Golub Capital BDC Inc (GBDC) 2014 Q4 法說會逐字稿

Good morning. Welcome to Golub Capital BDC, Inc.'s September 30, 2014, 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 facts made during this call may constitute forward-looking statements and are not guarantees 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's BDC, Inc.'s filings with the Securities and Exchange Commission.

For a slide presentation that we intend to refer to on the earnings conference call, please visit the events and presentations link on the home page of our website, www.GolubCapitalBDC.com, and click on the investor presentations link to find the September 30, 2014, Investor Presentation. Golub Capital BDC's earnings release is also available on the Company's website in the Investor Relations section.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I will now turn the call over to David Golub, Chief Executive Officer of Golub Capital BDC. Please go ahead.

Thank you, Leanne, and good morning, everybody. Thanks for joining us today. I am joined today at Golub Capital's offices by Ross Teune, our Chief Financial Officer; and Greg Robbins, one of our managing directors. Earlier today, we issued our quarterly earnings press release for the quarter ended September 30, and, as Leanne noted, we posted a supplemental earnings presentation on our website. We'll be referring to that presentation throughout the call today.

I'd like to start by providing an overview of the September 30 quarterly financial results. Ross is then going to take you through the results from a financial perspective in more detail. And then I'm going to come back and provide an update on our outlook for conditions in the middle market lending environment over the next couple of quarters. So with that, let's get started.

As highlighted on page 2 of the investor presentation, I'm pleased to report we had another strong quarter. For the three months ended September 30, we generated net investment income of $14.9 million, or $0.32 a share, and that compares to $15.1 million, or $0.32 a share, for the quarter ended June 30. We had particularly strong net gains during the quarter, principally realized gains from the sale of several equity co-investments, and so net increase in net assets from operations, or net income, for the quarter ended September 30, was $20.2 million, or $0.43 a share. And that compares to $16.3 million, or $0.35 a share, for the quarter ended June 30, 2014.

Let me give you a little bit more detail on those net gains. The $0.11 per share of net realized and unrealized gains on investments for the quarter were the result of $10.3 million in realized gains on the sale of five equity investments, reduced by about $5 million of net unrealized depreciation. The net unrealized depreciation was primarily reversal of previous write-ups on those investments that we sold during the quarter.

Overall credit quality remains very strong. We have a nonaccrual rate that continues to round to zero. And, as we'll discuss, nearly 95% of our investments have an internal risk rating of 4 or 5, our two highest ratings. In regards to new investment activity, we had a very strong quarter, with new origination commitments totalling $332.6 million. This was quite unusual, because the quarter ended September 30 is usually a slow quarter, and the fourth calendar quarter, the quarter ended December 31, is typically more active than Q3. As I'll talk about later today, we anticipate that, that's going to reverse this year.

It's also interesting to note that our high originations quarter in Q3 came despite our being more selective. We monitor and collect data on the number of opportunities that we look at over the course of the year, and so far this year, we've completed an unusually low percentage of the opportunities we've generated. Our originations have focused on areas where we have a competitive advantage that you've talked -- that you've heard me talk about before. I'll talk about three of those now.

Over 80% of the new originations this quarter were one-stops, and we think we have a particular advantage as a leading market provider of one-stops. Over 85% of the new originations were with sponsors we've worked with before. And you've heard me talk about how repeat business -- repeat business with the same quality sponsors -- is a key element of our strategy. And over 65% of new originations this last quarter involve companies we've previously been a lender to -- what we call incumbencies. So, again here, repeat business with repeat obligors -- key elements of our strategy and, we think, a key risk reducer. Despite strong originations, overall funds growth for the quarter was modest. We had an unusually high level of runoff this quarter, $286.6 million of repayments, and that resulted in overall funds growth of $22.7 million.

Turning to slide 3 of the investor presentation, you can see in the table that $0.32 per share we earned from net investment income and the $0.43 per share we earned from a net income perspective. You can see that NAV went up this quarter, to $15.55, as compared to $15.44 last quarter. I want to emphasize this, because it is our view that consistent increases in net asset value per share are a critical measure of our success. This is the ninth consecutive quarterly increase in our net asset value per share. As shown on the bottom of the slide, we had a slight increase in average size of our investments, but the portfolio remains very well diversified, 145 different positions, and an average size of $9.1 million per investment.

