activity. We think that as a general rule of thumb, that in a normal year, we will see approximately a three-year weighted average life to our investments. Right now, we've got and then usually young portfolio because a large chunk of it has been originated within the last 14 to 16 months.

So, I think looking at the portfolio and anticipating a full 33% turnover of the January 1 portfolio is probably too high. But my expectation would be that it's going to be -- at the end of the year, we'll see a repayment rate in the 20% to 25% rate for the portfolio. I will tell you, though, that's a guess. This is the single hardest thing to forecast.

Okay. Appreciate the color. Just a few modeling items -- so certainly you have about $59 million of unfunded commitments outstanding. Could you give us, maybe, a general idea as to what amount of cash or debt capacity you want to keep on hand to fund that amount over time? How do you look at those?

You know, most of those are going to turn to cash -- I'm sorry, turn to funded investments, either because they're delayed draw facilities or they are revolvers that we anticipate being drawn. I think we have an unusually large amount of unfunded commitments right now. But we want to make sure that we maintain firepower to be able to manage those unfunded commitments. I think that one of the ways that we look to do that is with unused capacity on debt lines, so we don't necessarily need to keep cash available to manage those unfunded commitments.

And then with the Fed's talk of keeping rates low, would you expect to alter your fixed floating mix, given that rates might stay where they are for quite some time?

I like our fixed floating mix right now. I think the nature of the SBIC debentures, the degree to which they are highly flexible and low-spread makes them particularly attractive. So we have the opportunity to continue to grow our SBIC debt, I think we will look to do so. Our non-SBIC debt, I think, we'll continue to focus on floating rate debt.

Greg Mason, Stifel Nicolaus.

David, on the unfortunate ruling by the SEC -- I think on slide five you show a 208% regulatory asset coverage ratio. If I'm doing my math right, I think that's a regulatory debt-to-equity number of, call it .92 debt-to-equity. First, is my math right on that? Are we that close from a regulatory debt-to-equity standpoint? And second, what kind of regulatory leverage are you comfortable running this with, given the ruling by the SEC on this TRS?

Greg, I don't want to spend time right now on the math -- we can spend time with you on the math after this call. But let me address the non-mathematical part. First, no question, we were disappointed with the SEC's decision that this non-GAAP treatment for regulatory purposes was appropriate. We got with that to a level of closeness on the asset coverage test where we were of the view that it was appropriate for us to do one of two things -- either to complete the secondary, which we did, or to unwind the total return swap, which we may do at some point in the future, given the negative regulatory treatment of it.

I think that, in answer to your question, I don't have a specific percentage in mind that we view as a bright line. One thing I think is favorable about the total return swap is that it can be unwound at any time. So, in unwinding it, we can very dramatically impact its ratio. We are effectively being tagged right now with $80 million of debt that the Company doesn't have. So unwinding the total return swap has the effect of eliminating that $80 million of regulatory debt.

I think where this pushes us, is toward an approach where we use the total return swap when the Company is rich on equity, and we move away from using the total return swap when we're not. And I think that, directionally, is where we are going to head.

Great. I applaud you on voluntarily waging the incentive fee on that. How should we think about that going forward? Is that going to be continuing to be waived, or should we expect that incentive fee to be paid at some amount of the TRS income coming through?

Good question. We are discussing that with our Board. We don't have conclusive guidance I can give you on it. What I can tell you is, that we were pretty surprised when the SEC took the position that they took on it -- pay yourselves more! I don't think many people have been told that by the SEC.

Well, I applaud you on waiving it. We appreciate it. Can you -- Ross, you said you're getting close to your target asset mix. Could you remind us what that is for senior versus unitranche, versus sub?

If you go back to the page 4 of the presentation, what we said is that we want to work down to those senior secured, which sort of, this sort of 59%. We have already taken it down to 37%. I think the low 30s is our ultimate target there. And to the degree we continue to have a senior secured component decline, that increment will be spread in the other categories.

Great. And then you had some dividend income this quarter. Is that one time, or should we now start expecting a little bit of dividend income since you've got about 2% of your portfolio in equities?

Yes, that was -- one of our portfolio companies went through a dividend recap. So that is more of a, I think a one-time payment from that particular investment. Obviously, we hope to see more of this in the future. But I can't say that we would have that same amount next quarter.

All right. And then one last thing. David, could you talk a little bit about Pillar Processing, your new non-accrual, and kind of what your expectations are for working that investment out?

