Logan Ridge Finance Corp (LRFC) 2015 Q2 法說會逐字稿

Good morning. At this time, I'd like to welcome everyone to the Capitala Finance Corp.'s conference call for the quarter ended June 30, 2015.

(Operator Instructions)

Today's call is being recorded, and a replay will be available approximately 3 hours after the conclusion of the call on the Company's website at www.CapitalaGroup.com under the Investor Relations section. The hosts for today's call are Capitala's Finance Corp's Chairman and Chief Executive Officer, Joe Alala, Chief Operating Officer, Treasurer, and Secretary, Jack McGlinn, and Chief Financial Officer, Steve Arnall. Capitala Finance Corporation issued a press release on August 10, 2015, with details of the Company's quarterly financial and operating results. A copy of the press release is available on the Company's website.

Please note that this call contains forward-looking statements that provide information other than historical information including statements regarding to the Company's goals, beliefs, strategies, future operating results, and cash flows. Although the Company believes these statements are reasonable, actual results could differ materially from those projected in the forward-looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks including those disclosed under the sections titled risk factors and forward-looking statements in the Company's quarterly report on Form 10-Q. Capitala takes no obligation to update or revise any forward-looking statements.

At this time, I'd like to turn the meeting over to Mr. Joe Alala. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Thank you for joining us. The highlights of last quarter, we issued 3.5 million shares in the above NAV offering in April, netted $64 million in proceeds. Those proceeds from the offering have been invested during the quarter. This quarter we've invested $103 million in gross investments during the quarter through our direct origination platform. Approximately 28% of these loans were senior secured loans. The average yield on these Q2 investments was 11.6%.

The yield of the aggregate portfolio right now is approximately 12% with a reasonable 4.2X leverage at the portfolio level. This compared to 12.6% the prior period. The average EBITDA of the portfolio of the Company is up to $34.1 million. Also in Q2, we realized a capital gain of $15.8 million or $0.99 per share. This effectively completed our rotation strategy of rotating out of equity securities. At IPO, we're at 36%, and now we're under 15% of equity securities as part of the portfolio at fair value.

The net investment income was $5.3 million or $0.33 per share, and that was impacted this quarter due to the equity offering, and Steve will get into more detail about that. We are optimistic about our NII momentum for the rest of the year. We paid $0.62 of distributions during the quarter. That consisted of $0.47 in regular distributions and $0.15 of special distribution. Based on the June 30 NAV of $17.95, we're paying an approximate yield of 13.8%.

We also repurchased shares during the quarter with our stock repurchase program. We repurchased approximately 225,000 shares, $3.9 million, or 1.4% of shares outstanding at quarter end.

The subsequent activity to the quarter, Q3 to date we deployed approximately $49 million in debt investments yielding approximately 12.7%. Year-to-date through today, we have deployed approximately $219 million with debt yielding approximately 12.4%. We think this demonstrates that we are not experiencing the lack of the margin compressions that many others in the industry are facing.

We have not increased our debt level materially at the portfolio level to generate that yield, and moreover approximately 30% of our loan securities are senior debt securities. We currently have a very robust pipeline of directly originated deals of over several hundred million dollars in the pipeline.

At this point, I would like to turn the meeting over to Steve for some additional comments on our operating and financial performance. Steve?

Thanks, Joe. Good morning, everyone. As previously mentioned, on August 10 we filed a press release with our second quarter 2015 earnings. In addition, we also posted a second quarter 2015 investor update to our website, provided additional details about the Company, the investment portfolio, and other financial-related trends.

I'd like to take a few minutes to highlight a few items within the earnings release which can be found on the Investor Relations section of our website. During the second quarter of 2015, total investment income was $15.1 million, an increase of $2.6 million over the same period in 2014. Total interest, fee, and PIK income was $5.6 million higher in the second quarter of 2015 compared to 2014, but was partially offset by $3.1 million less dividend income.

Total expenses for the second quarter of 2015 were $9.8 million, compared to $6.9 million in 2014. The increase is attributable to an increase in interest and financing fees of $2.3 million, related to the notes offering in June of 2014, and an increase of $0.4 million in management fees net of the waiver. Net investment income totaled $5.3 million or $0.33 per share for the second quarter of 2015 compared to $5.6 million or $0.43 for the same period last year. Second quarter net investment income per share was significantly impacted by the issuance of 3.5 million new shares in April.

The execution of our strategy to rotate out of equity and into debt, coupled with the investment of the equity offering proceeds during the second quarter, position the Company well for future growth in net investment income per share for the second half of 2015. Management's highest priority is to cover regular distributions with net investment income.