And I'll turn it over to Ross, who will provide some additional portfolio highlights and discuss the financial results in more detail.

Thanks, David. I'll begin on slide 4. As David mentioned, we had total originations of $332.6 million, total runoff of $286.6 million, and net funds growth overall of $22.7 million. As shown on the bottom -- in the table at the bottom of the slide, 81% of our new originations were in one-stop investments, 11% were in traditional senior secured loans, 6% in second-lien loans, and 2% in equity co-investments. New junior debt investments continue to remain a very small percentage of new investments, and this product category continues to shrink as a percentage of the total portfolio, reflecting our negative view of market conditions for junior debt, as well as our cautious macro-economic outlook.

Turning to slide 5, these four charts provide a breakdown of the portfolio by investment type, industry classification, investment size, as well as a breakdown between fixed- and floating-rate investments. Looking first at the charts at the left-hand side, due to strong originations of one-stops this quarter, the percentage of one-stop investments increased to 70% of the portfolio; the traditional senior secured investments represent about 20%; while the remaining 10% is split between junior debt, equity co-investments, and our investment in senior loan funds.

Looking at industry diversification, the portfolio remains well diversified by industry, and there have been no significant changes within these categories over the past three -- over the past year. You can see the largest three concentrations are in areas where we have particular domain expertise -- healthcare, retail and restaurants, and software -- and the portfolio has low exposure to commodity-dependent and highly cyclical companies.

Looking at the charts on the right-hand side, the investment portfolio remains well diversified by investment size. The top 10 represent less than 25% of the portfolio, with the top 25 investments representing less than 50% of the portfolio. And looking at the table on the bottom, again, the portfolio is predominantly in floating-rate loans.

Turning to slide 6, for new investments, the weighted average rate on new middle market investments was 6.7% this quarter, down from 7.1% the previous quarter, reflecting market-spread compression on new investments that we've been discussing over the past year. The weighted average rate on new investments was also below the weighted average rate on investments that paid off during the quarter.

However, you can notice that the gap here is narrowing as compared to previous quarters, reflecting the significant turnover in the portfolio over the past 12 months. On a positive note, due to the recent volatility in the high-yield and broadly syndicated credit markets, we started to see a bit of a reversal in the spread tightening and leverage creep that we have been seeing over the past year, and we are cautiously optimistic that this trend will continue into 2015.

Shifting to the graph on the right-hand side, this graph summarizes the investment portfolio spreads for the quarter. Focusing first on the gray line, this line represents the income yields, or the actual amount earned on the investments, including interest and fee income, but excludes amortization of discounts and upfront origination fees. The income yield declined slightly from 8.3% from the quarter ended June 30, to 8.2% this quarter -- so fairly flat, quarter over quarter.

Including the amortization of fees and discounts, the investment income yield, or the dark blue line, you can see that, that jumped this quarter to 9.3%, from 8.9% last quarter. Again, this was due to increased fee amortization. As David mentioned, we had an unusually high level of runoff this quarter, and that caused an acceleration of unamortized fees on those deals as they paid off. In terms of dollars, for the quarter ended September 30, total fee amortization was $3.6 million. This was up $1.8 million compared to the quarter ended June 30. Last, looking at the green line, the weighted average cost of debt decreased slightly from 3.2% -- it was 3.2% this quarter compared to 3.3% last quarter.

Flipping to the next slide, the overall credit quality continues to remain very strong, with non-earning assets as a percentage of total investments on a cost basis at 0.2% and rounds to 0% on a fair-value basis. Flipping to slide 8, looking at our risk ratings, the percentage of investments risk-rated a 5 or a 4, our two highest categories, is about 95% of the portfolio. The number of investments with a risk rating of 3 remains stable, quarter over quarter, at around 5%. And the percentage of investments with a risk rating of a 1 or 2 remains fairly small, at 0.3% of the portfolio on a fair-value basis. As a reminder, independent valuation firms valued approximately 25% of our investments for the quarter.

Turning to slides 9 and then 10, looking at the more-detailed balance sheet and income statements, we ended the quarter with total investments of just under $1.35 billion, total cash and restricted cash of $79.9 million, and total assets of approximately $1.45 billion. Total debt was $697.3 million. This includes $215 million in floating-rate debt issued through our first securitization; $246 million of floating-rate debt issued through our second securitization; $208.8 million of fixed-rate debentures; and the remaining piece is $27.4 million of debt outstanding in our revolving credit facilities.