Sure. Pillar Processing is a company that in the foreclosure processing space, and we have two loans to it. Within the BDC, we have a first-out loan and a second-out loan. And you'll note in the schedule of investments that we have very sharply different values for the first-out and for the last-out -- we marked down the last-out very, very significantly.

This is a company that entered into significant difficulties late last year as a consequence of its largest customer, the Steven J. Baum law firm generating an enormous amount of bad publicity for itself around a Halloween party that you guys all may have read about. And the Steven J. Baum law firm is actually in the process of closing down. And that's, in turn, having some spillover impact on Pillar.

The company is being managed through what is a very significant workout right now. I think there is still uncertainty about how this process is going to play out. We think our valuation is quite reasonable here. But like all workouts of this sort, you have to, as a manager, admit that there is more volatility and value around a company that is in workout mode than there is around the normal loan. (multiple speakers) largely play out over the course of the next three or four months.

(Operator Instructions). David Miyazaki, Confluence Investment Management.

Just a question here -- in the fourth quarter, I think your and the BDC industries' cost of equity came down quite a bit, obviously, with your valuations moving up. And with the issuance that you had, as well as some of the other peers in the industry, it looks like your issuance costs for issuing equity has come down quite a bit. And I was wondering if you could provide a little bit of color on, do you think that's more of an ongoing trend?

And then, also, at the same time, it doesn't look like your investment opportunities are really shrinking a whole lot with regard to what you may be able to earn. And it seems a little unusual that your own cost of capital would come down when your investment set has not. That dynamic seems a little unusual for the industry, particularly against the backdrop of the fact that many of your peers have suggested that their Federal rates ought to be reduced. And it seems like, in this environment, that should not really be the case. If you have any comments on those issues, I'd appreciate it.

A couple of questions in there, and I don't get to all of them, please come back and remind me. So, two elements to cost of capital. Obviously, one is the way the underlying stock is trading. The way I tend to look at it is as a percentage of NAV. And I agree with you that over the course of Q4 we saw -- calendar Q4 -- we saw the sector move up in terms of percentages of NAV that most of the sector's trading at. Although relatively few companies in the sector are trading at premiums to book. We are one of them. As the premiums have been relatively modest.

So I'm not sure I see a really big change there. I think there's a subset of BDCs who are viewed positively, who have been able to access additional capital because they're trading at a premium to book. And there's a large number of BDCs that are not well-regarded by the market and are trading at meaningful discounts to book, and at least, to date, have not done dilutive offerings, hurting their shareholders more.

One phenomenon that occurred in connection with the first group of BDCs, the ones that are trading above NAV and have the opportunity to raise capital, is that the investment banking firms who serve as underwriters became more flexible about how much they were looking to generate from secondary offerings. So you'll note, in our case, that there was a 4.5% -- roughly 4.5% -- all-in difference between GBDC's share price before the offering was announced and the net proceeds received by the Company. That's something we managed very carefully, because every -- to put it bluntly, every nickel that goes to the investment bankers doesn't go to shareholders.

So we were pleased with being able to be efficient in our new equity offering. I am hopeful that ours and others' capacity to do that sustains itself. We'll see. It's not entirely something that is in our control.

I agree with the next thing you said, which is, I think it is unusual to be in a situation where the cost of capital is decreasing and the opportunity set is continuing to offer very attractive returns, and not really decreasing in context. And I think that is where we are right now. I think we are going to see a sustained period where we are able to generate attractive investments for GBDC -- attractive both in spread terms and in absolute yield terms.

And I don't anticipate that we are going to be going to shareholders anytime soon asking for a reduction in PERL rate. I don't think that would be appropriate at this time. We have watched, with interest, some others who were moving in that direction, and I guess we're just going to stay a shareholder-friendly outlier.

Okay, great. That's very helpful feedback. And I applaud that decision. The other question -- this is a bit of a follow-up to Greg's question -- given where you -- without getting into all the math, is there a change in where you feel comfortable managing your leverage ratio, given the way the TRS is classified right now?

I think for regulatory purposes, calculating the asset coverage just for regulatory purposes, we are comfortable going closer to the test than we were before, knowing that we have a virtually instantaneous ability to impact that ratio dramatically by making the decision at any time to unwind the total return swap. If we were managing the BDC without the total return swap, we would want to be more conservative in our asset coverage test level.

Thank you very much.

J.T. Rogers, Janney Montgomery Scott.

