Logan Ridge Finance Corp (LRFC) 2015 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Capitala Finance Corp's conference call for the quarter ended September 30, 2015.

(Operator Instructions)

Today's call is being recorded, and a replay will be available approximately three 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 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 Corp issued a press release on November 9, 2015 with the 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 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 risks and uncertainties including those disclosed under the sections titled risk factors and forward-looking statements in the Company's quarterly report on form 10-Q.

Capitala undertakes no obligation to update or revise any forward-looking statements. At this time I would like to turn the meeting over to Joe Alala.

Thank you, operator. Good morning, everyone. Thank you for joining us for our third-quarter 2015 update. As we've mentioned over time our strategy has been shifting as we have tried to cover our core distribution with NII and Cap gains. We have been shifting that strategy over the past few quarters with our goal being to cover our core distribution with net investment income.

What we realized over the past quarter is that in order to do that we had to reduce our equity percentage of the portfolio at IPO which was 36%, and we've been trying to reduce that under 20% over the past quarters. We are now down to 16% equity as a percent of the portfolio. With that equity rotation we generated a lot of capital gains.

Those capital gains did several things. One thing is it allowed us to pay a supplemental dividend which, including the core dividend and the supplemental dividend, our current yield on the stock is 13.8% at NAV. And that represents no return of capital through August. It also has allowed us to generate capital gains and redeploy those proceeds into yielding product.

What you've seen as a result of that redeployment yielding product is a substantial growth in NII over the past few quarters. Our NII this quarter at $0.48 per share was approximately 45% greater than prior quarter where it was $0.33 per share. We're proud to announce that we covered our core distribution with NII this quarter. In addition we had -- for our focus is on long-term NAV appreciation.

We did have NAV appreciation this quarter by the stock appreciating from $17.95 to $18.04. So those were our -- so our stated goals we have been mentioning over the past few quarters, we think this quarter represents that strategy being complete with the equity rotating into yield.

Shareholder alignment. This past quarter our stock buyback program repurchased 2.5% of the outstanding shares. That's a material amount for us. In addition which we believe is just as important is insider buying. We had insider purchases over the last quarter of the management and the board of approximately $1 million.

If you're looking on form 4 you'll see some transfers on my personal form 4, that is really related to our employee equity compensation plan, and we're here to communicate that no employee has ever sold a share of stock. Also to comment on our investment activity we continue to focus on our direct origination strategy which is producing very solid results.

Our yield for the third quarter on our debt products was 12.6% versus the prior quarter of 11.6%. The aggregate yield at the portfolio level increased to 12.1% from 12.0%. And we are doing this by not chasing yield.

I think we look at these dynamics you'll see we're not increased our yields by chasing risk. Our leverage at the portfolio company level is 3.9 times through our debt. Some data we have seen from other industry resources, the average middle market portfolio company debt is approximately 5.5 times. Ours currently is 3.9 times.

Also we have not changed our mix of senior debt to second lien debt. We're currently still about 45% senior debt, 55% second lien debt in our debt portfolio. These dynamics we believe show we're not chasing yield; however, we are finding, through our direct origination platform, the quality deals and our yields are increasing.

Current activity, we have a solid pipeline of quality deals. We will continue to focus on very strict underwriting standards and to close on the best risk-adjusted opportunities that we're finding. We continue to communicate our goal is to cover our core distribution with NII and produce long-term NAV appreciation. With that I'm want to turn it over to our CFO, Steve, to add more comments on financial performance.

Thanks, Joe. Good morning everyone. As previously mentioned on November 9 with filed a press release with our third-quarter 2015 earnings.

In addition we also posted a third-quarter 2015 investor update to our website providing additional details about the Company, the investment portfolio and other 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 third quarter 2015 total investment income was $18.3 million, an increase of $7.1 million over the same period of 2014. Total interest in fee income was $5.6 million higher in the third quarter of 2015 compared to 2014 driven by a larger investment portfolio. PIK and dividend income increased by $1.5 million over the previous year supported by several transactions within our existing portfolio.

Total expenses for the third quarter of 2015 were $10.5 million compared to $7.6 million in 2014. This increase is attributable to an increase in incentive fees of $1.9 million as incentive fees were not earned during the third quarter of 2014, and small increases in both interest expense and management fees.