The total net asset value at the end of the quarter was $732.7 million. This was up nearly $6 million from the previous quarter, due to our earnings per share exceeding dividends paid. Our gap-to-equity ratio was 0.95 times at the end of September, while our regulatory debt limit, once we back out the SBIC debentures, was 0.67 times.

Flipping to the income statement on the next page, total investment income for the quarter was $30.7 million. This was up $2.7 million, or 9.3%, from the prior quarter. This increase was driven by asset growth that occurred in the quarter ended June 30, as well as increased OID fee amortization that I previously noted. On the expense side, total expenses of $15.8 million increased by $2.8 million during the quarter. This is primarily due to an increase in incentive fee expense of $2.2 million, as we were fully through the catch-up provision of the incentive fee calculation this quarter.

As David mentioned we had net realized and unrealized gain on investments of $5.3 million during the quarter, primarily due to realized gains on the sale of several equity co-investments. And this was partially offset by the reversal of the unrealized appreciation on these investments. Net income for the quarter totaled $20.2 million.

Turning to the next slide, these charts summarize some of the information we've already talked about. Looking at our quarterly earnings per share this quarter, again, $0.32 a share from an NII perspective, $0.11 from unrealized, and unrealized were $0.43 in total. Our return on equity this quarter, 8.1% from an NII perspective, an 11% return on equity, including the equity gains that we had. And then looking at the graph on the bottom, this shows the growth in our net asset value since our IPO growing from $14.71 a [cents] up to $15.55 per share, this quarter.

Turning to slide 12, this slide provides some financial highlights for our investment and senior loan fund, or what we call SLF. As the vast majority of our originations this quarter were one-stop investments, SLFs in total investments were flat, quarter over quarter. As we've discussed in the past, SLF invests only in traditional senior secured loans. However, we do anticipate faster growth over the next few quarters, as we are in discussions with our partner to sell some traditional senior secured investments on GBDC's balance sheet to SLF. Our return for the quarter of 5.8% was negatively impacted by noncredit-related marks on some broadly syndicated loans that are held in this portfolio.

Turning to slide 13, we had approximately $165 million of capital available for new investments. This consists of restricted and unrestricted cash available, SBIC debentures and availability on our revolving credit facilities. As of September 30, subject to leverage and borrowing-base restrictions, we had $71.2 million available under our revolving line of credits with Wells Fargo and private bank, and we have about $16 million of debentures available under our SBIC licenses subject to customary regulatory requirements.

Turning to slide 14, we've summarized the terms of our low-cost, long-term debt financings that we have in place. And then lastly, on slide 15, our Board declared a distribution of $0.32 a share, payable on December 28 to shareholders of record of December 14.

I'll now turn it back to David, who will provide an update on current market conditions and some other closing remarks.

Thanks, Ross. I want to share, just in the couple of minutes here before we get questions, a couple of insights on the current environment -- four: the first one, I mentioned earlier, looks like calendar Q4 is going to be slow from a new originations standpoint; the second, macro-economic picture that we're seeing right now looks okay, but we're nervous; third, I want to talk briefly about the recently released clarification of the leverage-lending guidance impacting banks and how that's likely to be a positive for GBDC; and finally, fourth, I want to talk a little bit about our expectations for FY15. So let me hit on each of those four briefly.

I mentioned at the outset of this call that the calendar Q4 is often our busiest new origination quarter, but we're not expecting this to be the case in 2014. Partly, this is due to the high level of activity that we saw in September -- in the quarter ended September 30, and partly this is due to the recent market volatility. When we have a period of market volatility, typically buyers and sellers end up in different places, where buyers want to see a price reduction and sellers aren't prepared to offer one. So, often, there's a period of adjustment before buyers and sellers are seeing eye to eye again. We think there's -- this phenomenon is playing out in the current calendar quarter.

Second, let's talk some more about that market vol. I'm not sure I can explain to all of you what happened in September/October, and what caused the massive market mood swings with very significant changes -- in some cases, intra-day -- in major stock market indices, major bond market indices, even Treasuries. Yes, there was data from Europe and Japan that looked weak, and in some ways that data continues even since the September/October period to come out and look weaker. Yes, there's a growing degree of concern about China. But, what we're seeing on the ground is that corporate profitability here in the US continues to plug along.