David, I was wondering if you could talk a little bit more about the competitive environment. Are you seeing any competition coming in from banks? And then there's been some talk about CLO reinvestment periods ending towards the back half of this year. I was wondering if you see any opportunity there?

Let me take that in reverse order. I think there's a very interesting dynamic that is playing out in the broadly syndicated loan market. It's been reported in some sectors, and probably underreported relative to its importance. And that dynamic is that a very large dollar amount of CLOs -- that constitute a pretty big chunk of the DSL market -- are going to shift from being in reinvestment periods to being out of reinvestment periods, month by month over the course of the next 18 months. And in order for the broadly syndicated loan market to stay at its current size, we will need to see meaningful dollars of new CLOs or new funds flows into primary mutual funds, or new institutional investors in broadly syndicated loans.

One, two, or three, or all of the above, in order to sustain a healthy broadly syndicated loan market. My own sense is that the odds are that that will happen, that we'll see some continued pressure on broadly syndicated loan spreads. We've seen significant pressure in the month of January, but that will flatten out. We'll see some stability in spreads, it will be stability at a level that will make a new investment by CLO investors attractive. And it will put a bit of a floor for us in the middle market, and will put a bit of a floor on our pricing.

So I think that's a positive. I don't expect a real dislocation in the broadly syndicated loan market. There are some pundits who are predicting that; that's not my view. But I do think that the large dollar amount of loans -- of CLO money that's going to be flowing out of reinvestment period, will modulate what would otherwise be pretty significant pricing pressure in broadly syndicated loans.

In terms of the competitive dynamic in our market, look. There is a global search, on the part of banks and other investors right now, for yield. And we happened to be in a very interesting asset class for a lot of investors, because we are able to generate attractive yields, attractive spreads, LIBOR floors in securities that are largely senior secured. And that is an interesting replacement product for traditional fixed income investors frustrated with the relatively low rates of return on traditional fixed income that's available in the market right now.

So I think that we would be foolish not to anticipate that we are going to see continued pressure in our niche from some new entrants and from banks. As a practical matter right now, it's not a major factor. We are seeing isolated instances of banks being a little bit more aggressive on some asset-backed facilities, and some yields with a lot of asset coverage. But banks are not a major player, or a major competitor of ours. We are seeing a little bit of increased activity on the part of a couple of relatively recent entrants into our world.

But I would say there's much more continuity than change, and what we are seeing in the market place leads us to be quite optimistic about our ability, over the course of the coming months, to continue to deploy capital into one-stops in particular on very attractive terms.

And then I'd just like to echo Greg in applauding you guys for waiving the incentive fee. I know you guys are consistently among the most shareholder-friendly of the BDC management teams out there.

Thank you.

Greg Mason, Stifel Nicolaus.

One follow-up question -- on this TRS, you said you can unwind it to give you some flexibility on the debt to equity. Do you have to unwind the entire thing? Or is it, you would have flexibility to, say, unwind half of it, and then if you actually had capacity you could re-utilize it again? What is the flexibility with that TRS facility?

I believe so long as we changed the stated total amount of the facility, that for regulatory purposes, whatever that new stated size would be the relevant variable. So in answer to your question, I think there's a way for us to accordion this to our needs. This is a very good question you ask, Greg, and something we've absolutely been working on. We don't have a completely definitive answer yet on whether we can practically make that happen.

Ross Haberman, Haberman Management Corp.

Any other credits which you're sort of monitoring which are of concern, and could you share that? And then I had a follow-up question for Ross.

There are always credits we are nervous about. We are lenders; we get nervous really easily. I think the best route to looking at the portfolio, in determining where we are concerned, is to look at the marks, and where you see marks that are meaningfully lower than par, that's where we are nervous.

(inaudible) right now.

And, Ross, to the extent that you paid out your dividends more than your net earnings per share, is that considered a return of capital?

Correct, yes. To the extent we exceeded our taxable earnings, exceeded what we paid in dividends, it would be a return of capital.

And for this year, what do you expect that to be?

(multiple speakers)

I mean in 2011, sorry.

For 2011, for our fiscal year ended -- again, as the 1099-DIVs went out, I think we paid out 98% of our dividends. So there was no return of capital for calendar year ended 2011.

(Operator Instructions). I'm shown showing no other questions from the phone line. Mr. Golub, I'll turn the call back to you.

Thank you all for your time this morning. And, as always, if you have any further questions, feel free to give either Ross or me a call. Bye-bye.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Thank you very much, everyone.