Net investment income totaled $7.8 million or $0.48 per share for the third quarter of 2015 compared to $3.5 million or $0.27 per share for the same period last year. Management remains focused on this most important operating metric.

Net losses totaled $16 million or $1 per share for the third quarter of 2015 compared to losses of $3.1 million for the same period last year. Unrealized appreciation for the third quarter of 2015 was $16.2 million compared to depreciation of $0.2 million the previous year.

Please allow me to spend some additional time on this topic as it is important. The impact to NAV related to net losses for the third quarter 2015 was approximately $3.9 million or $0.24 per share. The remainder of the investment portfolio appreciated approximately $4.1 million or $0.25 per share.

Net realized losses during this quarter coupled with other realized gains and losses during the year aggregate to a net gain of $9.1 million for the nine months ended September 30, 2015. The year-to-date gains have been beneficial in several ways including: one, the ability to maintain our normal distribution at $0.47 per share per quarter; two, the ability to declare a special distribution of $0.50 per share earlier this year; three, the ability to report no return of capital for the tax years ending August 31, 2014 and 2015; and lastly, the ability to retain and reinvest the proceeds from exiting investments into primarily debt investments to support NII and distribution coverage as demonstrated this quarter.

Jack will provide further information related to realized losses and valuation changes within the portfolio during the quarter. The net increase of net assets resulting from operations during the third quarter of 2015 totaled $8 million or $0.49 per share as compared to a net increase of $0.3 million or $0.02 per share for the same period last year.

Total net assets of $186.8 million at September 30, 2015 equate to $18.04 per share compared to $18.56 per share at December 31, 2014. During the third quarter of 2015 the company repurchased 399,448 shares of common stock under the board approved repurchase program, approximately 2.5% of shares outstanding at quarter end.

The weighted average annualized yield on the shares repurchased during the quarter was approximately 16.6%. The repurchases were accretive to net investment income by $0.02 per share for the quarter. From a liquidity standpoint we have cash and cash equivalents of $37.5 million at September 30, 2015 compared to $55.1 million at December 31, 2014.

SBA debentures outstanding at September 30, 2015 totaled $184 million with the annualized weighted average interest rate of 3.45%. In addition the company had $113.4 million of notes outstanding bearing a fixed interest rate of 7.125%.

Lastly the company had $69 million available under its senior secured revolving credit facility and a regulatory leverage ratio of 0.57 at quarter end. At September 30, 2015, the Company's balance sheet and future net investment income will not be materially impacted by changes in short-term interest rates.

Please see our form 10-Q for detailed information regarding the Company's interest rate sensitivity. At this point I'd like to turn the call over to Jack.

Thanks, Steve. After very strong second-quarter deployments we were pleased with our Q3 gross deployments of $55.6 million with a yield of 12.6% allowing us to raise our total weighted average yield on our debt portfolio to 12.1%.

In regards to repayments in the third quarter we received $34.6 million of repayments, the most significant repayment related to full exit of our investment in SSCR whereby we received over $14 million of net cash proceeds. While this exit resulted in a significant realized loss for the period, we were pleased with the outcome as we were able to work closely with the Company to facilitate a third-party sale to a strategic buyer negating any further exposure to the credit and allowing us to recycle the proceeds into current yielding investments.

Further unrealized losses and unrealized appreciation in order to clarify the activity in the quarter we provided a more detailed breakout of the significant transactions in our earnings release. That chart shows the impact of the SSCR transaction as well as others.

To summarize, while the full loss realized on SSCR was $11.2 million, we had already reserved, in the form of unrealized depreciation, $9.5 million in the previous quarters and therefore the Q3 impact was only $1.8 million. Likewise we realized our loss on market [ease] of $5 million but had already depreciated that in [dessum] by $3.3 million, thus a net impact to the quarter of $1.7 million.

On the flip side we experienced strong appreciation of several of our equity investments in the quarter with a net unrealized appreciation amounting to over $4 million. As we've successfully rotated out of our pre-IPO equity positions, we are pleased to report nice growth in some of the newer equity investments made since our IPO process.

So the net NAV impact of the third quarter weight of the realized loss was minimal since we had already depreciated much of those investments and since we had strong offsetting appreciation during the quarter. As of the end of the third quarter the Capitala portfolio consists of 58 companies with a fair market value of $588.3 million on a cost basis of $553.3 million.