I wouldn't say that we're seeing any signs of accelerating growth, but results are pretty good. Revenues are growing. Profitability is growing. The number of areas of weakness outside of energy are few. So, as we think about the macro-economic picture right now, we're nervous, we're particularly nervous about infection from abroad. We think it's reasonably likely that Europe and Japan adopt policies designed to devalue their currencies. And we think this could have an impact on the US economy. But we continue to view as our base case expectation muddling growth, a continuation of what we've seen so far this year.

Third topic I wanted to talk about was leverage-lending guidance. A very interesting piece of guidance came out earlier this month. As you all probably know, there are three different regulatory agencies that regulate banks -- the Fed, the OCC, and the FDIC. And it is, in my experience, rare for all three agencies to come together and deliver messages in a coherent, consistent, and, in this case, very loud way. But that is what just happened.

They issued a report in conjunction with their annual review of what are called share [dashmel] credits, and the short version is that the regulators are not very happy with their banks. The regulators indicated they're -- they believe that the previous guidance they've given on leverage lending is not being followed by many of the banks, and they've indicated that they're going to be enforcing the previously released guidance.

We're seeing, already, some impact from this. We're seeing some banks pull back from some leverage-lending activity, and that's good for us. Market volatility of the sort we saw in September/October and regulatory uncertainty -- both of these things make our ability to deliver very reliable buy-and-hold solutions for our private-equity firm clients much more compelling. So, the leverage-lending guidance, I think, is going to be something we're all collectively going to be hearing more about over the course of 2015. And I think it's likely to play out in a good way for Golub Capital.

Finally, as we turn the corner into 2015 -- we've started the new fiscal year and we're shortly going to be turning into the new calendar year -- I'd say our overall view is one of cautious optimism. We think this quarter's going to be slow, but we think that, after this quarter, we're likely to see an improving level of middle-market M&A activity.

There's an enormous amount of private-equity capital looking to be deployed. We anticipate that credit markets are likely to stay volatile, and we think that, that's good for our message of reliability and certainty. And we think that the tailwinds for us from increased regulation of bank-led leverage lending is going to be increasingly important.

As you think about what to expect from us in the context of the new year, the guidance I'd give you is, we plan a continuation of the strategy that you've seen from us over the last several years. We plan to continue to be very selective to focus on senior loans and, in particular, senior loans to market-leading, very resilient companies that have strong private-equity sponsorship and that have appropriate capital structures. And we think, as a franchise, that we're well positioned to execute on that strategy.

That concludes our prepared remarks for today. As always, thanks for your time and your continued support. And, Leanne, let's open the line for some questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Jon Bock with Wells Fargo. Please proceed with your question.

Good morning, congratulations, and thank you for taking my question. Maybe diving right into it, as we see the spread compression in the book, which is apparent across the space. I'm curious at the investment in the SLF, just as it relates to its ramp, because that is a strong offset of potential spread compression. And while one has the ability to ramp, I'm wondering are there other constraints or maybe a willingness to perhaps be more patient as spreads widen? What do you think about use of the SLF to counter-act the spread compression you have seen in the book today?

Great question. So within the context of what I view as a quite good quarter for us, the disappointing element of the picture is the slow growth of SLF. And we have been looking at this slow growth of SLF in the context of potential ways to make it faster. And, as Ross mentioned, a solution that we have been spending a fair amount of time exploring is the possibility of selling assets from the BDC balance sheet, into SLF.

Because while new originations of traditional middle market loans have been slow, we have been faster on one stops, which are not appropriate for our SLF strategy, than we have been on traditional senior. We have a fair amount of traditional senior on balance sheet. So I think what you should expect, what we are anticipating, is that as we originate new loans on balance sheet, we will free up capacity to do that by selling some loans, again, subject to the approval of our SLF partner, selling some traditional senior loans from balance sheet to SLF.

This is a double win for us, Jon, because it improves the ROE of SLF, because we are going to be ramping it further and have the ability to be somewhat more efficient in the use of our leverage there. And it is also capital sparing, because sales of assets from balance sheet to SLF will free up capital on balance sheet, for new investments. So it will put us in a position to be able to avoid having to think about any new equity issuance for a longer period of time, as we grow SLF, and free up capacity on balance sheet.