Net realized gains totaled $15.8 million or $0.99 per share for the second quarter of 2015 compared to $0.5 million for the same period last year. During the quarter, we realized gains related to Boot Barn Holdings, Inc., approximately $7.7 million, Corporate Visions, Inc., $7.1 million, and KBP Investments, LLC, $0.9 million. The change in unrealized appreciation was a decline of $16.2 million or $1.02 per share for the second quarter 2015 compared to an increase of $0.1 million for the same period last year. However, it should be noted that $15.7 million of this decline related to the realization of net gains for the period by a reduction of previous unrealized appreciation. Therefore, the remainder of the portfolio was flat as compared to the prior quarter.

Net increase in net assets resulting from operations during the second quarter 2015 totaled $4.9 million or $0.31 per share as compared to an increase of $6.2 million or $0.48 per share the previous year. Total net assets of $291.9 million at June 30, 2015, equate to $17.95 per share, compared to $18.56 per share at December 31, 2014.

During the second quarter of 2015, as Joe mentioned, the Company repurchased 224,602 shares of the common stock under the Board approved repurchase program, approximately 1.4% of the shares outstanding at quarter end. The weighted average annualized yield on the shares repurchased during the quarter was approximately 14.3%.

From a liquidity standpoint, we have cash and cash equivalents of $39.5 million at June 30 compared to $55.1 million at the end of the year. SBA debentures outstanding at June 30, 2015, totaled $192.9 million with an annual weighted average interest rate of 3.51%. In addition, the Company has $113.4 million of notes outstanding bearing a fixed interest rate of 7.125%.

Lastly, the Company has $80 million available under its senior secured revolving credit facility at the end of the quarter. At June 30, the Company's balance sheet and future net investment income will not be materially impacted by changes in short-term interest rates. At this point, I'd like to turn the call over to Jack for a few comments on our investment portfolio and trends we're seeing in the overall investing market.

Thanks, Steve. Again, we're pleased the strong quarter of investments with over $100 million placed in the quarter. This investment activity was highlighted by the following large investments, a $12 million investment into Brunswick Bowling that included $2 million of senior secured term debt at LIBOR plus 6%; $7 million of sub debt at LIBOR plus 14.25%, that's cash rate; and a $3 million equity investment. Note that the LIBOR rates had a 2% floor in that investment which we are a co-sponsor on.

A new $15.7 million sub debt investment into Corporate Visions at a 11% rate, 9% cash and 2% PIK, as well as a $1.6 million equity co-investment that was a sponsor-led deal; a $10 million senior secured debt investment into American Clinical Solutions at LIBOR plus 9.5% cash rate. That was a low leverage dividend recap. A $28.3 million sub debt investment into Cedar Electronics at a 12% cash rate. That was also a sponsor-led deal. As previously announced, we also made a $5.2 million investment into the Capitala Senior Liquid Loan Fund I, which is our joint venture with Kemper.

The yield on new debt investments was 11.6%, bringing the total weighted average yield to 12% for our debt portfolio. As Joe mentioned, we had subsequent Q3 deployments of $48.8 million with a new debt investment yielding 12.7%.

In regards to repayments, for the second quarter we received $57.4 million in repayments. Two items of note here. We received almost $20 million of payments from non-income producing equity investments. We have then reinvested into mostly interest-bearing securities. With that we feel we have accomplished our goal for rotating out of our pre-IPO equity concentration. It was in the mid-30% range.

Secondly, we exited our initial investment in Corporate Visions with a $21.2 million repayment that included a $7.1 million realized gain. We were then able to reenter the investment with a new buyer, a strong private equity sponsor. We were able to do this through the support and recommendation of the Corporate Visions management team.

The Capitala portfolio at the end of second quarter consists of 60 companies with a fair market value of $565.3 million on a cost basis of $546.6 million. Senior debt investments represent 36.1% of the portfolio, senior subordinated debt, 46.5%, Senior Liquid Loan Fund, 2.7%, and equity/warrant value of 14.7%.

In regards to portfolio quality, we continue to maintain a sub 2 internal weighted average risk rating of 1.97, with much of the increase from the first quarter rating of 1.88, due to the large amount of new investments, since we rank all new investments at an initial rating of 2. For example, we exited Corporate Visions that was a 1 rating, and invested in a new Corporate Visions deal that I previously mentioned that had now an initial rating of 2.