Senior debt investments represent 36.7 % of the portfolio, subordinated debt 44.2%, senior liquid loan fund 3.3% and equity warrant value of 15.8%. In regards to portfolio quality we continue to maintain a sub-2 internal weighted average risk rating of 1.96 level with the prior quarter while average leverage at the portfolio level improved to 3.9 times.

At the end of the quarter there were three debt investments on cash nonaccrual with a fair value and cost basis of $10.9 million and $13.6 million respectively. There were also two debt investments on PIK nonaccrual with a fair value cost basis of $9.7 million and $13.5 million respectively. As an update on our investment in the energy space, the five investments at fair value totaled $65.3 million or 11.1% of the portfolio.

As oil prices have remained depressed we continue to mark down the value of these collective investments recording additional unrealized depreciation of $3.2 million during the quarter resulting in a fair value of 83% of cost at quarter end.

We continue to actively work with these companies while the cost-cutting and other initiatives implemented at several of the companies was successful in stabilizing the businesses in the short term, as we have now exceeded a year of the lower oil prices, we are having ongoing dialogue to discuss longer-term solutions to the liquidity and balance sheet issues.

With no identifiable impetus for a significant improvement in oil prices, we feel it is prudent and in the best interest of all parties to seek longer-term solutions. In regards to market conditions we have seen little change since last quarter as we see strong proprietary deal flow and have several deals that are currently in the diligence phase. With that I will turn it back to Joe.

Thanks, Jack. Thanks, Steve. I think this quarter really marks the end of a lot of noise that's been in our portfolio over the past quarter as we've had to -- we call it the equity rotation, really change the dynamics of our asset mix to reduce those equity securities from 36% of IPO to under 20%. We are now currently at 16%.

And I think we're at a nice place now where we can focus on covering the core distribution with NII and also have long-term NAV appreciation as we do still have equity securities in the portfolio and as you've seen from this update we are still experiencing significant appreciation of some of those positions. With that, operator, we're ready to turn it over and have questions asked.

(Operator Instructions)

Mickey Schleien, Ladenburg.

Good morning, guys. First question for Jack. You mentioned SSCR was sold to a third-party. Was [Market Ease] also sold to a third party, or what was the result of there?

We had sold Market Ease to a third-party probably two quarters ago, and there was some in-kind payment at that point and a note that was to be repaid, and there was a default on that repayment which resulted in the additional loss.

Okay. Just philosophically, Jack, what is your -- what is Capitala's view toward trying to work out problem deals as opposed to selling them?

I think if there's an opportunity to sell the business where we can minimize our loss, we will look to do that. That is not always the case. And sometimes there's a better longer-term value if we can restructure and rework the company. It's really on a case-by-case basis. There's not an overarching principle. Each deal is different. We approach each one differently, and it just depends on the circumstances.

Okay. A few more -- I think most remainder of my questions are predominantly accounting side. How high do you -- are you willing to take debt to equity in the current environment and with the current portfolio structure -- total debt to equity?

From and leverage standpoint on our balance sheet?

Yes.

I think we will stick to the 0.75 is a leverage ratio we think is prudent. One, it give some cushion for any kind of global disconnect in valuations, but two, it provides us with optimal earnings capacity. So roughly 0.75 from a regulatory standpoint.

Regulatory okay.

Correct.

And Steve, on the senior loan fund correct me if I'm wrong you are running those gains and losses -- you are not dividending up -- you're not upstreaming dividends from that fund. You're running that through unrealized gains and losses and realizing gains and losses because of the TRS? Is that correct?

No, that is not correct. We earned roughly $400,000 of dividend income in the third quarter on that fund. The income that the BDC will earn will be in the form of a dividend.

Okay.

There's some disclosure showing all the specific investments held by the fund and other details, but in terms of income for Capitala Finance, we will earn a dividend quarterly.

Okay. And it looks like you have finished repurchasing shares this quarter meaning the fourth calendar quarter. Do you intend to ask the board for more authorization?

We are in discussions with the board on that topic and we will revert at a later date in that regard but great question.

And my last question. You syndicated part of Western window. What kind of fees do you get when you do something like that?

It varies. We attempt to keep most of the fee as much as we can, and that's always negotiated as part of the syndication effort. But we do attempt to keep at least half of the fee when we do that.

Okay, thanks for your time. Those are all my questions.