So that is a key part of our strategy, for 2015. I don't want anybody to conclude that they should anticipate that we are going to see a massive change in one quarter. We are not. That's not how we operate. But I do think there is an opportunity for us to grow SLF over the course of FY15.

That makes sense. And, David, if you look at loans that might be available to put into the program, if you are going to kind of segment out that bucket. I mean obviously we could easily sort by yield and assume some of the lower yielding highest quality credits can go in. How would you gauge the bucket of capital that might be a consideration for the SLF vehicle. Do you have an amount?

There's about $200 million or so of kind of senior secured loans that we have looked at and identified as being potential candidates to send over to our partner to have them take a look at. So again, I wouldn't -- I don't want to leave anyone with the impression that tomorrow we are going to be transferring $200 million. That's not the plan. I want to be very clear that this plan requires the consent and approval of our SLF partner. It is not something that is fully in our control. But as you can see from the number that Ross cited, we have a substantial amount of traditional senior loans on balance sheet that we can look at for this purpose.

Got it. And maybe taking a time just to go into the portfolio really quickly, I just noticed that the write-down in AVATAR, but I see the position is still accruing interest and it is worth the question maybe on that credit in particular, if you have a moment. Why it would still be on the accrual status, if the mark had been I would say sizable as a percentage of the overall previous mark last quarter?

Well, we look at the question of whether to put something on nonaccrual status very carefully. We put things on nonaccrual status when we anticipate there is going to be a near-term prospect of not getting paid interest currently, and/or when we believe that an impairment, a permanent impairment is likely. We did not make the judgment that, that was appropriate to do for AVATAR this quarter. We are absolutely working with the Management team and sponsor on AVATAR to assist them in a program to improve its financial performance. And you know, we are -- happily, there are very few companies that are in our watch list special assets category, where we are engaged in these kinds of discussions, but that is certainly one of them.

Appreciate that. And then as we think about the potential for middle market activity to occur in 2015, and also I think as you mentioned, at a potentially higher spread given vol and once buyers and sellers come together. What we are trying to ascertain is a lot of the same reasonings that we've heard that there is private equity capital on the sidelines, that there is obviously lots of bank -- pull-back in bank allocations in the space, et cetera.

We continue as investors to hear these a lot. And the question is, what attaches and what gives you the high degree of confidence that 2015 will start to see maybe a breakup of the log jam, as it relates to M&A and new money deals for yourself and some of the others that are providing a sponsor-based and non-sponsored financing?

Well, we actually saw pretty good M&A volumes in the early part of calendar 2014. Until, I would argue, until quite recently we were seeing pretty good levels of M&A volume. So I don't mean by my comments to be predicting that we are going to see a 2015 that is sharply different from the first eight months of 2014. I think they are like -- I think 2015 is likely to look a lot like the first calendar eight months of 2014. I think the anomalous period is going to turn out to be September, October, November, December.

And if you think about M&A activity and the cyclicality around M&A activity, what tends to drive, in our experience, what tends to drive periods of robust middle market M&A activity are factors like the following, a degree of stability in the economy and predictability in earnings streams, a desire by management teams to accelerate growth because organic growth is challenging, significant capital availability on the part of private equity firms, relatively good access to debt financing.

All of these factors are present right now, and we have one more which is in the period from just before the crisis until I would argue about 1.5 years ago, 2 years ago, we had a relatively depressed level of M&A. And following a relatively depressed period of M&A, you tend to see a bit of a bounce-back. So those would be at the top of my list, John. If we think about the down side case of some macro economic issues arising in the US economy, and as I said, we view that as most likely coming from some kind of infection from abroad, some kind of impact of European weakness, or Asian weakness. In that scenario, that could have a significantly negative impact on M&A activity in the short term.

Got it. Very interesting. And while we see spreads trickle down a bit, but also stabilize and with the potential to go back up, as buyers and sellers maybe adjust to a different situation, terms would also be of interest, just as you think about -- not just leverage, although we would love to hear your comments on where leverage is today.