During the quarter, we added one investment, the subordinated debt of SSCR to cash non-accrual status. Debt investment security had as a cost basis of approximately $17.8 million and a fair value of $10.5 million. The impact of adding SSCR to non-accrual to Q2 debt investment income was $0.02 per share. We continue to have one portfolio debt investment on PIK non-accrual. This sub-debt investment has a cost basis of $8.1 million and a fair value of $5.7 million.

As an update on our investments in the energy space, we continue to closely monitor our five investments that represent 10.7% of the total investment portfolio at fair value. These fair values are marked at approximately 86% of cost at quarter end, slightly lower than the 89.5% at year end. All the five investments continue to be current on their interest payments.

In regards to market conditions, we continue to see strong proprietary deal flow and have several deals that are currently in the diligence phase. With that, I'll turn it back to Joe.

Thanks, Jack. Management acknowledges that NII fell short of analysts' forecasts. One of those reasons is approximately 94% of the $102 million placed in Q2 was in the second half of the quarter. Since the equity offering in early April, we have placed approximately $150 million in directly originated deals yielding 12%.

This monetization of Corporate Visions also last quarter has effectively completed our rotation of strategy of rotating out of the equity securities and into yield. We've had subsequent capital gains of about $25.2 million of this equity rotation. These capital gains generated as part of this equity rotation along with NII have allowed our regular distributions per share to remain unchanged during the year, while allowing us to declare a special distribution of $0.50 per share. Again, 2015 to date through June we have earned $2.44 per share of NII and realized gains and have paid out $1.14 per share during the quarter.

Now that we have completed this equity rotation over the past few quarters, management is very optimistic about net investment income for the final two quarters of 2015.

With that, operator, we're ready to address questions.

(Operator Instructions)

Mickey Schleien, Ladenburg.

Joe, I wanted to make sure I understand what you're saying in terms of your prepared comments. At fair value, the equity and warrants are now 15% of the portfolio, but NII was short of the regular dividend by 30%. Are you saying that even if you stay at 15% to fair value in equity you can make up that difference by reinvesting and rotating that capital plus the funds you earn from equity offering into yield earning investments?

Yes, Mickey, this is Steve. That is basically correct. The backend investments during the quarter of $102 million being in the second half of the quarter, coupled with the rotation from equity into debt, put us in a good position to have a full benefit in Q3 of those investments, yes.

Okay. Steve, can we expect the equity positions to decline further as a percentage of fair value, or is this the range that you are comfortable with?

We have said on previous calls that we would like to be between 15% and 20% as a benchmark. If we ever rose much above 20%, I think the rationale for that would be we would do that through appreciation, meaning that the Companies were doing well, and we had investments appreciating. I think a general rule of thumb would be where we are, we like very much. With that though we will continue to evaluate opportunities to invest additional equity because we have had great results. The track record speaks for itself.

Okay. I have a lot of other questions. I'm going to ask one more, and then get back into the queue. Maybe this one for Jack, or I'm not sure, but could you walk us through the decline in the portfolio's yield from 12.6% to 12%? There are a lot of moving parts here. Was it pressure on spreads? Was it a change in the portfolio's mix going more senior? Was it a combination of those two? Just give a little bit of color. That would be helpful.

I think with the originations that we had in Q2, $100 million obviously, that was a large portion of the portfolio now. It was a lower rate. Some of that was because of the senior debt nature of it. These were, even the lower middle market investments, some of them were right at the $30 million EBITDA mark.

We had a lot of sponsored activity this quarter, so they were somewhat higher leverage in the 4X and in some cases slightly over 4X of leverage. Then there was also a good competitive yield too, whether was on the senior debt or the sub debt on those sponsored deals. It was a little bit lower yield this quarter especially compared to last quarter, but then again for Q3 the money we put out so far, we've brought that yield back up some. It was an active quarter. We weren't stretching, or giving up yield to get deals done. We had some good deals in front of us, and that was the market rate at the time for the security we were investing in. (multiple speakers) the opportunities.

Jack, I think you said Q3 deployment so far were $49 million at 12.7%.

Yes.

Would it then be fair to expect the portfolio's weighted average yield to climb in the third quarter, if we were to stop today?

Yes, year-to-date it will be up from where it is at the end of Q2. As Joe mentioned in his comments, year-to-date, the investments have been made at an average yield to 12.4%.

I'll get back into queue. I have a few more questions.

Chris Kotowski, Oppenheimer.

I wonder when you quote the yield of 12% or 12.4%, or 12.7%, is that an all-in yield, or is it including OID accretion and prepayments, things like that? Or is it just the yield coupon plus PIK?