John Hecht Jefferies

Thanks guys. First question in terms of this quarter on the revenue side were there any -- in the accruals were there any kind of prepayment or fee income that we should normalize in order to determine the right run rate out of the quarter here?

This is Steve. I think on the fee side we had a $1.9 million in fees. $1 million of that was origination related. $900,000 was for amendment and other restructuring type fees. As we've talked about in the past we always have some portion of our fee income that is tough to model but is pretty predictable and that is the $900,000 we had this quarter. The other origination fees clearly will just be driven on directly originated deal flow.

In terms of trying to find a normalization, we've had in excess of $1 million in fee income over the past five quarters again made up jointly of origination fees and/or other restructuring and amendment fees. I hope that helps.

That is helpful. Thanks. Second you mentioned a strong pipeline. Could you characterize this either geographical or type of loan or industry you are focused on?

John, this is Joe. I think our pipeline is strong. I think there is very diverse geographic sourcing of deals. I think our pipeline currently is representative of the similar mix as the existing portfolio meaning we are looking at 50% of our opportunities being in the form of senior debt or unit trench debt and the other half being second lien debt.

I think it's very consistent, and you'll have seen over the past quarters our ratio of senior to second lien debt has been about the same. It's not increasing, and I think our pipeline represents that same type trend. I would also say that a lot of our pipeline we're looking at or what we are focusing on are lower debt deals meaning at the portfolio level leverage multiple. We're looking at deals lower than the 3.9X that's currently in the portfolio.

But other than that, it's very similar to the past few quarters. It's a nice pipeline, and we're really focusing on picking the best risk adjusted return investments out of that pipeline.

And how would you discuss pricing or the yields in that type of pipeline you're looking at?

Our yield especially when you look at it on the security meaning senior versus second lien but even across all security, we are seeing yields increase. I think you saw that in this quarter where our average yield on basically the same asset mix as prior quarter went from -- to 12.6% from 11.6%.

And our average EBITDA at the portfolio company level is more or less the same. So we're not -- what we're trying to really communicate is we are not chasing yield by doing more second lien lending or by doing smaller deals. It's more or less the same deals as the prior two quarters, but we are seeing pricing increasing almost 100 basis points this quarter.

Okay. And then final question is if you take out the -- exclude the energy exposure, how is the portfolio of watch list investments, or how would you characterize EBITDA performance of the portfolio outside the energy exposure?

I think like usual it's a mixed bag. The majority of the portfolio companies are within an acceptable range of budget. There are several that are exceeding budget and several that are behind budget, and some of those for reasons like oil and gas or commodity prices and others for performance reasons that we are closely monitoring. But I think it is relatively the same mix as we normally have.

Great, thanks very much.

Chris York, JMP Securities.

Good morning, guys. One question this morning. Looking at your equity portfolio on slide 9 I can deduce that further in the money position that could be a source of additional distributions. But that said I guess I'd be curious to learn of any updated views for your dividend policy considering potentially a muted market response for your last special distribution and now that you're covering your dividend from net investment income.

I think we've been focusing on is we do recognize the muted market response are very high dividend on NAV which is even higher when you are below NAV, which we are. But what we have done effectively and believe is optimize those proceeds.

We did pay the one supplemental, but we redeployed the others into higher-yielding products, and as you've seen the result our NII has grown materially. I think right now we're going to continue focusing on that path and redeploying it to yield. As you know, right now we are below NAV. We do not have that -- even though we have shareholder permission we have no intent to do a below NAV offering in any kind.

And so we're going to be very prudent on the deals that we do pursue, and all that cash that is in the BDT NAV we want to actually pay the core distribution out, but the rest we want to redeploy into these very high yield investment opportunities.

Great. And then maybe could give us an update on your second JV senior loan fund with CION. Is there anything new in regards to activity there?

Well, that activity there is right -- as you probably know right when we announced it, there became some affiliate issues when Apollo tried to buy American Realty Co, and it created some issues not with us at all but in sort of affiliate dynamics that the potential transaction was to cause. That is still undecided as of now. As far as what we have to do we're ready to go. We've reserved some monies to deploy into that. We fully deployed our Kemper JV already. And we're just waiting for the other market dynamics that are not related to us to play out to begin the CION JV.

That's it for me. Thanks, Joe, and congrats on achieving your goal.