But also some of the other items, whether it relates to equity cures, or a few of the other tangible covenants that you consider in middle market transaction, and whether or not you are seeing any movement there in the event that perhaps you might not be willing to charge a higher spread in this environment but maybe tighten up the covenant package a bit more than what have you had previously. Can you just give us the structure?

Sure. So from a structural standpoint, in traditional middle market transactions, say transactions involving companies of $40 million of EBITDA and lower, there has not been a meaningful dilution of structural protections. So I don't anticipate meaningful change there, because there wasn't meaningful degradation. The place that is interesting to watch is the upper middle market, $40 million to $75 million of EBITDA, where in some cases some large market terms like covenant light, build your baskets, allowances for cash to come out of the system, in a variety of different ways, we have seen those, in select transactions. And I think it will be interesting to watch in the coming couple of months whether there is an increased level of push-back on those terms in the upper middle market.

I would anticipate there probably will be, but I think it is too early to tell. And likewise, I think there has been a spread widening in the broadly-syndicated market, in the high yield market, in the BSL market, that spread widening is probably between 25 and 50 basis points over the course of the period since early September. And I think the tendency in our market is that we lag but move in the same direction as the broadly-syndicated market and the high yield market. And I think we are seeing signs of that same spread widening, hardening, in our middle market arena.

Thank you so much for taking my questions.

Your next question comes from the line of Doug Mewhirter with SunTrust.

Hi, good morning. I had two questions. One on the SLF and one more general regulatory question. The question on the SLF is, it is interesting that you have actually had a couple of quarters very healthy inflow on to your native balance sheet, but you actually haven't found a lot to put into the SLF relatively speaking. That's sort of an interesting dynamic, considering they sort of play in the same environment, but they are just different parts of the capital structure. I was wondering if you can comment on that sort of bifurcation of the market. Is it market conditions or specific sponsors, or what can explain that?

I think you're right, that if you look at the last several quarters, we have had what for us by historical standards has been an unusual proportion of our new origination in one stops and what we call our gold loans. And I think you have heard me say over the course of the last several quarters that, that is not by accident, that's because we have seen the best risk/reward in the marketplace in one stops, and so we focused our activity there. I don't necessarily think that is a permanent phenomenon.

So we are going to continue to respond to where we see opportunities and to make investments that are consistent with our view on risk and reward. I'm hopeful that we are going to, in coming quarters, find a larger number of attractive traditional senior investments to make, as one of the strategies for accelerating the growth of senior loan fund. As we talked about, in response to John's question, we also have a second strategy for growing senior loan fund, by shifting assets from balance sheet.

Great. Thanks for that. On the regulatory question, if you could maybe explore a little bit the specifics of what specifically is making some of the banks pull back and how that would be advantageous. So maybe if I could play devil's advocate a little bit and obviously your view on the ground would trump my opinion. But the way I see that regulatory pressure is that it is on the most I guess egregious abuses of terms and conditions in the market. So for example, don't make a loan that is above 6 times leverage, or something like that. So it would have the effect of trying to clear the banks out of that market. And in my opinion, that may create the biggest void is these sort of wildly leveraged transactions which you would have no interest in, unless it was a truly exceptional case.

So wouldn't it actually make it a little bit more crowded into the better, the lower risk, safer assets, that maybe you would be attracted to? Since again, are you not going to go after the loans that made the regulators the most nervous in the first place.

Great question. So I guess let's segment the market into three pieces. Let's talk about traditional middle market, meaning companies under $40 million of EBITDA. Let's talk about the upper middle market, from $40 million to about $75 million, and then let's talk about the larger market, the broadly syndicated market. What the guidance has said is that -- or what the recent announcement said is that the regulators found one-third of leveraged loans to be criticized, one-third. So this is not an isolated problem. This is not a small proportion of the universe.

And the regulators went on to say that they found significant deficiencies, and that's code for we are really, really unhappy. And they went on to say that they are going to increase their monitoring of banks in these areas, which is code for you better stop now. They went on to say that if a particular loan is judged to be a past loan by a bank, but then subsequently reviewed by the regulators and found to be a criticized loan, a non-past loan, that it is not okay for banks to simply refinance that loan because it is no longer viewed as a past loan. It is viewed as a non-past loan. So these are not minor issues. These are major issues.