It is just the yield and no fees included. It is coupon plus PIK if it is any PIK in that particular loan.

Just as it relates to the debt portfolio.

Correct.

Okay. All right, good. And then you gave us the $48 million or $49 million of new investment subsequent to the end of the quarter. Can give us an idea of how prepayments are running?

Prepayments, I think there was about $4 million or so of repayments so far in the quarter. They've been pretty (inaudible).

$4 million. Okay, so that is net growth. Then give us an idea of your view of asset quality generally. Obviously, you had new non-accrual but that have been marked before. Are you seeing any, outside of the energy patch, are you seeing any softness? Stretching on covenants?

From quarter to quarter, and year to year we have always had some portfolio companies that are not performing as expected. There is nothing unusual in this quarter than historically has been the case.

Again, we're watching our energy investments in the oil and gas space with the further decrease in fuel prices. We continue to be very active with those companies and monitoring them. We added SSCR to the non-accrual list and are actively engaged in working with that portfolio company too. I would say it is normal activity.

Lastly, I guess, August is obviously always the slowest month of the year. Then it takes a while to recover from Labor Day. Should we expect that the activity that we have seen in the third quarter is more or less it, in terms of new transactions?

Chris, this is Joe. Our active pipeline has never been greater. We are finding that Q3 quarter-to-date and forecast is going to be a very active quarter. We do still got to get them closed, as you know, but our direct origination platform is generating an enormous amount of quality deal flow. I think that was one of the main reasons we're not experiencing yield compression right now. I think this quarter and our forecast is the following quarter will be very active quarters for us.

John Hecht, Jefferies.

Real quick, just from a modeling perspective, was there any unusual or non-recurring administrative expenses in the quarter related to the equity offering? Should we think of the expense rate now as the recurring level?

I think if you look at the expense run rate, there's a little bit of timing, there's some professional fees in there, but by and large, the expenses are pretty much in line with what management would expect within a moderate range.

Turning a little bit to the pipeline, it sounds like you guys had an active quarter. You still see a lot of activity. I'm wondering can you tell us where you're sourcing it, characterized is this direct lending? Is this relationships with sponsors, or any a geographical mentions out there?

Yes, this is Joe, John. I think it's all directly originated. It's coming through our six full-service offices now. It's a great blend of both equity sponsor and non-equity sponsor growth capital opportunities. What we are finding is we're still able to get the yields.

We are seeing, as Jack mentioned, our average EBITDA now in the portfolio is up to about $34 million. These are larger, lower middle market, and sometimes traditional middle-market deals.

The neat dynamic we're also finding is a lot of these deals, approximately 30% or more, are senior debt structured deals. We're able to generate these 12% plus type yields on that type activity, and the pipeline is very robust. And I think these direct originating offices they are all hitting their stride again. That is why we have such a robust pipeline of activity.

It is fairly spread across the entire platform?

It is, and it is spread geographically too. About a year ago, not quite, we opened our West Coast office. It has performed very well and it is also complementing our more Southern-based offices, and we're seeing deal flow from across the US, and it is very high quality.

On that topic, how do you describe your liquidity? We know your cash and balance sheet. We know the availability in those bank lines. What is your target leverage, and how do we think about your overall capacity to invest?

This is Steve. I think the way I'd frame it out is at the end of the quarter, as you saw, we've got about $40 million in cash at the parent and the two SBIC subs. The quarter end leverage, regulatory leverage, was 0.39X. We've got in excess of $100 million of debt capacity to remain, say, at or below 0.75X, which is probably as high as we would want to go from a regulatory leverage perspective. That debt would come in the form of drawing down on our senior secured credit facility.

At the end of the quarter, we had $80 million available to us, but we've made some recent additions to our borrowing base. Subject to continued good opportunities from our origination platform, we think there's an opportunity to upsize the credit facility and provide some liquidity from that perspective.

Okay. That's very helpful. Final question, I'm wondering if you guys have any thoughts or comments just on the SEC issue targeting unfunded commitments?

No. For us, it is relatively immaterial at this point. I think it is something we're staying engaged with, with our accountants and lawyers. We have got that fully disclosed in our financial statements, and pretty immaterial impact to us at June 30.

Christopher Nolan, MLV & Company.

On the share repurchases, I estimate the repurchase price averaged at $17.32 per share. Is that about right?

That is about right, yes, sir.