Troy Ward, KBW

Thank you and good morning. A follow up first on Mickey's question about the Western window syndication fee. Just more pointed, do expect to see a syndication fee in the coming quarters? Should we expect that? And if so, how much?

When we say syndication fees, we're not really -- if you look at it from the perspective we're signing $100 million syndication, and we're going hold $20 million and syndicate $80 million of it and take a big fee. That is not our model. Our model is really to focus on deploying our dollars into the deals we directly originate.

However, we are cognizant of our liquidity now and our strong pipeline, and so what we have decided to do on some of our larger deals is to reduce our exposure in those deals. What we would like to do since we directly originated it and we underwrote it and we will continue to portfolio monitor it, is to keep a larger portion of those fees.

But if you're looking at, are we changing our model where we go to a potential obligor and sign up $100 million [unitron] trade where we'll hold $20 million and syndicate $80 million and generate fees, that is not our model at all.

To follow up on that, there were no fees in Q3 related to that sale.

Okay, so it's going to be on the scheduled investments. It's just going to be smaller and no additional income from other than the 12.5% coupon that'll come from Western this quarter?

That is correct and to help us optimize our hold size as it relates to our borrowing base and those types of situations, so, yes. It is not a fee income driver. It's a balance sheet hold issue to optimize that.

Right, okay, that's great. On the southern pump and tank exit this quarter, it looks like your fair value and par were in line. Cost basis was low. You had about $800,000 there. What line -- I'm assuming that came through the income statement the difference between your cost and the fair value, or did it? And if so, where did it come through?

Half of that came through in PIK income. We received $4 million of -- in [exion] of that transaction so half of that was in PIK income. The other was in fee income.

Okay that explains that -- my next question on what the difference in PIK income was. And then on the senior loan fund stepping back and thinking about what those assets are and what the market did during the quarter, I'm surprised to see the fair value mark on the liquid senior loan fund wasn't maybe a little more. Can you speak to why you saw such strong stability in those marks this quarter?

The only thing I can say is that they are marked independently by the bank that holds the TRS. And there are multiple markets on a daily basis. That's the fair value of the asset at September 30.

Okay. One final one. You give us a little bit of color or an update on CR Hamilton

Nothing too specific. They are one of the companies in that space that are working hard to make sure their liquidity is strong as they continue through this downturn. And I think that than a good job of doing that. They have managed their debt levels well, and there's not much of anything -- there's nothing really in front of us there. It's about managing liquidity and they're doing a strong job of that.

Okay great. Thanks guys.

Terry Ma, Barclays.

Good morning. I want to follow-up on the revenue and EBITDA trends in the portfolio. Could you give more color on the industrial focused companies in your portfolio? I think recently there's a pretty large commercial lender that suggested its outlook for the industrial economy was weakening. And we've had some other people suggest that there's a potential industrial recession in the US. Can you maybe share your thoughts there and give us some color on your industrial companies?

Yes. I don't think we've seen anything significant. We are, obviously, conscious of the macro environment. There are none really that come to light or that are very concerning at this point as far as exposure to a downturn in China.

I think they are all cognizant of where the market is and are cutting back where they need to, to make sure they are spend is not exceeding their revenue growth. But for the most part it has been relatively stable, and we're still seeing growth some of which is driven by acquisition which is being done at very prudent debt levels.

I think everyone is cautious of it, but we haven't seen any direct revenue downward pressure from the macro environment.

Okay. That's fair. On your oil and gas, we just assume $45 oil is the norm for the next two or three years. Could you talk a little bit more about what you can do, or what your portfolio company can do to maybe limit losses and protect shareholders?

I guess the basic model is to cut back to that level of revenue that they can count on. I guess that is part of the good news is that they have been in this -- it's been a somewhat stable oil price now but at a much lower amount.

They've been able to reduce costs. They've been able to maintain customers at the lower-level and have been able to entrench themselves more with those customers. They have right sized the businesses maintaining profitability. There are some short-term advantages to as you reduce the size of the business it actually generates some cash flow.

Over this period liquidity has been fine, so now we're working with them to see what's next. Everyone is assuming it's going to be a longer-term environment in this pricing arena. What do we need to do from a balance sheet longer-term perspective to make sure that these companies survive and are able to thrive when prices do go up again.

Okay, great. That's it for me. Thanks.

David Myazaki, Confluence.

Good morning. I appreciate your comments on your share buyback and your capital allocation policy with regard to not issuing below net asset value. That helps reassure us as investors that the right capital allocation decisions are taking place with regard to balance sheet management. I do have a question for you, though.

As you talked about the transition of the portfolio from 36% equity down to 16%. And at the same time the debt portfolio being fairly balanced with regard to senior and subordinated exposures with regard to how you are underwriting the deck. The gains that you've seen -- that you've realized on the equity side have been vert helpful, they been utilized in some way to offset the losses you had on the debt side.

As the equity side comes down by -- you've lowered it by 20% of the overall portfolio. Presumably if you have fewer and smaller gains on the equity side against the backdrop of the same kind of return risk profile that you have on the debt side. How do expect to manage the credit losses to move forward with a smaller equity allocation?

Yes. There is some trend in the portfolio that all works together that we try to communicate and we definitely disclose in our NDR. When we went public in September, about September 2013 our average EBITDA to portfolio level was $9 million. That average EBITDA now is about $35 million. That's a very different portfolio company.

Also our mix and IPO of senior debt to second lien debt was much more second lien debt. I don't have that actual statistic in front of my guess it was about 75 -- I don't even know what it was. I don't want to put a quote on that. But if you look at our trends over the past many quarters our senior debt is 45%, and our second lien debt is 55%.

It's much bigger EBITDA companies, much more allocation of senior credit through second lien credit. And we do believe that even at a equity percentage of under 20 %, which we are at16% now, that we can generate the significant cap gains that more than offset any losses.

And historically -- remember we've been around for 17 years. We came from the SBIC platform. The general rule in SBIC world is you couldn't have more than 20% of your assets in noncurrent-pay securities, so call that equity.

We operated at 20% and under underwriting investment thesis for 17 years now. At IPO it was at 36% but our cost basis on those equity secures were under 20%. We had material appreciation over that time. We think of our 17 year track record of keeping equities at 20% and under in the portfolio, that we can generate material capital gains that will more than offset any losses in the portfolio.

That's great. Great detail on how that allocation has moved through time. Obviously, you're moving up in size with regard to EBITDA that will tend to help your defaults and recoveries as you move forward.

Have you found -- and you'll have to pardon me for not knowing this on top of my head. The losses and write-downs have a primarily come from the smaller companies with less EBITDA and from the companies -- from the positions we've had secondly as opposed to first?

Yes we actually have our chief risk officer Chris Norton we review this with the officers a lot when you're setting underwriting policy. I think what we have found is especially if you get single-digit EBITDA that your loss ratios are materially different than double-digit EBITDA.

We're not -- we've talking about from $9 million on average on this past two years or so to $35 million. That is a big difference in the EBITDA of a the small business or middle market business. It's not as if we've gone from $9 million EBITDA to $12 million, so you're saying you're going from single to double digits.

We have gone a multiple in greater EBITDA, and we found those loss ratios are materially lower. We do price it differently. When we do an $8 million EBITDA deal we expect different economics.

We are talking about risk-adjusted returns. We think that is a riskier deal on average. We will demand more economics for that deal. However, if we see a $30 million EBITDA deal on average, we will think that's a less riskier deal, and the pricing may reflect that.

We really focus here very focused on risk-adjusted returns, and we realize and we have the data to prove it over our 17 years of operating history, that the smaller deals have more risk than larger deals, everything else being the same.

Thank you very much.

Mickey Schleien Ladenburg

Just a couple of follow-up questions. Steve, it looks like you paid off some of your near-term SBA debentures that were coming due. It looks like there's a little bit more coming due soon. Do you intend to reborrow those amounts and try to lock in those rates before the Fed does it's thing?

Unless they increase the family funds we cannot redraw those funds. What you're referring to is the $8 million we paid on September 1. And we've got another $2 million maturing in March next year. We will repay that, but we do not have the ability to redraw that at the BDC in the current setup.

What precludes you from redrawing?

This is Joe. There is an SBA family limit of $225 million. The debt in the BDC then, what's in our private SBIC, we're at the max. We would have to have a family limit go -- there is some legislation that would try to increase that from $225 million to $350 million.

What we would do if that were to happen is we would immediately go down in the BDC and apply for our fifth SBIC license. And that way you go through the process and hopefully get the license. We've already obtained four of them so we think a fifth one would be -- would happened we would again drawn on that facility after that process took place.