These are ways in which the regulators are speaking with a megaphone and ways in which they are getting the attention of very senior officials in the legal departments, the compliance departments and the senior executive departments of major banks, and it is already driving behavior. So how is it going to drive behavior? And this is where I think your question is interesting. I don't think it is going to drive behavior in the banks toward doing more in that lower middle market, what I call traditional middle market sub $40 million category. The banks have largely exited that category, and I don't see signs of new entry, and I think if we did see signs of new entry, those -- that new entry would likely be subject to regulator criticism.

Where we are seeing big impact is in the upper middle market and in the broadly syndicated markets where banks are in my judgment likely to step back from their activities in leveraged loan origination. I don't think that we should assume they are going to leave the market entirely. I think what they are going to do is pick their spots and put themselves in a position to be able to tell the regulators, look, we listened. We have dramatically reduced our activity. They are going to try to reduce their activity in a way that maximizes their fees, so that they have the lowest possible impact on fee revenues that they can have.

So that will mean they will focus on those transactions where they can be lead left, so they are the party that is getting most of the fees. That will mean that they will focus on larger sized transactions, because guess what? They make more fees on larger-sized transactions. So my expectation is that you are going to see a pull-back of bank activity in the larger middle market segment that, that is going to be the most significant change.

And that the opportunity for us is going to be to step into those larger middle market transactions with solutions that are reliable, are goods for sponsors, are not going to require significant syndication risk, and that are going to be from our perspective well priced and well structured.

Okay, great. Thanks for that very thorough answer. And that's all my questions.

Thank you.

(Operator Instructions)

Your next question comes from the line of Leslie Vandegrift with Raymond James.

Good morning. I was just calling in --

Hello.

Hi, sorry. I just wanted to ask about your at the market program that you reinitiated this year. You tried that last year in 2013, and you didn't do any sales through it, and I was curious why you brought that back out in August for $75 million this year to try to do a common stock sale, if you did not utilize it the last time? What was the -- kind of explain the reasoning behind trying that again?

Sure. So we like to put ourselves in a position of having options. So we have our Board approve a stock repurchase program with regularity. So that if by way of example our stock price declined and was in the below book category, we would have an easy ability to start repurchasing stock without having to call a Board meeting, without having to go through a lot of permutations. Likewise, we have in place an ATM program that put us in a position where if we need small amounts of equity. We can issue small amounts of equity in a very cost efficient way that would, because it is an ATM program, and not an issuance, it would be possible to do in small size, and that might be advantageous from the standpoint of minimizing dilution.

As you point out, we have had this program before, we have not issued before. We have this program now, as I have talked about, we have actually quite a lot of dry powder now. So I am not in a position to tell you we are or are not going to use it at any point in the future. But I would tell you that we think that there are circumstances under which utilizing an ATM program could make a lot of sense for us.

All right. And then the other thing, I had a question about earlier in the call, you were discussing the one stop advantage you had over your peers possibly or just within the industry itself, on doing -- going that route rather than the SLF. What do you believe your specific advantage is on that?

Well, we are a market leader in one stops. We and Ares are far and away the largest arrangers of one-stops in the market. Ares tends to be more focused on the larger middle market. We compete with them vigorously in that larger middle market. We also from time to time collaborate with them and work with them on a lot of transactions. In the sub $40 million EBITDA portion of the market, I think we are far and away the market leader in arranging one-stops. I think that market leadership enables us to be in a position to get a lot of looks, a lot of first looks, a lot of last looks.

We have a capacity by [din] of our scale to make a lot of these one-stop loans, buy and hold single lender loan, which gives us an ability to offer a degree of reliability that our competitors who need to bring in partners can't do. And we also have the advantage of having done a whole lot of these, with a large number of sponsors, and by the end of that, they know what it is like to work with us on a one-stop. They know what it is like to close one. And they know what it is like to have us as lender to their portfolio company. All of those things are hard to quantify, but are big, big advantages.

All right. Well, thank you.

(Operator Instructions)

There are no further questions at this time. I would now like to turn the call back over to Management for closing remarks.

Thanks, Leanne. Again, I want to thank everyone for joining us this morning and for your support this quarter and over time. Look forward to giving you a report on calendar Q4, in roughly 2, 2.5 months, and as always, if you have any questions before then, please feel free to reach out to Ross, to Gregory, or to me. Thanks again.

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