You issued shares of $18.32, and you're buying them back at $17.32. Can you give us a little clarification in terms of how you're looking at share repurchases? Is it simply opportunistically below NAV? Is there some sort of return threshold you are looking for?

The Board approved $12 million over an annual basis. That is parameters which we're operating under, but we're actually looking at from an opportunistic basis under NAV. It seems to make sense that if we can again retire these shares at a yield above what we can invest in the market, it seems to make strategic sense. The management and the Board feel the same way.

Based on that, should we be thinking about accelerating share repurchases in the second half of the year, given where the share price is?

We've talked about that, but we have not implemented any changes in that regard at this point.

Okay. Final question, the outlook for realized gains, it looks like you guys have basically sold down almost all of your position in Boot Barn. Given that you don't really have any more publicly trade equity positions, should we look for a slowdown in the realized gains in the second half?

I think it is very fair to say compared to the first half, the second half will be materially lower, yes. We still have a few shares of Boot Barn remaining, almost 100,000. It's to be determined what we will do with those, but yes, we have had pretty active first half of the year in gains. I think that would be a slim chance of repeating that. From a modeling standpoint, realized gains are going to be much lower.

Final, is the SLF levered yet? What is the yield right now in the second quarter?

The SLF is levered, but it got levered during the second quarter, so there really wasn't any yield to the investors during Q2. We will announce our first dividend and distribution to the shareholders in September, so we will have some returns at that point. (multiple speakers) Nothing for the second quarter.

Greg Mason, KBW.

Can you talk a little bit about the origination fees? Do you guys take those all into income when you originate the loans, and how does that impact? Obviously, this is a big quarter from originations. It sounds like the second half of the year is, but how does that play into your ability to get NII to cover the dividend? Say, the BDC market just continues to stay depressed and you can't raise more capital, and originations eventually have to slow. What goes into your hope of NII covering the dividend from the fee aspect?

This is Steve. We do recognize the fees upfront. I think if you look at the fee income that we've generated over the last several quarters, that is just a part of our interest income base. As we're able to provide liquidity through debt and equity offerings to fund this direct origination platform, we're very optimistic that the fee income can continue to support our coverage of our distribution level.

If we get to the point where business flow slows down, and the economy's not doing well, we'll address that. But at this point, we're very optimistic that those trends will continue and that we can continue to have fee income part of our earnings stream.

Great. Then on the dividend income, you exited a lot of your equities and your highflying equity, so how should we think about that dividend income line going forward, given the lower percentage in equity? Any guidance there would be really helpful from a modeling standpoint.

The past few quarters, we've basically had a few hundred thousand dollars of dividend income as opposed to the comparable quarter last year where we had over $3 million. I think if I was modeling that, I would use the current quarter more so than previous. A few hundred thousand dollars would be normal amount of dividend income. If we had some event, and some companies were in a position to provide us with something greater than that, that would be an exception.

One last question, Joe. I know you're closely involved with the SBA. I believe the SBIC bill is now through the House, I believe. Just any commentary you have on the SBIC potential legislation out there?

The commentary I have been, and I do serve on the exec committee for SBIA. The commentary I have is their position is very optimistic. Specific to Capitala, we would be prepared to submit, if the lending increase were to happen from [225 to 350], we would be first in line to submit a subsequent SBIC application. The fact that we have received four SBIC license is in the firm's history, we would expect that our application would be expedited.

We would try to take full advantage of the low cost leverage that that program offers us, so we are prepared to move. We just need the legislation to happen. We may fly that application up to DC, which we have done in the past, to make sure we hand-deliver it. That is really how we are viewing it, and we are ready to go.

Vernon Plack, BB&T Capital Markets.

Jack, could you give us a little more color on what you're thinking regarding SSCR, the outlook, possible resolutions? I'm just looking for a little more there.

I can't comment a lot on that just because it is such an ongoing process. We are very active with the Company and the management team working on a resolution. I really can't comment other than that.

Okay. Can you give me a sense, if oil stays where it is today for say the next two years, what impact do think that's going to have to the oil and gas exposure that you have in the portfolio?

When we look at this, and we always talk about the five investments in that space, and one of them is natural gas, and it hasn't really been all that impacted by the oil prices. One of them is in utility services, so that is really not highly impacted. We really look at TCE as the one that has the most impact by that.

And to get into a little bit of detail there, as you have seen as you follow the market, the prices have continued to come down. That is mostly because US production has stayed pretty steady. There's a reduction in the number of rigs, but production has been pretty stable, and there has been good output from that. That production stability has helped TCE have a stable amount of business.