So Joe are saying the $8 million you paid off in the BDC this quarter was used outside the BDC? And that's why you or at the maximum?

Correct. When we launched the BDC to take those two SBIC's public we also formed a private SBIC, and we had an agreement with the SBA and our underwriters of the allocation of that $225 million we forecasted, that the debt repaid in the first two years of IPO that would be during the same investment period as the private SBIC. We had an agreement with SBA of that allocation and those repayments in the first two years of BDC went to the private SBIC. Correct

And, Steve, how much would you say remains that's coming due within the year?

Within the next six months is about $2 million. And we've got a larger chunk due in September 2016.

Okay. So barring any -- I am not even going to try to guess what congress will do. Barring any changes in legislation the same think will happen, that will get paid in which the private funds?

Correct.

Okay. My last question. Joe or Steve, when you set the special monthly dividend of $0.05 did you budget for the loss of SSCR and Market Ease? I'm trying to understand is where you stand now on the taxable income basis relative to where you were at the end of last year?

Mickey, before Steve answers that I want to go back your question on SBA. We do put it on our NDR which is our on our website, the sort of balance sheet, debt layout. The debt we are repaying currently to the SBA is really the highest cost debt. (multiple speakers)

Most of our debt, I think 80% of our debt, is really six years and beyond. Most of that debt is at BDC longer-term at the lowest cost. The stuff we are paying off now is from our fund [queue] SBIC higher cost interest rates we're paying off.

But it's not your highest cost debt. You have debt that's even more expensive. I'm just trying to understand what the balance sheet might look like down the road.

In response to your question, in March we did not forecast or budget a loss of any specific investments. And second part of your question, with our tax year ended August 31, we're putting final touches but we will have some spillover income to the tune of $6 million to $8 million that we will retain and reinvest. And we're happy to report for that tax year in August 31, that we will not have a return income to return of capital to shareholders.

That's good news. Thanks for answering my follow-ups.

George [Vahamans], Deutsche Bank

Good morning. When we back out fee income of $1.8 million from the $15.9 million of interest and fee income generated in the third quarter, we're getting to about $14.1 million in interest income which implies a yield of 11.6 % on the average debt portfolio.

That is up from 10.4% last quarter. I'm wondering if you could touch on what drove the increase and if you think the yield from the third-quarter is sustainable going forward?

This is Joe. I'm talking about the yields. They way we look at the yields is on the debt portfolio we define it as 12.6% third quarter. It was 11.6% last quarter. What we're seeing in the pipeline are very similar characteristics.

You're seeing a lot of supply of quality investment opportunities, especially if they're directly originated. And with the average BDC trading below NAV the liquidity in the BDC market is contracted.

You are seeing this equilibrium shift especially if you have directly originated deals. We are seeing yields widen, and we've demonstrated almost 100 basis point increase in the third quarter, and we're seeing similar trends in our existing pipeline.

Okay, great got it. Thank you.

Vernon Plack, BB&T Capital Markets

Hi. Jack, was looking for more color on another question on the energy portfolio. It looks as though you added to your US wells in your TCE holding positions.

Yes. US wells was part of the initial commitment that we had to fund that. They have actually been growing and been quite a strong performer. They had a capital call or debt call, and we funded that. That was the growth in that one.

TCE is part of the ongoing conversations that we had with the company and other parties there to make sure they have got the proper liquidity to manage their business. There was some additional funding in there to -- as part of a general forbearance agreement and ongoing operations.

Okay. So I take it, you feel good about TCE right now.

Again back in my earlier statements, this prolonged period of low prices and without seeing any reason why they are going to go back up anytime soon, certainly keeps us on edge, and we need to keep working through that. There is certainly work to be done there, and we will be working closely with them to get things done. No one is out of the woods in that industry.

Okay, thank you.

This concludes our question-and-answer session. The turn the call back over to Joe Alala for closing remarks.

I would like to thank everyone for participating. We try to be as transparent as we can be. We put a lot of great data on the NDR deck on our website.

We are around all day today so please follow up with any direct calls or communications if you have any, and we are happy to provide it. We're trying to be transparent, and we believe that the equity rotation is complete now, and we can just really focus on NII covering the core distribution and long-term NAV appreciation. Thank you.

Ladies and gentlemen thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.