We really had to look at the production side of things, and we really don't have a crystal ball there. We're just looking to see what the large production companies are going to be doing in the future. They are still stable at this lower pricing, obviously concerned about it. A lot of their competition has flushed out of the market. They've actually been able to pick up new business in this market, and that has been able to help them out. That is really our main concern.

If the prices stay low, at the end of the day, it's not good for them, but if they continue to maintain steady business. They have been keeping current with payments to us.

From your perspective, TCE is the company that you are most concerned about assuming --

Yes, they're the most influenced by oil prices.

Mickey Schleien of Ladenburg.

Thanks for taking the follow-up questions. I want to go and talk about the senior loan funds. I'm trying to understand the rationale of having two of these, particularly since the second one is sub advised by Apollo. Given that these are non-qualified investments, it ultimately reduces the scale, and I am sure that is important. Can you walk us through the rationale for two of these rather than just one?

I think the rationale, on one level, is it's building out another origination platform for the BDC. Currently, we have a great direct origination platform through our 6 full-service offices, but now we're actually generating an origination platform through loan desks, which at times can be great product for a BDC.

Also we think these senior loan funds can generate double-digit yields, and then we can declare those as dividends back to the BDC. Right now, it is under 5% of assets so it is not a material investment for us. Lastly, we think these assets, since they are so diverse from our direct origination assets, it is a very diversified investment strategy. It helps for the diversification. I think the average EBITDA is multiples of the [35] on average EBITDA from our directly originated platform.

Those three dynamics really we think is value-added for the BDC shareholder. We do have one with Kemper as mentioned. We formed another one with CION/Apollo. And I will say that relationships that we have developed through these senior loan fund programs have been very beneficial throughout the platform on both growing out relationships with the loan desk and actually generating more directly originated deal flow. I think it is a very complementary and diversification strategy for us, and we've been happy to date with the results.

I understand which you are saying, Joe, but if I'm sitting over at Kemper, from their perspective the amount of equity that you can contribute to the senior loan fund is limited because that is an unqualified investment. Now you are adding CION to the mix, so it's even more limited. I just don't understand why you have two of these. Why not just focus on one of them?

We have two of them because it diversifies our relationship base. The CION/Apollo senior loan fund has brought a lot of additional complementary relationships to the platform, and so has Kemper.

We consider them complementary, and in fact, what the strategy would be, if you had two equally sized senior loan fund, and we're trying to get a $6 million allocation, you'd put $3 million in each bucket. They're co-managed, so obviously you have to get joint approval from both Kemper and Apollo.

We all believe that it is complementary, and it is really adding value throughout both platforms because of the extra distribution you get from having two parties versus one.

Remember, these are liquid quoted investments. These are not our traditional directly originated assets.

I understand. Joe, why did you decide to use a total return swap in the Kemper fund, and will you use a similar vehicle in the CION fund?

That goes back to these assets are liquid quoted senior loan participations, so the TRS offers a better structure for those type of investments. If these were into middle-market companies, that were non-liquid, non-daily quoted papers, a TRS is not the optimal solution for that. But since they are liquid, and they're quoted at the end of every day, a TRS offers a better capital structure for that type of investment activity. Yes, we would expect a TRS to be in with the Apollo/CION joint venture.

Right. When you say you expect double-digit yields on these, you're referring to return on equity, correct?

Yes. Correct.

Okay. Just a couple of liquidity questions. Of the $40 million or so in cash on the balance sheet, how much of that is outside the SBIC?

The majority of it actually is outside of the SBIC. Some of the activity last quarter was SBIC-eligible investments, so we've been very efficient with those funds.

There are a lot of moving parts here. Most of the cash is outside the SBIC, so you can use that to fund the senior loan funds or other sorts of investments. Can you remind us what kind of collateral does the credit facility expect? How flexible is it?

The credit facility is very flexible. From sub debt all the way up to first lien bank loans, so there is a wide variety of collateral accepted with varying degrees of advanced rates.

You can fund a lower middle-market investment with the credit facility?

We could, yes. It would be a certain earnings threshold and leverage statistics, but yes, that is absolutely correct.

Fair enough. I appreciate that. Steve, I think I probably want to follow up with you this afternoon. Are you going to be around?

I will be.

I'm showing no further questions at this time. I'd like to hand the call back over to Mr. Joe Alala for any closing remarks.

Thank you, everybody. We appreciate the conference call. We will be around, Jack, Steve, and I, all day, if you want to call one-off basis to ask any questions. We appreciate your time. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone.